Andrew Chen has a good post on how to forecast advertising for web startups:

The right way to model out inventory is a number of equations - I’ll pretend that a site has two types of inventory, their “brand” stuff and their “direct response” (aka remnant) inventory:

Brand revenue = # campaigns sold * average campaign size * brand CPM
Direct response revenue = (total impressions - brand impressions) * remnant CPM
Total revenue = Brand + remnant revenue

In an actual forecast, you could get a ton more detail in the brand revenues side, since what you really care about is the # of ad sales people you have, how many campaigns they’re selling per quarter, the size, etc. Again, think of this as an enterprise sell, and treat it as such.

Essentially, he suggests that brand advertising is a function of the size and efficiency of your direct ad sales force (and is demand constrained) while remnant advertising can go to networks and is supply constrained.

As Ed Sim notes about a direct ad sales force:

… many entrepreneurs underestimate the direct capital and management costs necessary to build such a team. In many ways, building a direct ad sales team is similar to building an enterprise sales team. These thoughts may seem quite basic to you but here they are nevertheless. First, don’t ramp up your sales team too quickly until you have a product to sell. That means if you don’t have scale or enough eyeballs you are better off using Google Adsense. If you don’t heed this advice you may quickly burn yourself out of business. Secondly, I know that many startups may not know what kind of ad units to sell but be careful of not having a standard product list or rate sheet when you go out to the market.

This advice can be difficult to follow in a new market where there are no standard product lists, which is why new forms of advertising are hard.

The WSJ recently noted something that developers have known for a long time, that bigger monitors increase productivity:

Researchers at the University of Utah tested how quickly people performed tasks such as editing a document and copying numbers between spreadsheets while using different computer configurations: one with an 18-inch monitor, one with a 24-inch monitor and one with two 20-inch monitors. Their finding: People using the 24-inch screen completed the tasks 52% faster than people who used the 18-inch monitor; people who used the two 20-inch monitors were 44% faster than those with the 18-inch screens.

This got me thinking about other areas where buying “cheap” can be a false economy:

1. Large monitors. As noted above.

2. Comfortable ergonomic chairs. Your team spends most of their working time sitting in these chairs. If they are not comfortable, they won’t be in those chairs, and thus they won’t be working!

3. High Quality Speaker Phones. Conference calls are a part of doing business. If the people on the other end of the line can’t hear all the speakers in the room, you risk losing the nuances of the communication.

4. Experienced Law Firms The big silicon valley law firms are constantly involved with negotiating financings, venture debt, acquisitions and other legal matters on behalf of startups. They know which terms are “market” and not worth fighting over, and which are out of the ordinary. Firms that don’t have the same volume of deal flow often want to fight every point. While their zeal on your behalf is commendable, in the end they usually end up with “market” terms but take longer to get there. That results in higher legal bills for all parties, and greater conflict between partners where it wasn’t necessary.

5. Administrative Assistance. At some point making entries into Quickbooks, figuring out which insurance plan to sign up for and finding the cheapest airfare to LA for that conference become a poor use of founder’s time.

What are some other areas that readers think startups should not skimp on?

I’ve noted in the past that some online and offline distinctions are starting to blur. Some companies are finding that the easiest way to monetize their content is to turn bits into atoms and sell the atoms - people are willing to pay for things in the real world that they would never pay for offline.

There seem to be three major approaches to combining online and offline:

1. Single order custom manufacture

Over the last ten years manufacturing processes and technology have improved to the level where it is now possible to make single items on a custom basis. This has spawned a lot of the convergence in online and offline business models.

There has been the most activity in the market for photo books, including Apple, Shutterfly, Picaboo, LuLu, Blurb, Mypublisher and many others.

Zazzle, Cafepress and Spreadshirt take a similar approach to selling custom printed T-shirts, coffee mugs, mousepads and more.

A more collaborative example is Tribbit. Tribbit mirrors offline behavior by allowing multiple users to build and “sign” a group online card, which can then get printed out and presented to the recipient - in effect a group contributed photobook.

All of these examples are focused on user generated content. But rather than using user content, Tastebook, backed by Conde Nast, lets you choose from an extensive collection of recipes to create a customized cookbook. Techcrunch says:

TasteBook is a service that lets users take their favorite recipes from partner sites (starting with Epicurious) and create printed cookbooks that are delivered to them and/or friends. Users can add their own recipes as well, and customize the book with their name and other information.

2. Small order custom manufacture

Occasionally, one of the problems that can occur with single item custom manufacture is that the processes used for single items can result in lower quality. This is definitely true of T-shirts - many of the custom T-shirt sellers mentioned above have an “iron on” quality to them. The only way to make a high quality T-shirt with a silk screened print at a reasonable cost is make a batch.

Threadless takes this approach to it’s T-shirts. They have done a great job of building a community online, soliciting T-shirt designs, winnowing out the best designs for production through community input, and making batches of these shirts. This way they keep quality up, keep costs under control, and minimize inventory risk by selecting only to make T-shirts that are likely to sell out.

JPG Magazine takes a similar approach to the issues of its magazine. JPG is a physical magazine focused on photography. It solicits all its photos and articles online and its online community helps determine what gets printed. In a world where a new magazine launch can cost $40m before breaking even, JPG got to profitability at vastly smaller scale. A sister magazine focused on travel, Everywhere, has its first publication on Nov 27th.

3. Tying an online experience to an offline purchase

Whereas many of these companies start with an online experience and drive to an offline transaction, Webkinz starts with the offline transaction, and drives to an online experience. They have been able to draw synergies from their online casual immersive world and their physical plush toys and have sold millions of their toys to date. Barbie has had similar success with it’s online casual immersive world Barbie Girls which hit 3 million users in the first 60 days.

Another example is Hidden City, which was recently funded for a a horse themed trading card game aimed at little girls; each card unlocks a digital horse avatar online that girls can play with. The founder was behind the megahit trading card games Pokemon and Magic: The Gathering; he is clearly evolving with the industry as casual gaming moves online.

Conclusion

I expect more innovation in this area of combining online and offline business models. I am actively interested in meeting companies taking this approach. Let me know if you know of more!

The following is a guest blog posting by Laurie Thornton,the principal and co-founder of Radiate PR, a boutique public relations agency representing emerging growth companies in the Silicon Valley and beyond. Radiate is also Lightspeed Venture Partners‘ PR firm.
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While attending the Lightspeed Internet User Acquisition Summit last month, three of Silicon Valley’s most respected journalists – Matt Marshall of VentureBeat, Rebecca Buckman of the Wall Street Journal and Erika Brown of Forbes — offered some insider tips on PR. Whether you’re familiar with the ins-and-outs of the process, most agree that public relations can deliver tangible results: drive significant Web traffic, fuel user acquisition and contribute directly to a company’s bottom-line. Here’s a snapshot of what was shared that afternoon, plus a few more thoughts on the ABCs of publicity, aimed at first-time, do-it-yourself entrepreneurs.

-Know Your Target – Take Careful Aim: Any practitioner will tell you that tailoring a story pitch is essential. It’s well worth the time to thoroughly research the target outlet, understand the readership and know what the specific journalist covers. Sought after reporters receive upwards of 200 pitches a day. You won’t even make the first cut if your story idea isn’t spot-on.

-Implement the 30-Second Rule: The editorial world is saturated, so engaging a journalist at the outset is the hardest part of the job. Make the pitches brief – no more than a few short paragraphs. Too much text is a turn off! Craft your story idea as a well devised teaser and the reporter will be more likely to respond. You’ve got very little time to get their attention, so make it count.

-It’s Not Just About You: The majority of journalists won’t write about Company X’s new product, but they might cover it within the context of a larger category article or trend story. Consider Jaxtr, a VoIP contender. Here’s an opportunity to tell a David vs. Goliath story about how their service stacks up against Skype, the reigning industry behemoth who is generating some negative headlines at the moment. Package a timely story idea about how your company is making its own notable impact, or uniquely competing in the broader market.

-Users Tell it Best: During my firm’s nearly four-year tenure representing LinkedIn, we frequently parlayed user success stories to demonstrate the tangible value of a social network for business – one that could help you land a job, get a trusted referral, etc. With these editorial placements, user sign-ups measurably increased. Then there’s PeerTrainer, a social network for diet and fitness, who utilized astonishing ‘before and after shots’ of a successful user. The compelling story of this woman’s personal journey landed her on the cover of People Magazine, where she directly credited PeerTrainer with her 100-pound weight loss. For both companies, the testimonials proved the most convincing and powerful way to attract and secure new users, and motivate existing ones.

-Patience, My Friends: The PR process can be likened to the sales cycle. Can you imagine your business development guy closing a major deal with a coveted strategic partner with one intro email and a single follow up call? Coverage doesn’t always happen overnight.

-Play Fair, or Don’t Play at All: We expect journalists to be fair, accurate and truthful in their reporting. Conversely, we need to play by the same rules. Always be straightforward and don’t cover up or candy coat the facts. Also, if you ever offer an exclusive – stick to your commitment. Forge reciprocal relationships with journalists. They pay off for both you and the reporters – everyone can win.

-Oh, Yeah — Please Don’t Forget About the Product: A solid product that tracks to its promised claims is a check-box requirement for any successful PR program. Expectations are extremely high, even in the early Beta phase. Budget and bandwidth constraints aside, don’t rush out before a product is adequately tested and refined. The press and other critics will take notice. Not even a really clever PR pro can compensate for an offering that doesn’t deliver. Resist the temptation to simply get your offering out there as quickly as possible before it’s really ready. If you can, take that extra time to make your product shine from day one. The great publicity will follow.

People are asking what a widget is worth, and in particular what a Facebook app is worth. Lance Tokuda, CEO of Rockyou (a Lightspeed company), received a lot of coverage when he told the NY Times that the Superwall app was worth more than $10m.

Despite my previous attempts at building a framework to value a facebook app, I now think it makes little sense to talk in the abstract about what “an app” is worth. It’s better to apply the same principles to think about what a company is worth. A company will have various distribution channels through which it reaches its users; this can include its own website, a Facebook App, a Myspace widget, a distribution deal with AOL, SEM on Google, email virality, and others. Viewed this way, open platforms, and distribution, are opposite sides of the same coin.

In the late 90s, some companies pinned their futures to a single distribution deal with a single portal, and paid up for the privilege. Others, wisely, diversified their dependency on any single channel. A company that defines itself solely as a Facebook app runs the risk of relying on a single distribution channel.

Companies like iLike and Flixster (a Lightspeed company) have built their systems as a single database; their users can access the same data regardless of if they come in from their Facebook app or from their website. As the other social networks open up their platforms, these too will become alternative channels to reach users with the same system. It’s like one kitchen serving multiple restaurants.

On this basis then, we can apply standard mechanisms for valuing a media company, but adding the virality factor that is peculiar to social media:

Value of a social media company

= # of users x value of a user

= # of users x RPM x lifetime “pageviews” generated by user and subsequent invitees

= # of users x RPM x lifetime “pageviews” generated by user x virality factor

= # of users x RPM x “pageviews” per user per month / monthly churn rate x virality factor

(Note that I use the term pageviews loosely - these can include canvas views or any area that the company can put an ad.)

So value goes up as RPM goes up. RPM goes up depending on how targeted your traffic is; whether you’ve got endemic advertisers, demographically targeted users or just broad reach.

Similarly, value goes up as PV/user/month goes up. This argues that companies with high ongoing engagement (ie some aspect of ongoing utility) will be more valuable. Higher engagement often comes with access to the social graph through an API.

Value goes down as monthly churn goes up. One of the factors that reduces churn and increases “stickiness” of a social media site is how much “archive” value is built on top of the site. The more you commit to adding information to an site, the stickier that site will become.

Finally, value goes up as virality goes up. Virality will be different in each distribution channel, so this will need to be evaluated separately, depending on what viral growth modes are open in each social network.

As Myspace, iGoogle/Orkut, Hi5, LinkedIn, Bebo, Tagged and others open up APIs to their platforms, I think the companies that treat each social network as a distribution channel, rather than defining themselves as an application on a single platform, will create the most value.

Some startups that I’ve met are not sure how much money they want to raise. Some think about raising money to last a certain period of time, others look to benchmark themselves against other startups and want to raise similar amounts of money.

There are a few schools of thought as to how to arrive at a target amount of money for a startup to raise.

Marc Andreessen says:

In general, as much as you can.

Without giving away control of your company, and without being insane.

Entrepreneurs who try to play it too aggressive and hold back on raising money when they can because they think they can raise it later occasionally do very well, but are gambling their whole company on that strategy in addition to all the normal startup risks.

Suppose you raise a lot of money and you do really well. You’ll be really happy and make a lot of money, even if you don’t make quite as much money as if you had rolled the dice and raised less money up front.

Suppose you don’t raise a lot of money when you can and it backfires. You lose your company, and you’ll be really, really sad.

Dick Costelo of Feedburner/Google says:

First, raise enough money to last about a year or a good six months after your next big milestone. Some people like to say “raise just enough to get you to and then you will be able to do a B round at a bigger valuation”, etc., but you want to give yourself some reasonable stretch of time to be product and strategy focused after the A round before you have to hit the road again to raise more money. It’s no fun having to think about starting to raise money again only a few weeks on the heels of closing the previous round. Second, you always need more money than you think you need, especially if this is your first startup. You can have a nice detailed spreadsheet that accurately reflects market salaries, rent, and more, but you will still require more money than you think.

In general, I tend to agree with Dick. Marc’s advice is good but raising too much money raises the possibility of greater dilution than necessary, and it may not be practical advice to entrepreneurs with a less stellar track record than Marc’s (which is pretty much everybody!).

Here is how I would advise a startup to think about how much money to raise:

1. Figure out what you’ll want to have done before you want to raise the next round. This could mean revenue targets, usage targets, product development milestones or whatever, but focus on a set of tangible achievements that you think will make your next round of financing easy to raise. These achievements should demonstrate a reduction of one of the three types of risk that VCs worry about (i) technology risk (ii) market risk (iii) implementation risk.

2. Figure out how long it will take you to achieve these milestones.

3. Figure out how much cash you’ll burn in this time. Do this carefully. With costs, you should be able to be pretty precise in your projections. Costs are mostly within your control (e.g. hiring) or variable to your achievement targets (e.g. bandwidth costs). However, be conservative in your revenue projections. These are not entirely within your control, and many startups miss their initial revenue projections.

4. Add enough cash to sustain six months of burn with no revenue to that time period. This is partly as insurance in case your development timelines slip (that NEVER happens, right! ;-)) and partly because raising money takes time. You should budget between one and three months between starting the process and having cash hit your bank account, more if you’re raising money over a period like the holidays when it might be hard to set up all the meetings you want.

This should give you a reasonable estimate as to how much capital to raise in your current round.

I used to work with John McKinley at AOL where he was CTO and, later, President of Digital Services. I have enormous respect for him. In a recent blog post, he says that email in its current form is under attack and doesn’t have long to live:

We are in the midst of an important moment of truth - email as we know it is under attack, and the major firms are not moving fast enough to prevent it from becoming more of a niche form of communications in the next 5 years. The email experience of today is being threatened on multiple fronts by a variety of new forms of communication:

Twitter/short-form blogging

Asynchronous messaging in social networks (e.g., the Facebook Wall)

IM experiences now supporting queuing of messages to offline buddies

Away message/Status message utilization in instant messaging

SMS adoption (late to come to the US, but now pervasive)

Wikis and other new collaboration platforms

Comments (MySpace comments, Blog comments, et al)

Casual communication forms (the nudge, the wink)

New sharing experiences (Flickr, et al)

Email aggregators (e.g., I use Gmail to aggregate all of my AOL, Yahoo, and POP3 accounts. These other companies still bear all the cost of hosting my email accounts, but now get none of the pageviews.)

Email and IM integration into social networks (the new entrant risk).

People have more compelling, more contextual, more effective, and more convenient options to share and interact than ever before, and incumbent forms of communications will be the losers here.

John hits on a very interesting broader point. Every few years a new form of communication arises and for some people this becomes their primary form of communication. Over time, earlier forms of communication lose overall share. This has happened to letter writing, telegraphs, talking on the phone, Usenet newsgroups, chat rooms, and message boards in the past. Email has displaced many of these prior forms of communication over the last 15 years, and is now under threat itself.

I don’t think all of the communication forms John lists above are equally threatening to email. Some are just features, and others have communication as a secondary aspect to another purpose. But it is clear that SMS, IM and social network messaging have supplanted email use among teens. Kids and teens are also some of the earliest and most enthusiastic adopters of casual immersive worlds.

As John points out:

The risk is as follows: the major internet incumbents rely tremendously on having a robust base of consumer email account relationships to feed their ad/search businesses. Having that email inbox relationship can yield 2x the monthly page views, when compared with non-email-account consumers.

The reason is simple - users are more likely to use their primary form of online communication as their homepage. This is why the social networks threaten portals. Being a homepage is an incredibly powerful position because as the first page a user sees, you have an ability to influence what other pages a user sees.

The portals have long used webmail as the “milk at the back of the store” - a low margin product that keeps users coming back. But to get to the milk you have to walk past the high margin impulse purchase products in a supermarket - the candy and the cookies and the chips. Similarly, to get to your email you have to get past the editorial programming on the portals homepage. A few extra impulse clicks to which shows won at the Emmys or to read about the 700 foreclosure homes being auctioned in one city, and the portal generates some advertising revenue.

This presents a real opportunity for startups. In the past, innovators that have driven mass adoption of new forms of communication have been bought by big portals well before they needed to show a revenue model, with ICQ and Hotmail being the two best examples. I’d be interested to hear what readers think are today’s most promising candidates for new forms of communication.

The WSJ today has an article about how hard it is for US auto makers to get “import intenders” to add domestic cars to the consideration set:

Just about every month, CNW Market Research meets with a group of would-be car buyers and plays a trick on them.

Sometimes the company, which specializes in auto sales trends, takes a Toyota Camry, removes any identifying logos, and tells them it’s a new model from one of the U.S.-based auto makers. Or it takes a domestic car and tells them it’s a Toyota or another import make.

Either way, the result is the same. “If they think it’s an American car, the perception of the vehicle falls dramatically,” said Art Spinella, vice president of the Bandon, Ore.-based firm. “Detroit really gets a bum rap in the U.S.”

When I was at AOL we did a similar experiment for search. We took search results from multiple search engines, stripped branding and UI, and asked users what they thought. The marks were pretty even across the board, but when branding was put back, Google was thought to have the best results ever time. PC World found similar results in April.

As I’ve mentioned in the past, there are three phases of adoption for a new consumer technology. In the first phase distribution is paramount, in the second product is paramount, and in the third branding is paramount. Competing on the wrong dimension at the wrong time may not move the needle, as Detroit is discovering.

Epicenter pointed me to an interesting Seattle Times article that asks what is the impact of startups with weird names.

New Internet companies are being baptized daily with handles that sound like a blend of toddlerspeak, scat singing and what the aliens will greet us with when they land.

Most Internet company names make little sense, and they roll around the mouth like a marble.

“Old-school ideas about sounding trustworthy or sounding big are not as important as they used to be,” said Burt Alper, co-founder of Catchword Branding in Oakland, Calif., which has helped companies pick such names as Vudu (makes a device for watching videos) and Promptu (creates voice-recognition products). “Now it’s about sounding different and standing out from the crowd.”

Maybe I’m showing my age, but I’m not a fan of dropped vowels or unconventional use of high scoring Scrabble letters in company names. I think company names (or at least URLs) need to pass three tests:

1. Can people say it?
2. Can people remember it?
3. Can people spell it?

Word of mouth is a great, free user acquisition channel. But if a happy user tells a friend to check you out, you only need to fail one of these three tests to lose the shot at a new user. Remember how Universal Tube and Rollerform Equipment Corp’s website, utube.com, got a lot of traffic intended for Youtube? Word of mouth can be like playing the Telephone Game. The wrong name risks that happy user’s referral getting lost in the translation…

Businessweek has an article about Google’s venture capital investments. It notes that corporate venture investing has been on the upswing recently, calling out Intel, Cisco and Motorola (in addition to Google) as other active corporate investors.

Companies that aren’t full-time investors pumped $1.3 billion into 390 venture capital deals in the first half of 2007, up 30% from the $1 billion invested in about 350 deals a year earlier, according to an Aug. 30 report by PricewaterhouseCoopers and the National Venture Capital Assn. (NVCA), based on data from Thompson Financial (TOC). That’s the most invested since 2001, just before the bottom fell out of the tech industry.

As Paid Content notes:

Aside from increasing their presence in growing markets, corporate VC activity gives companies like Google another advantage: by funding early stage companies, corporate VCs tend to buy these companies outright for a cheaper price than they would otherwise pay regular VCs down the road.

This is certainly consistent with my experience. When I was VP of Strategic Planning at IAC earlier this decade, when we invested in a startup we would always think about a “path to control”. We always asked for a call option to buy the rest of the company at a certain date and price in the future so that we knew that we could own the company outright in the future.

An entrepreneur should bear in mind the implications of accepting an investment from a strategic investor, especially understanding the motivations as laid out above. A financial investor (whether angel or VC) is looking for a maximum return on their investment. A strategic investor may be looking for a way to buy companies for less than they otherwise would.

Often strategic investments start out as business development discussions between the two companies. At some point, the big company (BigCo) says that by doing a biz dev deal with the startup(LittleCo), it will meaningfully increasing the value of LittleCo. BigCo would like to share in the value that it is helping to create. This is a perfectly reasonable position.

For LittleCo, the key is to make sure that BigCo does not end up owning so much of LittleCo that it becomes the only logical acquirer. It’s hard to get full price at an auction if there is only one bidder.

One way to think about BigCo’s ownership stake is as a discount if/when they want to acquire a LittleCo. Since BigCo already owns x% of LittleCo, BigCo will essentially be paying x% less than another acquirer (OtherCo) would have to pay.

If x is large, then OtherCo may not bother bidding. OtherCo’s corporate development team is busy, and doesn’t have the time to waste on potential acquisitions that they are not going to win. OtherCo will realize that BigCo can outbid them because of the implicit discount that BigCo gets from already owning x% of LittleCo, so OtherCo doesn’t bid at all. This can lead to lower exit valuations for LittleCo*.

The less that BigCo owns of LittleCo, the more likely OtherCo will be to bid. If OtherCo thinks that it can bring more synergy to LittleCo than BigCo can, and that LittleCo is more valuable to it than LittleCo is to BigCo, then OtherCo may still believe that they can win the auction, even with BigCo’s x% discount. In the extreme case, (x=0), all potential buyers line up at the table and all make their best bids, and exit valuations are maximized.

The implication of all of this is that entrepreneurs should be careful. When they take strategic investments from corporate venture arms, they should not give up so much ownership that they discourage other potential acquirers from bidding in a future sale process. They should keep x small. Since early stage investors usually get more ownership than later stage investors, taking strategic investment tends to make more sense in a later round of funding.

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* As an aside, similar logic applies to giving anyone (whether a strategic investor or a biz dev partner) “right of first refusal” to a sale of your company. A potential bidder won’t want to do all the work to get to a deal, only to see it matched by the party with a right of first refusal. As a result, they often don’t bother bidding. With less bidders, once again, exit valuations are not maximized.