How bad is it for startups seeking financing? November 24, 2008
Posted by jeremyliew in start-up, startup, startups, VC, Venture Capital.14 comments
It is difficult for startup companies to raise venture capital at the best of times. A venture capitalist might get emailed 5-10 pitches from startups each day. Over the course of a year that adds up to 2,500-5,000 pitches. Of those pitches, that venture capitalist might fund one or two companies. Not great odds for a startup. Granted, some of the other startups may raise funding from other venture capital firms, but even so, it’s a chancy proposition.
Recently, startups have been facing an even more difficult environment for raising capital. There are three factors that are contributing to this. Some of these factors will change in the short term, but others will likely continue to be a factor for a while. From longest to shortest then:
Angel financing has dried up. Often, when a company is too early to raise institutional venture capital it will raise money from angel investors – wealthy individuals. According to the Center for Venture Research, $26B was invested by angels in 2007, a marked increase compared to $15.7B in 2002. The precipitous drop in stock markets and housing markets since the beginning of the year has made many angel investors nervous about making new investments in risky and illiquid startups. Many angel investors will likely sit on the sidelines until we see a rise in stock markets and in consumer confidence. While the companies who raise angel financing would not likely have raised from venture capital firms anyway, a slowing down of angel financing will mean that less companies are ready for institutional venture capital in the next few years.
A slowing economy has reduced near term revenue growth expectations. We are in a recession. While for many startups, the micro factors (e.g. Did we hire our second sales person in Q1 or Q3? Was our VC able to introduce us to BigCo for a distribution deal?) trump the macro factors, startups still operate in the same economy as everyone else. With consumers and enterprises alike watching their spending closely, even the most promising startups are likely to see slower growth than they might have projected a year ago. Slower revenue growth usually translates into a longer period before the company gets to profitability, and hence more capital required. Strong companies will still get funded, but each financing may be a little larger than in the recent past to give the companies the additional runway to get to profitability. As a result, there may be a slight reduction in the overall number of financings (given that the pool of available capital is largely the same) and some marginal companies will not be able to raise capital. Since early stage venture capital firms by definition take a long term view, this impact is likely small, but will persist until investor expectations for consumer and enterprise spending improve. As we get additional data on the likely length and depth of this recession through 2009, this effect will likely disappear.
Venture Capitalists are focusing on their portfolio companies. The slowing economy affects not just companies raising finance, but also companies that have already been funded. VCs are currently fully engaged with their current portfolio, helping them to prepare for a tough 2009. Many entrepreneurs are first time CEOs, and some were not even in the workforce during the last recession. They are turning to their VC investors to help them think through what actions their companies need to take to adjust; cost reductions, changes in strategic direction, or otherwise. This takes time. Time spent by VCs with portfolio companies is time not spent looking at new potential investments. As a result, companies currently seeking financing may not get the same level of attention that they might have received a few months ago. The good news for startups is that this is a short term effect. 2009 planning should be completed within the next few weeks, and certainly after the holidays, venture capitalists time will once again free up to look at new deals.
Better time ahead. Although startups seeking financing right now may have a tough time, as these factors fade away they should see a relative improvement in the very short term. As the market will only improve, startups looking to raise new financing should try to defer for as long as possible. This may require cutting costs to extend the cash runway, reducing the scope of projects, prioritizing revenue over new features or looking to existing investors to provide a bridge loan. But do not lose hope! Promising companies will continue to get funded, with the pace returning to close to normal by part way through 2009.
Three meta-rules for usability design November 20, 2008
Posted by jeremyliew in iphone, product management, UI, usability.2 comments
I recently saw a useful deck from Create with Context about how people really use the iPhone. The company did a bunch of ethnographic research on how ordinary users (not power users) used the iPhone, and in particular, what were common mistakes made. Based on their research, here are their eight rules of thumb for designing for the iPhone:
1. Take advantage of learned behaviors
2. Avoid interaction inconsistencies
3. Provide clear conceptual link across widgets
4. Put space between action widgets
5. Plan for accidental overswiping
6. Don’t rely exclusively on multitouch
7. Provide visual feedback for taps
8. Provide interaction affordances
The presentation provides examples of all of these rules and what sort of errors are possible when they are not followed, and is well worth the 10 minutes it takes to review.
These useful rules of thumb fall into three metarules for design that make sense under almost all circumstances:
A: (1&2) Use UI standards whenever you can
When I was GM of Netscape I drove some bad design decisions for the Netscape 8 browser based on my idea of “efficiency”. The worst one was moving the browser dropdown menus to the right hand side of the application window, up a level so that it was on the same level as the logo and the name of the current web page. See a screenshot here (look at the top right hand corner of the page, in the black background with blue text).
We did this with the best intentions – to save some pixel height and thereby create more space on the screen for the actual webpage. Of course, since this “improvement” was different from the way that every other app in the world works, many users were confused and couldn’t find the dropdown menus at all. It was a bad idea.
I think that tagclouds, once all the UI rage, have since faded from the scene for the same reason. A few years ago they were the hallmark of web 2.0, all over the home pages of Delicious, Technorati and Flickr. But they are gone from all of these home pages now. The majority of users (not early adopters) found them to be too different from the standard forms of navigation that they were used to (left hand nav bars, top nav bars, search, headline-teaser) and didn’t use them.
B: (4&5) Make sure that user error is not catastrophic
This is obvious, but worth mentioning. The team building a product are by definition experts, and this can lead to a blindness to possible modes of error. Just five user tests will turn up the biggest problems.
C: (3,6,7&8) Give users visual clues as to what does what
This is an area where designers sometimes come with the wrong instincts. Making things look good is definitely not the same as making them easy to use. In fact, sometimes these factors are contradictory.
One common example is in formatting a page to fit a screen. While the most aesthetic design has all the elements of a page fitting neatly into a grid so that nothing is “cut off” by the fold of the screen, in fact having partial images disappearing off screen is an important visual cue to users that there is more below the fold. Similarly, overly stylized icons can confuse a user as to what they represent. Also, UI that is too subtle can leave a user confused as to what is clickable and what is not, and what they should be clicking on next. Why are some web ads and social network profiles so garish and “ugly”? Because they serve not to please the eye, but to draw the eye, and they do that job well.
Keep these three simple meta rules in mind when you’re designing your user interactions.
We’re excited to invest in Casual Collective November 18, 2008
Posted by jeremyliew in games, games 2.0, gaming.5 comments
I spent way too many hours playing Desktop Tower Defence last year. When I met Paul Preece, the man who destroyed my productivity for months, and heard that he was working with David Scott, a guy whose game Flash Element Tower Defence had even more gameplays than DTD, I was quite interested in hearing about what they were working on next.
I’m a big believer in applying the principles of web 2.0 to gaming: fast development cycles, user generated content (ie multiplayer games) and a direct to consumer distribution model (often free and viral).
Casual Collective, Paul and David’s new company, is applying all these principles to create a free-to-play social gaming site, and Lightspeed are excited to be seed investors in the company. In addition to the newest version of DTD and FETD, check out some of the new great games there, including the real time naval strategy game Desktop Armada, an addictive social wordgame called Farragomate and the joyful platformer Buggle Stars. But don’t expect to get much done today!
Facebook’s digital goods revenue $50-60m sources say November 12, 2008
Posted by jeremyliew in digital goods, facebook, gifts, virtual goods.12 comments
In September, I estimated that Facebook’s digital goods sales were on a $35m revenue run rate. Silicon Alley Insider quotes an anonymous insider to say:
Facebook’s revenue this year will be about $265 million, the source says, which is less than the $300 million expected. The source estimates that this is composed of about $180 million of ad revenue, $50-$60 million of virtual gifts, and some smaller revenue items.
I was in the ballpark!
More signs of consumer discretionary spending slowdown, online feeling the impact November 12, 2008
Posted by jeremyliew in Ecommerce, recession.1 comment so far
Last month I wondered which companies might prosper in an advertising recession:
Companies that buy advertising (rather than selling it) will find that they can now buy advertising more cheaply than previously.
Ecommerce companies, subscription businesses, lead gen businesses and online game companies are all buyers of online advertising. In the last advertising slowdown, companies like Expedia, Zappos, Quin Street, Lending Tree, Lower My Bills, Netflix, Classmates.com and Ancestry.com were all able to grow to over $100M in revenue by taking advantage of cheap media.
Will history repeat itself in this recession? It is hard to know. Certainly lower CPMs can lead to lower customer acquisition costs if all else is equal. But the difference between this recession and the last one is consumer confidence, which is markedly lower today than in the 2000-2003 time period…
Certainly, consumers are deferring “considered purchases” including homes, cars and other big ticket items. Etailers selling “necessities” that cannot be deferred, such as diapers or business cards, will do fine. The question is what will happen to the demand for small ticket consumer discretionary spending. Starbucks might be considered a proxy for this sort of spending.
So far it isn’t looking good. Comscore notes:
A review of monthly retail e-commerce growth rates helps to further depict the slowdown in the U.S. retail economy. So far this year, retail e-commerce growth rates have fallen from levels of 18 to 20 percent observed during Q4 of 2007 to a growth rate of only 6 percent in Q3 2008. Since April, we have seen five consecutive months of declining growth rates. September’s 5-percent growth rate is the lowest recorded by comScore since it began tracking e-commerce sales in 2001.
And further:
In addition to reporting this data from comScore’s passively-observed behavioral panel, comScore surveyed more than 1,000 consumers in October 2008 to gather attitudes on the economy. The study revealed that the majority of consumers are fearful of the future, with 82 percent stating they are more afraid about the economic future than ever before. Additionally, only a quarter (26 percent) of respondents said they believe the economy will be ‘better’ a year from now.
Online entertainment sales (music, movies and videos) were the worst affected, down 29% year on year in q3. These is the most discretionary of discretionary spending.
And as for Starbucks, the WSJ notes:
Starbucks Corp. said it will open fewer stores internationally than planned and offered a more pessimistic earnings forecast for the coming year as the coffee chain said fiscal fourth-quarter earnings plummeted 97%… Same-store sales, or those at locations open at least a year, declined 8% in the U.S.
It doesn’t look like we will spend our way out of this recession
Facebook’s engagement ads could be the standard we need for social media advertising November 11, 2008
Posted by jeremyliew in advertising, engagement, social media, social networks.3 comments
The WSJ today notes that Facebook lags Myspace substantially in ad sales, despite having surpassed MySpace in usage:
[Facebook] … says 70 of the U.S.’s 100 largest advertisers have advertised on its site since 2007. But its share of total number of U.S. online display ad views was just 1.1%, according to market research firm comScore Inc., in its most recent report in June.
News Corp.’s Fox Interactive Media Unit, which includes rival MySpace.com, is the market leader with 15.9% of display-ad spending, according to comScore.
I believe that this is because most of the ads the Facebook sells are not standard units, unlike most of the ads that MySpace sells. As I’ve mentioned before, new forms of advertising are hard.
However, I am excited about the new engagement ads that Facebook is now selling:
The Palo Alto, Calif., company is rolling out a new ad format called “engagement ads” that further blurs the line between marketing and social networking.
The new ads appear on the main screen when a person first logs in to Facebook. They prompt a user to do something within the ad, such as comment on a movie trailer or RSVP for the season finale of a TV show.
This could be the first move towards a new standard for social media advertising. As I said previously:
The thing that differentiates social media sites from other forms of online media is not just user generated content, it is also that users are willing to affiliate themselves with brands. This takes many forms, from friending Scion on Myspace to putting a Natasha Bedingfield style on your Rockyou photo slideshow, to buying one of your Top Friends a Vitamin Water. These willing user affiliations/endorsements of brands are clearly valuable to marketers of those brands. Right now though, these deals are being negotiated on a one off basis; they look more like business development deals than selling ads off of a rate card. It will take a while for the social media industry to establish standards for selling this incredibly valuable inventory to brands, but I suspect that this will happen over the next 12-36 months.
Facebook’s engagement ads are potentially the first step towards defining what the ad unit will be (prompting a user to take an action that affiliates themselves with a brand). Flixster has had good success with this concept in many of its campaigns with movie studios. I think this concept could well be the basis for a new standard unit for social media, and I hope that the rest of the industry gets behind it.
Founders, be ready for the long haul November 10, 2008
Posted by jeremyliew in exits, M&A, start-up, startup, startups.13 comments
The chart below shows the average time in years between a startup’s first equity investment (usually Series A) and its sale, for companies sold in each year from 1997 to 2007. (Source is Dow Jones Venture One/E&Y study)
As you can see, companies sold in 2007 had seen almost seven years pass since their first financing. Often they were founded up to a year before they took their first financing, so they were likely eight years old when they were sold. These numbers are averages – some companies exit faster, but some exit slower as well.
This data represents M&A exits. Usually the time to exit via IPO is even longer.
Although no data is available yet for 2008, there has been virtually no venture backed IPO activity in 2008, and the number of M&A tractions is sharply down from previous years. That means that the time to liquidity is likely getting longer.
Obviously, these are backward looking metrics (2007 numbers refer to companies that were sold in 2007, not companies that were started in 2007). However, founders of companies looking to raise venture capital should be ready for the long haul. You can’t start a company and expect a quick flip.
Which user experience research tools a startup should use, and when November 7, 2008
Posted by jeremyliew in A:B testing, product management, UI, usability.6 comments
I recently posted about how usability testing can slow down launch but speed up success. But usability testing is just one of many elements of user experience research, with others including the ethnographic field studies made popular by Ideo, the A:B testing becoming standard for web 2.0, customer feedback, focus groups etc. With so many tools at your disposal, which user experience research tools should you use and when?
Jakob Nielsen recently posted about this topic, and concluded that it depends on what phase of product management you are in. For startups, my summary of his work is below:
Ideation: At the very beginning of the process you are looking at new ideas and opportunities. In this phase, aside form the founders vision, ethnographic field studies, focus groups, diary studies, surveys and data mining of webwide behavior can all be useful. Most startups will not have access to proprietary user data of existing products to identify additional opportunities.
Pre-launch: Once you’ve settled on a product idea and are working towards (beta) launch, you want to improve design and functionality as much as possible to minimize risk and maximize the likelihood for a successful launch. In this phase rely on tools such as cardsorting, paper prototype and usability studies, participatory design, desirability studies and field studies (including closed alpha launches to “friendlies”) to improve the user experience.
Post-launch: Once you’ve pushed the product out you will have live data that you can use to compare the product both to itself and to its competition. In this phase, usability benchmarking, online assessments, customer emails, surveys and A/B testing will be your primary tools
Nielsen provides some additional frameworks to differentiate when to use different forms of user experience research in his post. The site is a good resource about user experience in general.
Tips on A:B testing November 4, 2008
Posted by jeremyliew in A:B testing, product management.4 comments
If you’re doing A:B testing, you should read this paper and the accompanying presentation by Kohavi, Practical Guide to Controlled Experiments on the Web: Listen to Your Customers not to the HiPPO. It is a comprehensive primer on how to do A:B testing well.
Some nuggets of goodness culled from the paper in no particular order (some sound obvious but read the paper to get more context). It will take you 20 minutes and you’ll use the lessons you learn for years:
1. Agree on evaluation criteria UP FRONT (vs after the fact analysis)
2. Ensure sample size is sufficiently large to have high confidence in results (with small samples, testing a version against itself can show wide ranges in performance)
3. Be truly random, and consistent when allocating users to groups
4. Ramp experiments from 1% of users to [50%] of users to get results fast [subject to day of week variations]. Auto abort if the new version is significantly worse.
5. Account for: robots skewing results, “newness” effect, time of day, day of week
6. Understand why as well as what (e.g. is lower performance caused by slower load time? incompatible browser types or screen sizes? etc. If fixable, fix and retest.)
7. Integrate constant testing into culture and systems
8. Test all the time.
Discovered via Eric Reis
How robust are communities? November 3, 2008
Posted by jeremyliew in communities, product management, usability, user generated content.4 comments
Wired has an article in its November issue about Urban Baby and You Be Mom. Urban Baby is an anonymous forum for Moms. Like 4chan, its anonymity makes for a mix of candid discussions, raw honesty and trolling, but with a mommy bent (think cheating, divorce and public schools). Says Wired:
Then in May, UrbanBaby, which was purchased by CNET in 2006, launched a redesign. All hell broke loose.
The changes weren’t huge, but each of them subtly altered the flow of conversation. CNET added a wide sidebar on the site to create space for ads. This reduced the reading area, a big problem on a board with hundreds of comments per hour. Discussions had been organized chronologically, but immediately after the relaunch, the default setting had “most popular” threads at the top, even if they had been started days earlier. Worse, you had to refresh your browser to see new posts. UrbanBaby users went nuts, demanding a return to the old design.
They soon got it. But not from UrbanBaby. A week after CNET rolled out the hated redesign, a couple of work-at-home computer programmers—longtime UrbanBaby users themselves—launched a rival site called YouBeMom.
They perfectly re-created the look and feel of the old boards. Better yet, they made improvements, including a souped-up search engine and privacy controls that make sure your spouse can’t use your computer to find out what you’ve been posting. They also set up a blog to capture users’ requests for site improvements and to outline what YouBeMom plans to do about them.
Within days, there was a mass exodus of users from UrbanBaby to the new site. CNET won’t give out traffic figures, and neither will the owners of YouBeMom. But I logged on to both sites recently and compared how often people posted. I’d estimate that YouBeMom has three times the traffic of UrbanBaby. That’s just how fragile a social application can be.
I found much higher comment volume and more vibrant conversations at YouBeMom as well when I looked at conversations on similar themes on both sites. The moral of the story according to Wired:
People have a very sophisticated sense for their online hangout—if you mess up the feel of it, or impede the ways they want to schmooze online, they’re gone.
What a terrific parable about the importance of community. What is strange though is that the traffic stats don’t appear to bear it out:
According to Compete, not only is Urban Baby far bigger that You Be Mom, but the redesign actually seems to have dramatically grown usage.
Sometimes communities are more robust than you think. Redesigns almost always create a lot of negative feedback when they first occur because all users hate change. You have to leave a little time to pass for users to get used to the changes before you can truly judge if the redesign has been a success or a failure.
There are three classes of user within social media, creators, curators and consumers. It may well be that many of the Urban Baby creators moved to YouBeMom, but the 90% of social media consumers, who read but don’t write, stayed at Urban Baby.
Do any readers have experiences of the impact of redesigns on a community?
Lightspeed Venture Partners Blog 