jump to navigation

What to do if your users think you’re something that you’re not October 8, 2008

Posted by jeremyliew in product management.

I was talking to the founders of Zintin recently about their iPhone app. Although they had initially expected their dominant usecase to be “keep in touch with your friends”, it rapidly became “meet nearby people”. The Zintin team did a great job of rolling with their users and evolving their product development towards the dominant use case, rather than treating it as a “user error” problem.

It reminded me of this great quote from one of the founders of IMVU, Eric Reis:

In our first year at IMVU, we thought we were building a 3D avatar chat product. It was only when we asked random people we brought in for usability tests “who do you think of as our competitors?” that we learned different. As product people, we thought of competition in terms of features. So the natural comparison, we thought, would be to other 3D avatar based products, like The Sims and World of Warcraft. But the early customers all compared it to MySpace. This was 2004, and we had never even heard of MySpace, let alone had any understanding of social networking. It required hearing customers say it over and over again for us to take a serious look, and eventually to realize that social networking was core to our business.

The moral of this story, if you disagree with your users about what your product is for, then you are wrong and your users are right. There is no such thing as “user error”.

Which online media companies will survive the ad recession? October 6, 2008

Posted by jeremyliew in advertising, start-up, startup, startups.

As I have mentioned previously, we are entering an overall advertising recession and even online advertising growth has slowed. Notes the LA Times in August:

“Advertisers have pulled back in a pretty meaningful way, and display is feeling the brunt of it,” said Clay Moran, a Stanford Group analyst who recently wrote a research report called “Online Advertising: caution required.”

In recent weeks:

* Yahoo Inc. Chief Executive Jerry Yang told analysts that demand for display advertising was “softening.”

* Online publisher Tech Target Inc. lowered its third-quarter forecast, blaming “macroeconomic weakness in the U.S. and its impact on advertising spending.”

* Lending site Bankrate Inc. cut its 2008 guidance. CEO Thomas Evans explained that the company had “continued to experience softness in display advertising from several of our largest financial advertisers.”

* Ad network ValueClick Inc., based in Westlake Village, blamed the economy for a slowdown in display advertising, which led to a 6% drop in its second-quarter profit.

What does this mean for startups? When advertising budgets dry up, three things happen:

    1. Advertisers buy what they know

This has two implications. The first is simply brand recognition. It is much easier to make the case to buy media on a well known site. As a result, scale matters. The leaders in both web 1.0 (AOL, Yahoo, Cnet etc) and web 2.0 (Facebook, Myspace, Rockyou*, Digg etc) will continue to see high demand for their advertising inventory.

As the web 1.0 leaders are already at scale, they may see greater negative effects from the overall market, but there will continue to be a strong core of demand. Many of the web 2.0 companies have grown out their traffic and brand in advance of their sales forces, so they may be able to ride the growth of their sales teams to better mitigate the market effects.

But being big (5m+ UU/mth), and a leader in your category, will help a lot.

The second implication is that advertisers will continue to buy advertising against targeted content. Advertisers are used to buying content adjacencies. Targeting against users (whether behavioral or demographic targeting) can’t be counted on to lift CPMs in the next couple of years.

Sites with highly targeted content that attracts endemic advertisers (Flixster*, iLike, Streetfire.net* etc) or demographic clusters (TMZ, PopSugar, AskMen etc) will be better off than broad reach sites.

    2. Experimental budgets are the first to get cut.

In an ad recession, advertisers appetite for experimentation is low. They like to stick to the established ad standards. New forms of advertising are hard. Startups whose sales processes feel more like business development than selling off of a rate card may have a tougher time.

Companies selling standard ad units will weather the recession better than those that have unique ad units.

    3. Marketers keep funding direct response advertising.

The brightest spot in an ad recession is direct response. As Ad Age notes:

Many analysts now agree that when marketing budgets come under pressure in a stressed economy, those sectors that can best document their connection to ROI, such as search-engine advertising, are far more attractive to corporate chiefs than other kinds of less-trackable traditional advertising.

Direct marketers will continue to spend to acquire customers if that spend can be directly tracked to a sale. Lead gen companies (Quinn Street, Tippit*, LowerMyBills etc) will hold up better, as will companies with CPC and CPA models (Google, TripAdvisor, $uperRewards, etc). However, they may also be affected if the overall number of people “in market” goes down, or prospective buyers become less likely to buy, due to the overall economy slowing down.

Who will have it toughest? Sites that are sub scale (<1m UU month), with no targeted content AND selling custom ad units are going to have to work the hardest over the next few years. Great teams always find a way, but the road may be long and hard.

What are your thoughts as to what sort of online media companies will survive the ad recession best?

UPDATE: WSJ also finds that experimental budgets are getting cut

FURTHER UPDATE: Which companies might benefit from an online ad recession?

* Rockyou, Flixster, Streetfire.net and Tippit are Lightspeed Portfolio companies.

Don’t count on ad targeting to lift CPMs in the near term October 2, 2008

Posted by jeremyliew in advertising, contextual targeting, targeting.

The online ad market is not immune to the overall advertising recession, and growth has slowed. Many online media companies and ad networks are counting on targeting to help lift CPMs.

But Julie Ruvolo reports from the Adweek conference last week that media buyers are still hesitant about highly targeted ad campaigns:

In the traditional media-buying paradigm, advertisers buy audiences by buying content. Coca-Cola sponsors American Idol, Nissan sponsors Heroes, and so forth. But social media, ad networks, and especially behavioral ad networks, are chipping away at the “content as a proxy” mentality and positing that ads can be as or more effective if they’re tied directly to people and not to content…

But for all the talk it’s garnering, media buyers remain hesitant about jumping on the addressability band-wagon for several reasons.

First, while agencies are opening up to a more data-centric approach, operational challenges abound. One of the key issues is that it’s easier to buy a national TV ad than to set up and constantly manage a million-word AdSense campaign, or develop video creative for hundreds of demographics instead of one broad demographic…

Further, advertisers are struggling with the sheer volume and sophistication of data available to them. As digital marketing agency Avenue A’s Andy Fisher said, “We’re drowning in data.” …

We can talk all day about how wonderful digital media is, how addressable and trackable and cheap the media is, but the reality is that there’s a decades-long and multi-billion-dollar symbiosis between the ad industry and the TV industry. It’s going to take more than superior product, logic and efficiency to supplant that relationship.

I think Ruvolo is right.

Online advertising has typically been sold in one of three ways:

1. Endemic advertising targeted against relevant content, typically commanding double digit CPMs. An example would be selling movie advertising against Flixster (a Lightspeed portfolio company).
2. Demographically targeted advertising, typically targeted against relevant content, typically commanding low single digit CPMs. An example would be selling a “women” demo against TMZ.
3. Broad reach inventory, typically commanding $1 or below CPMs. An example would be a selling Yahoo email inventory.

Advertisers are comfortable with buying advertising against content adjacencies.

There are four flavors of ad targeting popular today:

1. Geographic
2. Demographic
3. Contextual
4. Behavioral

Through demographic and behavioral targeting, online media companies are asking advertisers to follow the user instead of following the content:

But, online ads should follow users and communities, since users are the ones to decide what content they want to put where, says David Carlick, Managing Director at Vantage Point Venture Partners.

“[I] say no, now you [the advertiser] are sponsoring the consumer—not the content online, but what they want to do online. If they want to go on MySpace and look at half-naked drunk photos, who are you to say that’s not good for my brand? You need to go where the people are and sponsor what they do, and not attach yourself to the 5% of content that looks like TV.”

Or as Jeff Jarvis says:

That’s [buying content adjacencies] still treating us like a mass. That’s still about lazy advertisers who want to buy upfront and don’t want to converse with us as individuals or at least communities. We need advertisers’ money; that will be the primary support of online media. But we need to both retrain them and give them the infrastructure and data to enable them to market smarter and create meaningful relationships — and, in the process, support small instead of big.

In my experience, when the guys with the money [advertisers] want to do things one way, and the guys who want the money [media companies] want to do things another way, then it is usually the guys with the money who walk away happy.

Behavioral and demographic targeting to the user level will likely have success with direct response advertisers who can readily measure and potential lift in response rates. But brand advertisers will want to continue doing business the way they are used to doing business. Furthermore, an advertising recession is not going to be an easy time to “retrain” advertisers. Content adjacencies will likely be the way most brand advertising is sold for the next couple of years at least.

What impact will the credit crunch have on venture financing for startups? October 1, 2008

Posted by jeremyliew in financing, start-up, startup, startups, VC, Venture Capital, venture debt.

An entrepreneur asked me recently if I was concerned about the impact the credit crunch will have on venture financing for startups. I responded:

For high quality companies, the short answer is no. The more nuanced answer is that

(i) The credit crunch will impact venture debt (already has) so people can’t count on that to extend their runway, so should raise a bit more than they would have done
(ii) If the economy indeed slips into recession (as a second order effect of the credit crunch), then this will impact sales growth for many startups, whether selling to enterprises or consumers. This will also impact timelines to profitability, and hence amount raised. It will also likely cause some angels and some venture firms (especially corporate venture firms and firms with a shorter time horizon) to become less active investors.

At Lightspeed as we take a long term view towards the companies we invest in. However, we are urging them to be conservative in their revenue projections and hence cash planning (both from amount raised and from cash burn perspective).

GigaOm weighs in on the venture debt issue in particular

Fewer, costlier loans. No way around it, money is getting more expensive. As long as banks are licking their wounded balance sheets, they won’t make loans that carry even a whiff of risk. This could raise borrowing costs and complicate growth for capital-intensive sectors, like telecom.

A more immediate problems lurks in short-term lending such as commercial paper. Interest rates in that part of the market have recently risen from 2 percent to 4.5 percent for riskier companies, according to Businessweek.

Fred Wilson has a similar perspective on the venture capital market:

All startups are going to have to batten down the hatches, get leaner, and work to get profitable, but the venture backed startups are going to get more time to get through this process than those that are not venture backed. Here’s why.

Venture capital firms are largely flush with capital from sources that are mostly rock solid. If you look back at the last market downturn, most venture capital firms did not lose their funding sources (we did at Flatiron but that’s a different story). If you are an entrepreneur that is backed by a well established venture capital firm, or ideally a syndicate of well established venture capital firms, then you have investors who have the capacity to support your business for at least 3-5 years (for most companies).

Venture capital firms will get more conservative and they will urge their portfolio companies to do everything Jason suggests (and more), but they will also be there with additional capital infusions when and if the companies are making good progress toward a growing profitable business.

If you go back and look at the 2000-2003 period (the nuclear winter in startup speak), you’ll see that venture firms continued to support most of their companies that were supportable. The companies that were clearly not working, or were burning too much money to be supportable in a down market, got shut down. But my observation of that time tells me that at least half and possibly as much as two/thirds of all venture backed companies that were funded pre-market bust got additional funding rounds done post bust.

So if you run or work in a startup company that is backed by well established venture capital firms, take a brief sigh of relief and then immediately get working on the “leaner, focused, profitable” mantra and drive toward those goals relentlessly.

If, on the other hand, you are just starting a company, or have angels backing you, or are backed by first time venture firms that are not funded by traditional sources, then I think you’ve got a bigger problem on your hands. It’s not an impossible problem to solve, but you have to start thinking about how you are going to get where you want to go without venture funding.

I say that because in down market cycles, it’s the seed and startup stage investing that dries up first. It happens every time. Seed/startup investing is most profitable early in a venture cycle and late stage investing is most profitable late in a venture cycle. It makes sense if you think of venture capital as a cyclical business and it is very cyclical. Early in a cycle you want to back young companies at bargain prices and enjoy the demand for those companies as the cycle takes hold. Late in a cycle you want to back established companies that need a “last round” to get to breakeven and you can get that at a bargain price compared to what others paid before you. I’ve been in the venture capital business since 1986 (that was a down cycle) and I’ve seen this happen at least three times, probably four times now.

There’s another important reason why seed and startup investing dries up in down cycles. Venture firms don’t need to spend as much time on their existing portfolio companies when things are going well. A rising market hides a lot of problems. But when things go south, they tend to become inwardly focused. I believe we are headed into a period where venture firms will spend more time on their existing portfolio and less time adding new names to it.

Plan appropriately