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How much money should a startup raise? September 27, 2007

Posted by jeremyliew in start-up, startups, VC, Venture Capital.

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.

Google is making it harder for vertical search engines September 24, 2007

Posted by jeremyliew in advertising, arbitrage, business models, google, Lead gen, Search.

DavidZHawk asks, “What if Google Declared War on Comparison Shopping Engines and No One Noticed?” and points to an Inside Adwords blog post (my bolding):

The following types of websites are likely to merit low landing page quality scores and may be difficult to advertise affordably. In addition, it’s important for advertisers of these types of websites to adhere to our landing page quality guidelines regarding unique content.

* eBook sites that show frequent ads
* ‘Get rich quick’ sites
* Comparison shopping sites
* Travel aggregators

* Affiliates that don’t comply with our affiliate guidelines

Comparison shopping sites and travel aggregators are just two classes of the many flavors of vertical search engine, although they monetize better than most because of the high proportion of transactional search queries. As a result they have been able to afford to buy traffic through Seach Engine Marketing (SEM) where other vertical search engines have not been able to afford to due to lower monetization rates.

When you combine this move to send less traffic to vertical search engines with Google’s more aggressive inclusion of “One Box” search results from Froogle and their other owned vertical search efforts, you start to wonder if Google is looking to keep more of its traffic recirculating within its own properties. iGoogle and Gmail were the first signs that Google might aspire to keep control of more of the traffic that starts there.

Communication, performance and birthdays September 23, 2007

Posted by jeremyliew in communication, email, performance, social media, social networks.

It was my birthday on Friday ,and it was the first birthday I’ve celebrated as an active member of a social network.

I’ve posted in the past about the performance aspects of social network communication, and how this affects future email use. I’ve also posted about social design for social media companies, and how Facebook’s birthday reminder and wall work together to uphold the first two of the rules of social design:

Motorola Findings

It was interesting to see this all play out as a participant. For my birthday, I received in total:

  • 1 “happy birthday” phone call
  • 2 “happy birthday” cards
  • 20 “happy birthday” email
  • 3 “happy birthday” private messages on social networks
  • 26 “happy birthday” public messages (ie posted on profile) on social networks
  • Fully half of the messages were public. But within the context of the social network, almost 90% of the communications were public.

    Communications modes seem to be shifting very quickly, at least for those messages with a “performance” aspect.

    I’d be interested to hear similar stats from readers.

    News can’t be an online only business September 19, 2007

    Posted by jeremyliew in advertising, business models, newspapers.

    Sometime a picture is worth a thousand words:

    Newspaper advertising revenues

    From the WSJ today as they self referentially discuss if they will go from pay to free.

    The rate of growth of online-newspaper ads dropped to 19.3% during the second quarter of 2007, down from a growth rate of 33.2% during the second quarter of 2006, according to the Newspaper Association of America.

    The slowing growth online coincides with accelerating declines in newspapers’ print-ad revenue, casting doubt on whether newspapers will ever be able to offset their losses in print with gains on the Internet. Online ads still make up a small portion of total newspaper revenues, just 7% of the $11.3 billion total print- and online-newspaper ad revenues during the second quarter.

    Twelve lessons from World of Warcraft for designing MMOGs September 19, 2007

    Posted by jeremyliew in engagement, game mechanics, gaming, mmorpg, social media, social networks, virtual worlds.

    From Gordon Walton’s presentation at GDC about making MMOs post World of Warcraft

    1. Take a critical look at your genre rather than being a fan or having experience. Blizzard were not experts in the genre — in fact, the company had never shipped an MMO before — Blizzard learned well from the genre’s past.

    2. Keeping system specs low. “This is not about getting some more customers — this the opportunity to get lots more. Like 4-10x more.”

    3. Quality counts. “What was consistent about every MMO pre-WoW is that they were buggy as sh*t. They were rough. Even if they were fun, they were rough. They all launched with hundreds, if not thousands, of known bugs.”

    4. Embrace solo play, because gamers want it. Blizzard says, “We look at soloing as our casual game.”

    5. Simplify the GUI! WoW’s interface is “as simple as it can possibly be and as fun as it can possibly be … but no simpler.”

    6. It sucks to build content, but you have to do it. A player should not perceive all that she can do from the beginning of the game: something tantalizing has to hang out of reach. “If I can visualize everything that will happen to me by the end by level 3, the game’s over.”

    7. Strong PVP (player vs player combat) is essential. Besides the core PVP gamers, “a certain percentage of people [exist who] don’t know that they want to compete once they have some mastery.”

    8. Don’t tune for the hardcore. Don’t forget that the object is not to keep people as long as humanly possible, but to provide entertainment. When it comes to grinding, “they will do it, but they will hate you.”

    9. Let players quit. Otherwise, “they quit because they’d stayed too long… the only way for them to escape was to demonize the game.”

    10. Give players clear direction and choices. “An accessible game is directed. You never leave them in a place where they go ‘what do I do next?’ The vast majority of customers — particularly when you get out of the hardcore — need the signposts.” But don’t give them too many choices, and make them all good choices. People want to feel like things are complex, but they don’t really want them complex. You have to give them the illusion of complexity but keep it super-simple.”

    11. An MMO should be easy to learn but difficult to master. “Nobody’s entertained by feeling incompetent. Feeling competent and gaining mastery is a huge part of game fun for people.”

    12. Brands matter.

    Some of these are also applicable to social media sites. Worth reading the Gamasutra summary of the talk for more color.

    Will email be dead in 5 years? September 17, 2007

    Posted by jeremyliew in communication, Consumer internet, email, facebook, myspace, social networks, start-up, startups, VC, Venture Capital, virtual worlds.

    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.

    In late stage consumer markets, brand matters more than product September 14, 2007

    Posted by jeremyliew in branding, business models, Consumer internet, distribution, product management, start-up, startups.
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    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.

    Viral marketing, randomness and the difficulty of controlling growth in social media September 13, 2007

    Posted by jeremyliew in communities, Consumer internet, social media, social networks, viral, viral marketing.

    I recently met the CEO of a company who claim to be one of the most popular social networks in Turkey with several million monthly visitors from Turkey. This happened by accident – the founders are Americans who have no prior connection to Turkey.

    This is just one of many examples of how difficult it can be to predict or control the growth of viral social media. Google’s Orkut, is a better known example – a social network started by a Turkish engineer working in the US that now dominates in Brazil and India. Friendster and hi5 fall into this bucket as well. As I’ve noted before, the online advertising market in the US is bigger than that in the rest of the world combined. The senior management of these companies know this, and all would love to see more US traffic, but it is now beyond their control.

    The reason is the mathematics of viral growth. If the viral coefficient (the number of additional members a new member brings) in a population is less than one, it grows but eventually hits a ceiling. But if the viral coefficient is greater than one, it grows unbounded. Although your social media property may start in many different populations, it will come to be dominated by those with the highest viral coefficients.

    This is best demonstrated by example. Consider a new social media property with 30 members, 10 each from three distinct populations; call them Pinks, Purples and Greens. Suppose that by luck and because of the initial users, the viral growth coefficient for the Pinks is 0.6, for the Purples is 0.9 and for the Greens is 1.2. Watch what happens to the populations over time:


    All three groups are initially equally represented, But already by time period 4 the population is more than 50% Green. By time period 10 it is more than 75% Green and probably considered a “Green social network”. By time period 16 less than one member in 10 is not Green. For Green now substitute whatever national, language based, religious, racial or other demographic grouping that you choose.

    These evolutions can happen very fast since a time period is the time it takes for a new member to invite more members. 2-8 weeks might be a reasonable assumption.

    This example is vastly simplified, of course. Viral coefficients vary over time within and between groups. Viral coefficients also don’t vary quite as much between groups; the same underlying feature set is being exposed to all groups. But it illustrates the point that randomness can play a significant role in the eventual makeup of a social media property’s user base.

    I posted about a similar finding in May, how you don’t necessarily get the wisdom of crowds, but sometimes just the crowdiness of crowds. It was based on a NY Time’s article that showed how randomness can have a big impact on the most popular songs for a crowd when popularity information is public.

    Virtual worlds, real economics September 11, 2007

    Posted by jeremyliew in economics, gaming, mmorpg, virtual worlds.

    A couple of weeks ago I wrote about how virtual worlds can generate very real emotions. Alex Tabarrok’s blog Marginal Revolution, notes a post from EVE’s (the space based MMORPG) economist that shows that virtual worlds can also generate real economic phenomena. In particular:

    EVE consists of more than 5000 solar systems in 64 regions. The solar systems are connected in a complex web allowing for goods to be moved from one end in the Universe to another. Pilots have to be careful because in low sec and zero-zero security zones there is always the danger of being attacked by gangs of pirates looking for easy prey….

    EVE is so large it is difficult for anyone to grasp what is going on in all the regions at any given time. Yet the markets seem to be very efficient at distributing information resulting in symmetric prices throughout Empire space (and even further). This is clearly visible in figure 11 which shows the price for zydrine [one of the more valuable minerals that is used for manufacturing in game] in three different Empire regions.


    As one of the comments notes:

    The main way to analyze a video game economy is in terms of the one truly scarce resource: player time and effort. In Eve, in order for a player to perform arbitrage, he has to physically move the good from one place to another – thus players will only do so if the profits are worth the time spent moving the goods around. Zydrine is a relatively dense good, in terms of value per volume; a small ship can haul thousands of units of zydrine, so a 200 isk/unit price difference between regions can be exploited for millions of isk in one trip. Another mineral, Tritanium, is only worth on the order of 3-4 isk per unit; its price can be a lot more volatile, especially in uncivilized regions where a large cargo ship can be attacked and destroyed.

    Does anyone know of other studies done on the virtual economies in other MMOGs, casual online worlds, or social networks with virtual goods?