What happens to a startup if the founder dies? May 28, 2008Posted by jeremyliew in founders, start-up, startup, startups.
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I analyze the causal effect of the founder for firms in their infancy by using variation in the occurrence of founder death. Both cross-sectional and within-firm estimates suggest that founder death has only a slight effect on firm performance, as measured by firm survival, profitability, or growth. I interpret this as the founder being substitutable even in a firm’s infancy and that the main function of the founder is to discover new opportunities and setting up the firm rather than managing it.
Or as Paul sums it up:
Hey, What if the Founder Gets Hit By a Bus? Nada
It is hard to reconcile this research with our our investment experience; we have found that strong founding teams matter a great deal. In fact, we specifically include as part of Lightspeed‘s stated mission “to partner with exceptional entrepreneurs “.
Digging deeper into the research paper sheds some light into the potential areas of disconnect. Hvide’s research is based solely on a set of 6,800 companies started in Norway between 1996 and 2003. Of these, only 40 were information technology companies where the founder died. These two facts may be two reasons that the conclusions from Hvide’s research are not broadly applicable to the sorts of company in which we typically invest.
At least Hvide’s research gives comfort to VCs who invest in non tech Norwegian startups founded by unhealthy or risk taking entrepreneurs. Unfortunately, or perhaps fortunately, Lighstpeed isn’t such a VC firm!
The WSJ had an article on Friday about Nexon and the virtual goods model. Not new news to most readers of this blog but some good information nuggests in the article:
Prepaid cards used to buy Nexon game items are now the second best-selling entertainment gift card at Target Corp. stores in the U.S., after cards for Apple Inc.’s iTunes Store, Target says…
Nexon’s biggest hit in the U.S. so far is MapleStory, an online role-playing game popular with teenagers in which players assume the identities of warriors, magicians and thieves and collectively fight monsters. The game has 85 million users globally, of which 5.9 million are registered in the U.S. Last year players world-wide bought more than 1.3 million articles of clothing and more than one million hair makeovers for their MapleStory characters. Nexon’s U.S. revenue last year more than tripled to $29.3 million from $8.5 million the prior year.
With $30m in US sales and 6m US registered users, assuming a 20% “active player” rate and 10% “buyer rate”, that implies an ARPU of $20/mth which sounds about right and is consistent with number we’ve seen from games in Asia. It sounds like the US will be following very similar models of virtual goods monetization that we’ve seen in Asia.
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Bill Morrison, the internet analyst for investment bank ThinkPanmure put out an interesting report today that is worth reading for people in the online media space. He concludes:
1Q08 was, in our opinion, one of the worst fundamental quarters for publicly-traded online media companies in several years. Roughly 66% of the companies we cover missed expectations or lowered their outlook. We believe online media is in the midst of a cyclical downturn, yet 75% of the companies we cover need to accelerate growth to meet the consensus estimates this year. That is highly unlikely given macro headwinds, in our view… Within advertising, we favor names with minimal CPM exposure such as GOOG, RATE, and MCHX.
This sounds gloomy, and is consistent with other recent announcements such as eMarketer lowering their forecasts for 2008 online ad spend and Pubmatic finding lower CPM rates in their latest survey.
It is important to note though that large companies and small companies face very different situations. As Pubmatic notes:
The PubMatic AdPrice Index revealed surprising weakness in monetization for the vast majority of Web sites. Large Web sites fared the worst while small Web sites managed to maintain their monetization rates. eCPMs for large Web sites (more than 100 million page views per month) dropped dramatically by 52 percent from 38 cents in March to 18 cents April. Medium Web sites (1 million to 100 million page views per month) were nearly flat, with monetization dropping from 34 cents in March to 33 cents in April. Small Web sites managed to improve their monetization, increasing from $1.18 in March to $1.29 in April.
EMarketer’s report still projects 23% growth in 2008 online ad spend, and ThinkPanmure notes that growth for the public internet companies is slowing, not stopping.
There is no doubt in my mind that a slowing economy is impacting advertising spend. However, the shift of advertising to follow time spent is continuing to drive growth in online media. The trend is our friend.
Furthermore, for startups, micro issues (such as whether the new sales person in Detroit started in Q2 or Q4) will continue to have far greater impact on making this years revenue goals than any macro factors will. Startups should not look at the woes of the publicly traded online media companies as their own fate.
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The IAB just came out with their 2007 internet advertising revenue report, concluding that internet advertising totaled $21.2bn in 2007, up 26% over 2006. The primary industry categories are shown below:
The IAB further breaks down “consumer related” into subcategories:
Entertainment encompasses movies, music and TV, while leisure encompasses travel, hotel and hospitality.
I find it easier to consider all of these categories and subcategories on a single graph:
This shows that the top three categories for online advertising are retail (ecommerce), financial services and automotive. These are full year numbers for 2007, so they show little change over 2006, notwithstanding the ongoing credit crunch and slowing housing market, which might have been expected to lower the proportion of financial services advertising. All categories of online advertising appear to be growth with the market.
The full IAB report breaks down 2007 online advertising revenue further by ad format, industry concentration and pricing model and is worth reading.
Raph’s latest post says that there is a market glut of MMOGs, but most of them will survive. In passing, he shows a picture that is worth a thousand words:
… here is the rack of game cards available at Target — snapped this weekend, and strongly reminiscent, finally, of similar shots I have taken in Korea, Japan, and China. For years, there was no such rack in the US. Then it was just a couple of cards, and only at some checkouts. Now it gets a rack right between the TV box sets and the top pop albums (you can see REM’s latest CD there, abandoned on the top shelf).
Besides the cards you maybe expect to see, like Club Penguin, WoW, and Zwinky, there’s also a large stack of ‘em for gPotato games (Flyff, Shot Online, etc) And Acclaim, which make their living by bringing over games from Korea. There’s WildTangent cards, and the Gaia cards are almost sold out. The diversity is interesting, as is the lack of cards for most of the core gamer MMORPGs. The strong presence of the often-marginalized Korean games is telling.
One of the challenges in monetizing MMOGs through virtual goods in the US has always been finding a way to sell them to young players who don’t have credit cards. Gaia even employs 3 people whose sole job it is to open snail mail envelopes full of cash that people send in for virtual goods.
Pre paid cards at retail are an excellent way to monetize this audience. I have heard from a number of MMOG companies that they have seen a substantial increase in both ARPU and velocity of spending since releasing these cards. Watch this space.