Congratulations VideoEgg...
AOL's Beta version of AOL Uncut went live today (via Techcrunch).
espite being coastally challenged (currently living in Philadelphia), Josh has been an active entrepreneur and investor in the Internet industry since its commercialization. In 1992, while he was a student at the Wharton School of the University of Pennsylvania, Josh co-founded Infonautics Corporation – an Internet information company. In 1996, Infonautics went public on the NASDAQ stock exchange.
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AOL's Beta version of AOL Uncut went live today (via Techcrunch).
I just read the rumors about Jotspot being acquired. While I have no information as to the accuracy of the report, I wish for the best for Joe Kraus and team. Recently, I've been playing around with their new JotSpot Family Site that launched last week. I think Jotspot has been doing a great job of building specialized applications on top of a wiki framework. (Their tracker application is very slick).
One thing I noticed while playing around with their Family Site, however, is that they are pretty up-front with the fact that their business model is still a work in progress. Check out their pricing page (at http://familysite.jot.com/pricing.php). Very refreshing! A Web 2.0 startup that admits that their pricing strategy is still unwritten...
[UPDATE: JOTSPOT NOTICED THE LINK AND FIXED IT. A SCREENSHOT OF THE ORIGINAL PAGE IS BELOW]
One of the few benefits to being a technology investor
based outside of Silicon Valley is that I
don’t spend all my time in the valley. While I'm out in California every few weeks, I get to spend most of my time in the "real world."
Over the
last several weeks, I’ve been on several phone pitches from west-coast companies that are
looking to be the “flickr of XXXX” or “like del.icio.us but YYYY” or “the Digg
killer”. It got me thinking – how many people outside of the valley have
ever heard of these companies? I asked a bunch of local
(Philly-area) acquaintances and the answer came back loud and clear:
none – nada - zip. People here have barely heard of Myspace and
Craigslist – let alone any of the “hot” Web 2.0 companies.
As more and more entrepreneurs start building what Fred Wilson referred to as second derivative companies,
I think they run a big risk of designing a product/service that is targeted at
too small of an audience. Too many companies are targeting an audience of
53,651. That’s how many people subscribe to Michael
Arrington’s TechCrunch blog feed. I’m a big fan of Techcrunch – and read it every day. However, the Techcrunch audience is NOT a mainstream America audience.
A good review in Techcrunch can get a company their first
5-25K beta users very quickly. However, I’d strongly caution entrepreneurs from taking
their initial consumer adoption metrics and extrapolating them too far into the
future. I believe startups will find it difficult to cross the
“Techcrunch chasm” between the Web 2.0 geeks and Mainstreet USA.
If we could get access to the usage logs of the top 10 Web 2.0 properties, I would bet that their 10,000 most active users would all be the same.
As I evaluate new startups these days I’m finding it
harder and harder to see the big ideas that will appeal to a large, non-geek
consumer audience. Thoughts?
There have been a number of wonderful blog posts debating whether this is a good or bad time to start a business. Fundamentally, I believe that the reason the debate is occuring is because there have been some fundamental changes to the risk/reward ratio involved in business formation.
When I started my first business (Infonautics Corporation) in the early ‘90’s, the cost to “get in the game” for an IT business was $4 - 5M (ie, first round was $4M). It took that amount to buy the expensive sun hardware, build a datacenter, write the custom software, and build the appropriate infrastructure to grow a business. When I started Half.com in the late ‘90s, our first round of VC was about $2.5M – we didn’t have to build our own datacenter, hardware costs were coming down, and although we had to write custom software we were able to use development tools that made it faster and cheaper.
In recent years, however, it’s gotten much cheaper to launch a software/Internet company. The power of open-source software, cheap Intel-based servers, a plethora of robust development environments, ASP-based services to handle backoffice processes (ie, at Half.com we had to build a help desk – now startups can use an ASP) --- combined with the rise of offshore development – have dramatically reduced the costs to “get in the game”.
This allows companies to bring a product to market for much less than was previously required. Companies are able to launch a product or service for under $1M. This changes the game for the entrepreneur – primarily because of the cap table.
If a company previously needed $4M to get off the ground, they would raise venture funding – which would leave them with a post-money valuation typically between $8 and $12M. In order for the VC to get a “win”, their target return would prevent the company from ever considering an exit below, say, $100M. (ie, no early-stage VC would call an exit at $36M – or a 3x return – a “big win”). These VC economics typically led companies to work toward exits in 3-7 years – to allow them to “grow into” the valuations required by the VC.
However, if today’s entrepreneur is able to get a company off the ground with $500K - $1M, they have additional options. For example, if an entrepreneur is able to raise $500K at a $2M pre-money valuation (or a $2.5M post), they have the option of considering an exit between the $15M and $50M range. Indeed, a sale at a price of $18M would provide investors with an 8x return (assuming a 1x liquidation preference). Moreover, at valuations in the $15-50M range, acquirers are willing to buy “technologies” or “market positions” – as opposed to businesses. (ie, to justify acquisition prices of >75M companies must buy revenues and pipeline, but at lower prices acquirers are essentially making a buy-versus-build decision on a technology or market positioning).
This trend has definite implications for entrepreneurs, angel investors and venture investors alike. And, I believe, requires a candid conversation between the entrepreneur and his/her prospective funders. While I know that there are no guarantees - and that plans change once a business is launched -- it is important for me to know, going in to a deal, what the entrepreneur's ideal outcome is.
A few additional comments:
• Companies must still build a product or customer base
of real value. (ie, if a company is
built solely with a “flip” in mind – chances are that it will be able to take
neither track (ie, no VC and no buyer).
• I believe that
this trend could actually be a benefit for venture funds in the long run. Since companies can get further along on seed-stage capital, VC’s are
seeing business with reduced risk. VC’s
can see actual product/market acceptance prior to investing. This also plays nicely with the fact that
VC’s need to deploy larger amounts of capital (given their fund sizes).