A Series of Small Things
Random Thoughts on Building Venture-Backed Companies in the Midwest
What’s in a click?
4.28.11 by Dov
It’s unlike me to blog about something so industry specific, but as digital ad revenue has become a critical component of so many of the business plans we see (and of those of so many of our partner companies), I thought this article was worth sharing.
I recommend reading the whole article if you care at all about online advertising, but I’ll summarize here for you: according to their study, only 1% of users actually click on ads, but those whose who do click a lot. The “clickers” are less wealthy and less tech savvy than non-clickers (read, less attractive advertising targets), and there’s also some evidence that a bunch of reported clicks – particularly on game sites and mobile – are accidental. Now, there are lots of caveats here about how much their results can be generalized, but for the rest of this post, let’s assume this is all true.
My guess is that this wouldn’t surprise most of you (because everyone who reads this blog is pretty much on top of all this stuff), but apparently advertisers don’t believe this. Otherwise, why would they keep spending money on a CPC basis (are you listening, Google)?
At the end of the day, this means that advertisers have two options when thinking about online (three, if you count “bury their heads in the sand”). And, not coincidentally in my opinion, they are the same two options they have in thinking about every other advertising media. You can either try to drive immediate sales (i.e. direct response) and measure cost per acquisition, or you can approach your ad campaign as brand building (and thus pay on a CPM or other similar “exposure” basis). But this middle ground of CPC is dangerous.
There could be an endless debate over whether banner ads are effective at building brand and, if so, how they compare to TV or billboards or whatever, but it’s pretty clear that the places you’d put an ad online would be dramatically different if you were trying to build brand than they would be if you thought that a click was validation your campaign was working. The implications of a shift in advertiser thinking on this would be huge, as so much of the industry today is built on finding what are essentially ways to arbitrage CPC: finding inventory that isn’t “producing”, and placing targeted ads there in order to increase click-through. But what if those clicks turn out not to be creating any value? While many of those optimization platforms could be (and in some cases are already) used to better target CPM campaigns, they will lose the online “magic” of easy performance measurement.
Just when we thought we were figuring this all out…
Life’s too short to work with bad people
4.19.11 by Dov
I had a chat recently with an entrepreneur who wanted some advice on deal terms. He (wisely) had moved past simply looking at valuation to the other bullets in the term sheet he had been offered., and he had come to meet with me to ask, “What terms should I worry about investors !@$#$ me with?”
We had a long conversation about some of the details, and the various ways each term could be used against him in the future, but ultimately it boils down to trust. Bad people can take advantage of you regardless of the terms of the deal. There’s always a loophole, and even if there weren’t, people can always break the contract. And, you you as an entrepreneur are typically not in a position to sue them, and the damages you might someday recoverable probably won’t truly compensate for the actual damages that resulted from their breach (not to mention pain and suffering!) At the same time, good people won’t take advantage of you regardless of what the documents say they can do. That’s why they’re called good people.
On a related note – we are often asked about signing NDAs, and the advice I give as part of our refusal is basically along the same lines. You shouldn’t be sharing anything truly proprietary about your business with someone you don’t trust not to go blabbing it around – whether they’ve signed an NDA or not. And if you do trust them, there’s no harm in sharing without a written agreement (as long as you have your patent bases covered – but that’s another post).
At the end of the day, you have to work with people that you trust. And if you do that, nothing else matters (except perhaps multiple liquidation preferences).
“Companies are bought, not sold”
4.7.11 by Dov
That’s a saying you’ll hear over and over if you spend any time around the Allos offices.
When a company tries to sell itself – whether because the investors are forcing it, the company is running out of cash and doesn’t want the dilution from another fundraising round, or some other reason – the process almost never returns the results everyone’s hoping for. The bidders know you want to sell and the bids reflect that fact. You often end up settling for less than the company might actually be worth, because at that point there’s so much momentum that the board and management feel they have little choice. “How much more could we really get if we grew it another year?” “How much more money will take to make enough progress to get the valuation where we want? And how much risk is there that we still won’t be there?” “What would it do to employee morale now that they know we’re for sale (and know that they’re options aren’t worth as much as they may have believed)?”
Instead, to have a successful outcome as a venture investor almost always requires that you build a strong, successful company that some acquirer comes looking for. And often, it’s someone you never would have thought of – willing to pay a premium because you happen to fit some strategic need they have but which you never would have guessed.
While it’s important to have some sense of what the exit possibilities are – in case you are forced to go down that road - we prefer that our partner entrepreneurs focus on execution and building strong businesses. More often than not, when you are able to do that, the exit takes care of itself.
It may be harder to build a company than to simply start one and hope to get bought by Google (as Om Malik reminds us), but it’s a lot more reliable path to success.
Do you think like an employee or an entrepreneur?
4.4.11 by Dov
Nice article in the NY Times about the change in mindset needed when you’re starting your own company. Good reading for anyone thinking about making the leap.
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