I often get asked for stock advice, and before weighing in I give the caveat that I don’t trade public equities so you get what you pay for when it comes to my opinion. However I was recently asked why Google is more valuable than Facebook, and on that topic I have one simple point.
There is a new trend emerging, called Content Marketing, that is blending the lines between online publishers, brands, and eCommerce companies. The general idea is that people who sell things (namely brands and ecommerce companies) need to produce more than just advertising to get people to pay attention to their products. Instead of banner ads and videos, they are producing sponsored stories, advertorials, and paid content. This trend is gaining steam because brands need specialized content to broadcast and share over social media.
One example of how this works: Net-A-Porte, a large eCommerce site, recently recruited a senior editorial team from Conde Nast to build an in-house magazine. Net-A-Porte had two motivations. First, Google’s new algorithm emphasizes original content, so they were looking for a major boost in SEO. Second, they have over 800,000 followers on Facebook and needed a way to activate these users, so by delivering advertising in a story format they can move users from Facebook to other pages they control. One of my portfolio companies, Ceros, incidentally specializes in the underlying technology that allows the creation of digital marketing collateral that is used for this purpose.
I am particularly interested in how this experiment plays out because retailers like Net-A-Porte are paying a significant premium for writers and editors. And the business model is more profitable too – every visitor to Net-A-Porte’s eCommerce site is worth about $0.50, whereas every visitor on Conde Nast is only worth a few pennies. If the world continues to move in this direction many publishers will face a crisis where they are forced to rethink the advertising model in lieu of a commerce-oriented approach.
For the past few years I believed that online media companies were failing due to content costs. Traditional media was accustomed to spending $100K per minute for TV programming or $200 for a newspaper story, and you couldn’t recoup that level of expense on the Internet. I also watched as companies like “The Huffington Post” performed really well with virtually no content costs (at least for the first few years).
However I had a recent discovery that the cost of content actually comes in third place among the list of media company expenses, behind the cost of acquiring traffic and selling advertising.
I haven’t written a post for the past month. Once I learned about the Salesforce acquisition of Buddy Media it was pretty much all I could do to turn off my computer and try not to think about what the acquisition would mean for me, Greycroft, and my friends at Buddy Media. I thought anything I typed would be too much of a giveaway, and I also wanted to wait until the transaction was closed so I could tell the story of Greycroft’s involvement and how I got to know Mike and Kass Lazerow.
To give you a little background, I first met Mike Lazerow in November 2007, just a few months after he founded the company. I was introduced by my friend Howard Lindzon, who was in town from Phoenix and crashing on Mike’s couch. Mike stood out as an early advocate of Facebook, which at the time only had 40 or 50 million active users, and he was experimenting with new business models on the platform.
Earlier this year we funded a mobile gaming company called Playdek. Playdek makes a very popular iOS game called Ascension, which is sold through the App Store and has a few hundred thousand users.
For the past year Ascension was priced at $4.99, but last week, without any fanfare or promotion, the company lowered the price to $0.99. The game immediately spiked up to #1 in card games, #1 in board games, and even cracked the top list of all paid applications.
I thought this was an interesting experiment in what economists call price elasticity – how consumers react to a change in a price. It is clear that in the Apple store a small decrease in price makes for a giant increase in consumer demand.
I realize it is already old news, but I had to throw my hat in the ring about Instagram. By any standard Instagram was a typical Silicon Valley start-up, building a user base while it figures out a revenue model. Except this story ended when Instagram was purchased by Facebook for $1BN.
Instagram is a reminder that every company has two valuations. On one hand you have “fundamental” valuation, which is the sum of discounted future cash flows. This is how research analysts look at public companies. On the other hand you have “speculative” or “trading” value, which is the price a future buyer is willing to pay for an asset. Speculative values are most common in the market for art, antiques, and other collectibles.
Whenever I talk to entrepreneurs about corporate governance I get the same response. This topic is right up there with Audit Committee on the list of “10 Most Boring Topics for Early Stage Companies”. However, setting up the right investor base and board at the time of investment is critical for a company’s success. What many founders don’t realize is that even though they are selling a minority of their company to the VCs, the VCs will have a lot of control over the business.
The National Venture Capital Association has a set of template documents on their website that most VCs use. These documents have been around for a long time, dating back to when the venture business was a lot smaller than it is today. Every entrepreneur should take the time to read these documents before they raise money.
There are a lot of analogies for starts ups. It is a football game. It is a war. It is a poker match. I have heard all of them in the board room as we advise our portfolio companies.
It is the job of CEOs to make decisions with limited information, and start-ups take that to an extreme. How will the market react? What will competitors do? Where will the capital come from? Plus the environment is changing rapidly. Sometimes it changes in your favor and sometimes it moves against you. We all make educated guesses, but the reality is occasionally a coin flip.
Google does many smart things. One of the things I like in particular is that rather than just promote the advertiser that pays the most, Google also factors in the click through rate of the ad when they rank search campaigns. This means that if your advertising copy is good, and you are targeting the right keywords, you end up paying much less than your competitors for traffic.
This has never existed in other forms of advertising. Imagine if a television channel went to an advertiser and said, “Your advertisement is so obnoxious that it is causing people to change the channel. That hurts our Nielsen ratings and it costs us revenue from advertisers later in the broadcast. Going forward we are going to charge you three times as much to advertise here.” That doesn’t happen. Yet many of us can point to a TV advertisement that was so bad it had this effect.