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How to estimate market size March 16, 2011

Posted by jeremyliew in startups, VC.

As an entrepreneur, your time is a very valuable asset. It takes as much time and effort to build a business whether you’re attacking a small market or a big one. But the rewards for success in a big market are much greater, so it makes sense to attack big markets.

For the same reason,VCs are often very focused on market size. But there is is a lot of confusion about how to estimate market size. While you might play in a big industry, it is the Total Addressable Market size (TAM) that is really important.

TAM is really a pretty simple concept – it is what your revenue would be if you had 100% market share in your business. This is often radically different from what an analyst report estimates as market size as their view of the “market” can be quite different from what your product can address. Here is an excellent analysis from VigLink of their TAM:

Viglink allows publishers to put commerce links into their content with a universal affiliate code, and then tracks sales that originate from those links and pays out the affiliate fee. As you can see above, they have done a really nice job of starting with an enormous “market size” ($600bn+ ecommerce market) and broken it down into what is addressable by them, the network payout piece of commissions coming from affiliate orginated ecommerce transactions, which is still a $1b+ opportunity.

I’d urge other entrepreneurs to conduct similarly realistic analysis when they present market size estimates.


Internet/Media: 5 things that will define 2011 December 8, 2010

Posted by Bipul Sinha in advertising, Consumer internet, social media, social networks, startups.
Tags: , , , , ,

Some observations from Bipul Sinha about the internet and media industry in 2011.

1.  Year of Social Utilities

With over half a billion users and open graph integration, Facebook is the Internet with social graph at its core. This is as much of a game-changer (due to a new distribution model based on the social graph) as going from offline to the Internet was in the 90s. A number of startup companies, I call them social utilities, are leveraging the social graph to potentially disrupt traditional online businesses such as dating, e-commerce, travel and recruitment. Yardsellr, Branchout, and Mertado are examples of such companies and we will witness a few scale companies emerging out of this space in 2011.

2.  Display Advertising Enters a Golden Era

Innovations in media transaction platforms along with a better understanding of target audience have brought an amazing level of scale and efficiency in display advertising market. The use of data and technology will disrupt the premium, guaranteed media buying segment in the coming year resulting in an open, transparent marketplace for audience-based transactions. This marketplace will help bring price equilibrium to media supply and demand thereby further increasing the marketing budget spent on this medium. Startups to watch in this space are Legolas Media, Krux Digital, and BrightTag, among others.

3.  Social Media based Discovery Traffic Breaks Out

In the traditional marketing parlance, Google directed web traffic represents bottom-of-the-funnel users who are ready to take an action now. The aggregation of such high-intent traffic is what makes Google a formidable force on the Internet. However, the emergence of social media in the past few years has created a new web where people are the nodes, connected through the social graph. The traditional advertising formats such as display lack both context and intent to be effective in the social media environments. New advertising platforms are emerging to enable advertisers to leverage engaged followings and connections on social media for brand and discovery advertising. The resulting web traffic represents top-of-the-funnel users who are interested in learning more about the products/services, but not ready to commit just yet. This discovery/intent web traffic will grow fast in the coming year to become a significant source of users/customers.

4.  TV Goes Social via Mobile Devices

Since the advent of the Internet, media has been abuzz about web-connected living room. There have been several unsuccessful attempts to bring the web to TV, but the user experience hasn’t matched the lean-back, simple remote controlled TV watching. The new-generation mobile devices such as iPhones and iPads could bridge the gap between the web and the TV, and make TV watching a truly social experience. A number of startups including Peel, Umee, and Miso are attempting to turn this vision into reality and the implications are huge since the winner would essentially influence the content promotion and consumption. I believe that TV will finally go social in the coming year and we will witness a breakout company in this space.

5.  Online-Offline Commerce Accelerates

The astronomical growth of Groupon and LivingSocial* in the past two years heralded the integration of local businesses into the efficient marketing machine of the Internet. This online-offline commerce trend will accelerate in the coming year as more startup companies figure ways to leverage location capabilities of the smart phones to drive foot traffic to the local businesses. This acceleration would largely be driven by discovery via location based social experience sharing. The explosive growth of Instagram is an early sign of the experience sharing trend and we will witness a whole lot more in the coming year.

The New Year will create tons of opportunities. Are you ready?

*A Lightspeed Portfolio company

How to measure how well an online media company is scaling. December 8, 2009

Posted by jeremyliew in Consumer internet, Digital Media, Internet, media, start-up, startup, startups.

Two years ago I posted about the three ways to grow an online media business to $50 million in revenue. In this article I focused on RPM (Revenue per thousand pageviews, = CPM x sell through rate x # of ad units per page) and drew the distinction between three strategies, and the traffic needed for each strategy to get to scale:

1. Broad Reach, low RPM, traffic in the 10s of billions of pageviews/mth

2. Demographic Targeting, moderate RPM, traffic around 1 billion pageviews/mth

3. Endemic Targeting, high RPM, traffic in the 100s of millions of pageviews/mth

I think using CPM/RPM in this is a useful framework to think about strategy, but it isn’t necessarily the most useful way to think about howe well an online media business is scaling. In practice, most online media companies do not sell out their inventory through direct sales. Because direct sales generates RPMs so much higher than remnant inventory running through ad networks, the amount of direct sales is key.

Direct sales shows real economies of scale. While it is harder and more expensive to sell, support and serve a $1M insertion order than a $10k insertion order, it doesn’t cost 100 times more. Unfortunately, many media startups find that their campaigns are primarily in the 10s of thousands. This creates inefficiency and makes it difficult to scale. It is hard to get to $50M in revenue $10k at a time.

Right now, the key measure that I use to judge how well an online media company is scaling is by looking at quarterly revenue by advertiser. The more advertisers are spending over $100K per quarter the better. I like to see 10 or more advertisers spending over six figures per quarter. This shows that the site has grown beyond “experimental buys” and has become a core part of the advertising mix for a core set of advertisers. These sites are over the hump on scalability of their business as it is much easier to get repeat business from clients who are committed to the site, and to use these reference accounts to drive further sales growth.

What do readers think about this measure of how well an online media company is scaling?

Simplicity is always a disruptive innovation September 10, 2009

Posted by jeremyliew in economics, games, startups.

Clayton Christensen introduced the concept of disruptive innovation in his book The Innovator’s Dilemma. Summarizes Wikipedia:

Disruptive technology and disruptive innovation are terms used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically by being lower priced or designed for a different set of consumers.

Disruptive innovations can be broadly classified into low-end and new-market disruptive innovations. A new-market disruptive innovation is often aimed at non-consumption (i.e., consumers who would not have used the products already on the market), whereas a lower-end disruptive innovation is aimed at mainstream customers for whom price is more important than quality.

Disruptive technologies are particularly threatening to the leaders of an existing market, because they are competition coming from an unexpected direction. A disruptive technology can come to dominate an existing market by either filling a role in a new market that the older technology could not fill (as cheaper, lower capacity but smaller-sized flash memory is doing for personal data storage in the 2000s) or by successively moving up-market through performance improvements until finally displacing the market incumbents (as digital photography has largely replaced film photography).

I was recently talking to Trip Hawkins, CEO of Digital Chocolate, and he made the claim that simplicity and ease of use aimed at non-consumption is always a disruptive innovation that threatens incumbents. I think he is right. Some examples include the Flip, which disrupted consumer video cameras, and blogging which disrupted content management systems. Trip was talking about the rise of social and iphone gaming as the equivalent disruptive innovation that was causing non gamers to play games. Definitely something that incumbents need to watch.

What is the difference between a good product and a good company? August 12, 2009

Posted by jeremyliew in startups, Venture Capital.

Insightful tweet from Charles Hudson:

Good products create value. Good biz models capture value. Good companies have both

If a company has a good product but does not have a good business model it is usually because  it has not been able to figure out a way to benefit from the value that they create themselves. There are a number of common reasons for this:

1. They don’t create enough value for each user. If the value created for each user is small, it is hard to capture much of that value because of transaction costs.

2.  It is hard to identify who will get value from the product or convince them of the value.  Even if a lot of value is being created for each user, costs of sales may end up being too high.

3. Many other products create the same value. Competition and substitution limit the amount of value that you can capture from a user to a “market price” which can be lowered by too many alternatives. This is obviously much worse if they create MORE value than your product does.

4. Users expect the value for free.  Sometimes this expectation come about because of industry norms (e.g. online content) and other times this expectation is created by early decisions that the company makes.

It is rarer to find a company with a good business model that doesn’t create value. One notable class of such companies are focused on arbitraging new marketing channels, often with a lead gen or direct response back end. These companies often feel more like “projects” than companies in that there is a natural end of life for them when the arbitrage opportunity closes. These can be terrific projects for individual entrepreneurs, but because they don’t create enterprise value in the long term, are not necessarily good investments for venture capitalists.

I prefer to invest in companies that are both creating value and capturing some of that value for themselves.

Do readers have any other thoughts on ways to create value without capturing it, or capturing value without creating it?

New Media companies should emphasize “media” over “new” June 29, 2009

Posted by jeremyliew in advertising, business models, media, startup, startups.

AdAge has a good article today about how AOL has been attacking web publishing where it notes:

In the heady days of early 2000, the megamerger of AOL and Time Warner heralded the web-based future of publishing. It would create a digital platform for Time Inc., the biggest, most-prestigious magazine group in the world.

Needless to say, that didn’t pan out, and here’s where it gets ironic. Just as Time Warner is unwinding that mistake, AOL is figuring out the future of magazine publishing on the web. And it’s doing so without Time Warner’s content assets.

The model goes something like this: Find a vertical with an audience attractive to advertisers, brand it (Daily Finance, Asylum, Lemondrop, Politics Daily), hire five to seven people to run it and plug in AOL’s traffic fire hose. Repeat.

This reminded me a little bit of the continual tension in media companies caused by serving two  constituents  – readers and advertisers. AOL has clearly discovered one path to repeatable success, which is to start with the needs of advertisers. This is emphasizing the “media” part of new media.

The new media companies that are doing the best in this recession have taken a similar approach. Companies like CafeMom, Flixster (a Lightspeed portfolio company) and Glam have focused on creating highly valuable inventory for endemic advertisers, and on building excellence in sales execution.

In contrast, some other startups have focused on the “new” part of new media. They have often created incredible compelling experiences for users, and have generated impressive traffic. But their monetization ability has lagged; sometimes due to creating inventory that is hard to sell,  sometimes because the startu’ps culture is not inimical to ad sales.

Here in Silicon Value there can be a tendency to overemphasize product and technology and underemphasize ad sales.  Advertising revenue often scales with ad sales people. Yet I have seen some startups that have been disappointed with their revenue growth but have >10%  of their employees focused on revenue.

Like AOL, new media companies should remember that they are also media companies, and organize themselves appropriately. This can include doing things like:

– Building traffic with a consideration for your ability to package and sell it to advertisers

– Placing significant company and senior management attention on revenue. This can mean up to 30-50% of employees working on revenue generating activities

– Adding advertising sales expertise and contacts to the management team

– Being flexible about tradeoffs between advertiser needs and user needs

Many new media companies based outside of Silicon Valley (especially those in New York) grasp this innately.


For more in this vein read two prior posts;  on the preeminent importance for sales excellence in ad networks, and on the three ways to build an online media business to $50m in revenue.

Some startup CEOs’ New Years resolutions January 5, 2009

Posted by jeremyliew in 2009, start-up, startup, startups.

I asked my CEOs what their New Years Resolutions were. Here is what they resolved:

Jonathan Kibera of specialty ecommerce company Mercantila was alliterative in his focus on revenue:

Simplicity: Reduce the # of components necessary to generate revenue.
Stability: Be consistently excellent at each of these components.
Scale: Drive as much business as possible.

Lance Tokuda of social apps developer Rockyou is equally focused on revenue and mindful of the economy:

Optimize for revenue generation over growth to preserve cash in a weak advertising market.

Scott Albro of B2B media company Tippit knows what to worry about and what to not waste angst on:

Focus on what we can control and make sure, every day, that what we can control is more powerful than what we can’t.

Ed Baker of mobile virality company Demigo will be focused on execution in 2009:

Set realistic deadlines and meet them. While I will continue to encourage and work with the team to set aggressive milestones for each of our weekly releases, we need to do a better job of making sure we always meet these deadlines, and don’t let them slip.

Joe Greenstein of social movie site and app developer Flixster is making sure that his team feels the love:

Make sure everyone at flixster knows how much they matter. The further we get into this business, the more it is clear to me how directly responsible the talent and commitment of our team is not only for the successes we have had thus far, but for our hopes for the future and for the quality of the experience along the way. In a difficult economy especially, my 2009 new year’s resolution is to make sure everyone at Flixster knows that this is our company, to succeed or fail by our efforts and to be shaped along the way by our collective vision.

Amy Jo Kim of casual game publisher Shufflebrain (Photograb) is letting users guide product development as much as the company’s own vision.

My resolution is to listen to — and learn from — what the market is telling us, and mine the unexpected opportunities that are coming our way.

Siqi Chen of social game publisher Serious Business (Friends For Sale) will be putting in place the infrastructure to support the same key philosophical commitment:

In the new year, I resolve to get better at making data driven (characterize, hypothesize, predict, and test) decisions. This is an obvious point to most entrepreneurs these days, but the past year has really shown us that it isn’t as simple as just deciding to be data driven one day. Building the technology infrastructure and the engineering culture that makes this possible at scale are non-trivial projects. We’ve gotten a lot better at this in the short history of our company, but we’ve still got a long way to go, and we intend to continue to improve on this in 2009.

And finally David Scott of casual game maker Casual Collective sought more explicit communication and introspection:

Every Friday afternoon we will set aside time (away from our screens) to discuss all the things we achieved that week and list all we want to achieve in the following week. This will help keep everyone aware of what everyone else is doing, spark discussions and ideas that otherwise may not have happened, end the week with a better sense of achievement, and help us hit the ground running on Monday mornings. With such a small team we also need to better prioritize tasks.

And to lose weight of course 🙂

What are your new years resolutions for your company?

How bad is it for startups seeking financing? November 24, 2008

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

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.

Founders, be ready for the long haul November 10, 2008

Posted by jeremyliew in exits, M&A, start-up, startup, startups.

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.

Consumer confidence is at an all time low – factor this into your 2009 planning. October 29, 2008

Posted by jeremyliew in business models, Consumer internet, economics, start-up, startup, startups.

The Consumer Confidence Index (CCI) measures how optimistic consumers are about the state of the economy. Specifically, it measures how consumers are feeling about:

1. Current business conditions.
2. Business conditions for the next six months.
3. Current employment conditions.
4. Employment conditions for the next six months.
5. Total family income for the next six months.

Notes Investopedia:

In the most simplistic terms, when [CCI] is trending up, consumers spend money, indicating a healthy economy. When confidence is trending down, consumers are saving more than they are spending, indicating the economy is in trouble. The idea is that the more confident people feel about the stability of their incomes, the more likely they are to make purchases.

The Conference Board, which measures the CCI, announced yesterday that:

The Conference Board Consumer Confidence Index™, which had improved moderately in September, fell to an all-time low in October. The Index now stands at 38.0 (1985=100), down from 61.4 in September…

Says Lynn Franco, Director of The Conference Board Consumer Research Center: “The impact of the financial crisis over the last several weeks has clearly taken a toll on consumers’ confidence. The decline in the Index (-23.4 points) is the third largest in the history of the series, and the lowest reading on record. In assessing current conditions, consumers rated the labor market and business conditions much less favorably, suggesting that the fourth quarter is off to a weaker start than the third quarter. Looking ahead, consumers are extremely pessimistic, and a significantly larger proportion than last month foresees business and labor market conditions worsening. Their earnings outlook, as well as inflation outlook, is also more pessimistic, and this news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season.”

As a point of comparison, the CCIs most recent peak was at 112 in July 2007. It is down by two thirds since then. The last CCI trough was at 61 in March of 2003, down from a peak of 144 in May 2000. This time around consumer are far more concerned than they were in even the depths of the last economic slowdown. Historical CCI stats are available here.

All consumer facing companies, whether ad based or commerce based, should bear these numbers in mind when planning for Q4 2008 and for 2009.