Almost ten years ago, Amazon.com went public with a roadshow that emphasized the value of being virtual

- Amazon.com never closes
- build once and sell everywhere (compared to brick and mortar companies needing to roll out thousands of stores)
- unlimited inventory

Which all really come down to the fact that because of these structural advantages, Amazon.com’s (other online companies’) customer acquisitiom cost would be much much lower than the offline world.

That was true for a while until Google came along, inserted itself into 20%+ of the internet traffic, and forced companies to pay almost all their net margins into bidding for customers. Given that many of the online companies dont really have any expertise in offline acquisition or distribution strategies, they really dont know how to compare their customer acquisition cost to anything but other online channels. Without the proper yardstick, the cost of online customer acquisitino has met or exceeded offline acquisitino in many industries.

Recently, the increasing cost of online acquisition has forced many online companies to look to the offline world for distribution and customers. There are very very few companies that has nailed the the online/offline integrated distribution and usage model. . . (Green Dot, where I work, is close) but Webkinz (by Ganz) is by far the best and most well executed I’ve seen. (learn more about them here)

There are a few advantages to distributing an integrated virtual/physical service in the offline channel

- Acquisition cost can be significantly cheaper than online (cant emphasize this enough)

- Leverage existing store distribution channels and traffic (hallmarks, malls, gift shops etc)

- Allows for the creation of relationships with users ubiquitously and continuously . . . (I can hug my webkinz, but not my Penguin)

- Its the singularity advantage

- Payments, payments, payments . . . it so much easier for a kid to take their lunch money and buy a webkinz instead of trying to get a membership to habbo hotel

- Eventually, the physical good (like a webkinz) can become the main online interface, making the computer obsolete, in which case you’ve created a platform out of an application

- Many companies (such as Google) simply do not have the DNA (skills, knowledge, committment, patience) to compete with a company like webkinz in the offline world where the company have significant advantage. (manging logistics and contracts for tens of thousands of independent gift shops is not trivial)

Anyways, once in a while i get a man crush on a company, and my latest one is Ganz/Webkinz

Josh K. has an interesting post that contrasts the acquisition & retention model of social networks (and community sites) in general.

The winners have a “catch and keep” model where the site is “sticky” while the less succesful players have a “catch and release” model where repeat visits are low and value is garnered linearly.

Another way to put it . . . we should try to build a site with a set of functionalities which gives users incrementally more value on the second visit than the first visit . . . third visit more than the second vist . . . and so forth. In many ways, this is a practical intent of metcalfs law and perhaps much more actionable than simplying trying to build a large userbase and claiming to have reach critical mass and network effects. The goal for any website would be creating accretive value per incremental visit.

Another interesting interpretation of Josh’s post is that social networks that are augmenting/turbo charging offline & parallelsocial interactions seems to have higher value and relevancy to the user than ones which tries to be completely virtual. If a site has relevancy to the daily (and thus offline) lifes of its user (campus life for facebook users, professional & personal networking for meetup users etc) it will remain more sticky than a site which is simply trying to act as a bridge or replacement for physical interactions. (Yes, I believe the future lies in “singularity”)

Lastly, to the snarky title of this post. It wasnt long ago (12 month?) that the web is buzzing about “attention aggregators” which mostly became just “catch and release” websites. It is very possible to create a “edge” based site which has the “catch and keep” value proposition (google for one) . . . but in truth, the functionality and features required to provide accretive value per incremental visit can rarely be achieved by an aggregator unless aggregation can provide such a value (which only occurs very very rarely . .. such as in google’s case). In most cases, aggregation is not enough and product/feature based value can only be built and captured through a “walled garden” like website which nurtures and builds value within a tighly controlled environment. A potentially winning model (I have to think more about this) is a hybird site like digg which combines edge aggregation with wall-garden like product and features . . .

First of all congrats to Jason Steinhorn on his hard work and foresight (two of the most important ingredients of success) at Tellme.

I remember Tellme from the dot com days as one of those companies with insatiable desire and ability to raise money. In many ways it had more hype than substance in the intial stages (anyone remember the “voice web”?) but unlike most of its brethens, it slowly executed towards its vision (while the positioning has changed to reflect the latest buzz words, it has stayed surprisingly faithful to its original vision). Can’t say that about too many companies of that era . . . many of which eventually lost its way amongst all that cash.

Anyways, this is a big win for MSFT. (stock was up big today!). Instead of fighting Google at its own game, algorithmic web search, there are entirely new battlefields being born that are more wide open. . . voice, local, text, j2me and their intersections . . . mixing multiple input and output channels are what really made Tellme cool . . . smart buy for the guys up north . . .

(BTW, I hope eBay took a hard look at this deal . . . search is way too important to leave to the usual players)

A friend asked me what MyBlogLog was and I said

“Its like a group of guys standing in a circle patting each other on the ass”

MyBlogLog was a brilliant idea that both People Aggregator other social networking “aggregators” should have been. A clear case where one entreprenuer was very in touch of its target customers while the others fell in love with his vision instead; the others forgot how to serve the mindset/need of the target market. Unfortunately it is also because MyBlogLog brilliantly exploited this desire for peer validation from bloggers that MyBlogLog often annoyingly degenerats into quite a self-congratulatory and incestuous circle #$*%. In the end though, $10M seems like too low a price to sell one of the best concepts of 2006. (yes, despite my snarky comment, I think the site is brilliantly executed)

Zlango just announced money from major hitters today - Benchmark and Accel. I would like to pretend that I’m cool and in with the crowd but I dont get it . . . I would like to think that if one of these stuffy old guys would “get it”, it would be me. But nope, not me . . . I see that its fun, but I cant wrap my heads around $12M or an NPV model that justify the pre-money.

Back in the pager days I used pager codes. I used to type in alternating caps. I used to replace all my “s’s” with “z’s.” I had a low hundred digit ICQ account (probably by coincidence). I love my emoticons. I was on Asian Avenue before Tom ripped it off to create myspace.

still . . . I dont get it. . . and it scares me. These guys are smart, they are Israeli, they have to be . . . Benchmark and Accel are the best. Today, for the first time in my life, I feel too old rather than too young . . . (I’m still waiting on feeling just right). . . . I’m gonna go feed my neopet now . . .

Back in the good old dot-com days, companies runtinely uses its balance sheet (more specifically its ability to raise money and put it in the balance sheet) as an competitive advantage to acquire companies that has either better traction or revenue but not the access to cash. This strategy is often used by buyout shops to roll up companies without the sophistication to know how much they are worth or the ability to put together a business plan and financial model to pitch to PE shops. As much as we would like to believe capitalism is without friction, the VC or buyout circle is small and requires specific language, behavior, and access.

A classic example of “tail wagging the dog”, by virtue of raising a ton of cashing, the cash rich venture has essentially “sucked up” all the cash that VCs are willing to dump into a space. Even if a competitor comes along and achieve better traction, VCs are loath to invest because of the cash hoard that the original company has amassed. (its like competing against MSFT vaporware in the early nineties)

Well today, Obopay acquired BillMonk. A cool little app that seemed to have gathered a small but loyal group of users. Not to take anything away from obopay, (its succesfull in its own right), this is a case book study on “throwing your weight around” to gain (additional?) traction.

Man, what a loaded term . . . almost smacks of trying too hard . . .

Cambrian House had previously been best known for their ill fated attempt at bringing Google employees a taste of life outside of Cordon Bleu Googlex. But lately they have been making some noise with a cute little website called the RobinHood Fund . . . its a combination of hotornot.com and 43things.com.

Intriqued, I finally took a look and is facinated with their approach to website development and idea sourcing. I cant say that I’m impressed since that would connote full fledged “bet my money on the idea” kind of support. (I’ve only done that to SpotRunner, Meebo, Lala, and oDesk) BUT I will say that I’m facinated enough to spend about 5 hours this week on the site playing, contributing, and even discussing a few ideas . . . and to say the least, I’m a little addicted. I even submitted one of my crazy ideas to get the full exprience. (shameless plug, please vote for it)

So what is Cambrian House? Taking away the ultra marketing speak . . . it is essentially trying to extend the open source (sourceforge) model into ideation and marketing while attempting to create an incentive and selection system that encourages participation through out the software development and venture startup cycle. Its an open incubator on stanlozolol. Or American Idol for web based businesses.

As much as I like the idea . . . there are a few things I wish to improve

- Make it more explicit what is in it for Cambrian House. Each project has about 1500 royalty points which essentially equate to shares. Gross Margin of each of the project is split between point holders. I’m unsure if Cambrian House is trying to make money between Gross revenue and gross profit or if they are taking royalty points as well.

-Even more mind bending are the terms and conditions.

a. When you give us your submission you are assigning us all rights and interests, including all intellectual property rights, in the Submission, and CH shall be the absolute owner of all rights and interests therein.
b. If a Submission is not accepted by us, you retain title to all rights and interests, including intellectual property rights, in the Submission. You also retain all rights to your idea in the event a product is market tested, but we decide not to pursue it further.
c. In the event your idea is submitted and we don’t act on it, all IP is returned to you after one year.
d. All CH products and all intellectual property and other rights are the property of CH, regardless of whether a Submission has been incorporated into them. You acknowledge and agree that you have no property rights or license to any CH products, including CH products that may come into your possession in the course of performing work for CH.

Its essentially saying that you are giving exclusive rights of your idea to CH and forgo any commercialization rights for the next year (or more if it builds it) . . . Legally I understand why the lawyers would want to formulate their Ts&Cs in this manner. However, in the spirit of “crowd sourcing,” ownership should belong to the community (and the submitter) not CH. If I were CH, I would give equity in CH ITSELF as well as royalty points in ideas to the entire community.

- Another more strategic issue is that I’m unsure how more complicated ideas can get their proper vetting. Anything that has more long-term implication with no revenue or negative profitability implications in its early lifecycle (like Google) will not be approved since the royalty system is revenue driven (another reason for giving out equity). Today, most of the ideas are features or products rather than a full fledge company. It will be really hard for the “next big” thing to come out of the CH vetting process if it has a serious “investment” period. Probably even harder is the fact that each “idea” only gets 1000 words. I’m pretty sure not all business plans can be distilled into 1000 words (a lot can but not all).

- In a similar vein, once an idea has proved to be successfull, does CH intend to “spin out” the project so it can get the proper resources it needs to succeed? The initial idea for youTube would be very much executable under CH’s model. However, the business of running youTube and the current functionality available requires a full-time team to implement.

- Another question for me is that every open source project or business usually has a “visionary” or a “project manager” . . . essentially someone that acts as the heart, soul, and conscience of the project. CH seems to promote specialization to the point that the sense of ownership might become very dilluted and coordination become disjointed.

In the end, these are just superficial warts I believe the community model will rectify collectively (as long as CH listens to its community). I like CH very much. At the very least, it is a deserved social experiment on revamping the current venture capital/entrepreneurship process. More likely, it will grow to become a kind of micro-comglomerate of super profitable web properties (think a mini-IAC or even a uber Internet REIT) . If so, it is a home run in all but the largest ballparks (KP or Seqouia).

From today’s PE weekly . . .

Austin Ventures has sponsored a recapitalization of CreditCards.com, an online destination for consumers to search, compare, and apply for credit cards. No financial terms were disclosed. In related news, former Bankrate CEO Elisabeth DeMarse was named company CEO. American Capital Strategies and CreditCard.com founder Dan Smith also participated in the recap. www.creditcards.com

Wow . . . who knew anaffiliate spammer, keyword arbitrage, click arbitrage, traffic arbitrage, consumer information portal could get a top tier VC’s attention . . .

Actually, I’m just being facetious, I’m playing with internet marketing right now and do realize their value to advertisers and customers . . . In many way these are pretty legitimate businesses that provide value to the consumers much like an online equivalent of a distributor or retailer . . . providing breadth of SKU’s and enabling choice . . . its just interesting how the most important asset of the company is the URL . . . plus trying to understand what is Austin’s exit strategy . . . cause there are actually thousands of topic oriented sites with the same traffic like creditcards.com that Austin can build an entire practice around . . .

I was going to title this post Marketplace 2.0 (you know like software 2.0, enterprise 2.0) but I realized I dont want to create another empty bandwagon Anyways, last week, oDesk raised a good chunk of cash from an investor that knows more than anyone about building marketplace businesses - Benchmark. Which reminded me of one of the most important things I learned in the 2000 B2B craze.

As much as most people think that the value created by market places are from counter party discovery (aka search), capturing that value rest solely on providing transactional settlement services.

eBay.com is the exception rather than the rule. For consumer goods, the search cost of finding a business is high and the switching cost low. Thus EVERYTIME you want to buy a laptop, you will try to find someone to give you the lowest price. Thus eBay was able to build a gigantic business focusing solely on “discovery” as its main business. However, in the long run, when Google has taken over the world’s entire need for search, I would venture to guess that in 5 years, Paypal will generate over 2x the revenue of eBay’s Marketplace business. Note that Paypal is an example of a settlement service (financial one).

During the B2B days, eBay’s success on its business model let many to believe that if one created a marketplace and help business x find business y (or person x and person y) one can charge 10% for helping to broker that transaction. Oh boy, were we (I) wrong.

For most other businesses (non-consumer goods) counter party discovery is a commodity. It is also part of the transactional value chain that is hardest to capture. In most transactions, relationships matter much more (finding a plumber, contractor, house, supplier of PCB’s, or babysitter). The switching cost to of changing vendors/customer are very high. In that environment, once the introduction is made, the relationship between buyer/seller is taken “offline” - there is no longer a need for the marketplace going forward (for the completion of the initial transaction AS WELL AS the next transaction) . . . UNLESS you can add value through settlement services.

The marketplace (the discovery portion) is actually NOT the core competency of the marketplace business, it is just another way for the venture to hedge and reduce spending on Google. The marketplace acts as a FEEDER into the settlement services provided by the marketplace. As does Google. . .

Google has create the biggest “suckout” in the history of business by rendering metcalfe’s law irrelevant.

In such a world, oDesk has created the model for the next generation of online marketplace ventures. While others are still stuck in the 1.0 world competing with Google on search/discovery, oDesk has instead focused on how to lower friction and increase trust for the ENTIRE value chain. It has created a platform for relationship management that does not in anyway pigeon hole the value of the marketplace to fulfilling the initial need for finding a counter party. It has inserted itself between the buyer and seller permenantly. And that, is the brilliance of oDesk.

Wouldnt it be nice to join Google in 00, eBay in 98, Yahoo in 95, Dell in 92, or even Myspace in 2003? Not having to deal with the startup risk while gaining all the upside is one of the best bets you can make in your career - monetarily but even more so, for career progression (everyone loves a winner). Joining a startup with only 10 people is way too risky if you dont have over 5% of the equity. Joining big company after the hypergrowth means that you are stuck in a Corolla while everyone else at work has a M5 at home (and a Prius at work). My advise is to be like a VC and do due diligence on the new prospect like they do. Investing in your career is actually a bigger bet than the $4-5M in investment the average VC’s make in any round. This is not as hard as seed stage investing cause you dont want to be betting on a idea. This is much more similar to late stage investing where the financials/metrics can tell 70% of the story.

Not trying to say its a fool proof (or even a good way . . . time will tell) methodology or that its the only way. . . this is the process I came up with and went through as I hunted for my next adventure.

The key is to understand if COMPOUNDED growth can take place in the company and how close the company/startup is to reaching that stage. Geoffery Moore calls it the tornado, bankers call it hockey stick, VC’s call it traction, I just call it 100%+ growth year over year in REVENUE with a customer base over 500K. (law of small numbers can fool people into thinking the growth is large when its not sustainable).

1) First, I try to understand the buinses model well enough that I can identify the main levers that moves the business. The key is to have a water fall of metrics that starts at acquisition (or awareness) and all the way to revenue (profit is even better but too hard to measure in a startup cause you are sacrifising profitablility for growth)

Example here might be eBay in 1999

- new registration per month
- active customers per new registration
- # purchases per month per active customer
- average purchases per active customer

2) The basic requirement is that atleast one or two of these metrics has to ALREADY be growing at 15% - 30% year over year

3) Understand what needs to happen to make the other metrics grow 15% - 20% as well. Has anyone been trying to move these metrics? what tactics/programs/strategies has been tried? The answer I want to hear is actually that no one has been looking at it too carefully because the other metrics are already driving enough growth for the company. (And I think these needles can be moved)

4) #2 gives me proof of success, #3 shows me potential for even faster growth.

5) If EACH of these metrics can grow independently @ 20% a Year over Year, you have a blockbuster on your hand . . .

No company can grow at 80-100% year over year without multiple underlying factors growing at a reasonable 20% a year. It is often not sustainable if only one metric is growing at an incredible rate while the rest is stagnating. (quick example, retail companies relying soley on store expansion to drive growth . . . ie GAP in 2000)

So there you go, happy hunting . . .