Video is undeniably where search was in 2000, that is: a major part of the online ecosystem but desperately looking for a business model.
Back in search, many of the original search companies had thrown in the towel and repositioned on being a portal, these include AltaVista, of note. But even companies like Yahoo! - the largest portal already - was not convinced of the virtues of search. Yahoo!’s own search technology was only launched in 2004. Yep, 2004! MSN’s Live was launched the next year, in 2005… that’s pretty wild.
LUCKY 13TH: GOOGLE
Ultimately, it’s interesting to note that the company that is now synonymous with search, Google, was nowhere near the first one around, when it comes to search engines, according to Wikipedia’s list, they were 13th… of course, this excludes meta search engines, Dogpile, Metacrawler and Mamma, I worked at Mamma in 2000, for example, and it was around since 1996. Anyway, even when ranked by search engines alone, Google had 12 - count ‘em 12 search engines launch before it did:
That’s pretty wild. Forget “it’s not the first to market but the first to scale”, I think indeed it’s “don’t build a business until the business model is developed”.
Today search garners 40% of online ad revenues, and in Q3 of 2007, Google did 40% of all US revenues in online ads put together. Of course, Google was an anomaly, it owns the most profitable space in the highest growth media because its timing was perfect (luck and externalities) but because the market crash of 2000 made everyone else pull back.
That being said, search really only took off in 2001, a look at historical search revenues shows:
When you consider video advertising projections, you wonder, is video where search was in 2000?
Also good tidbits on Wikipedia and Search Engine Watch.
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WatchMojo NewsletterMichael Arrington, editor of Tech Crunch, has spent some time this week eulogizing Edgeio, the company that took on Craigslist and burned through $5M in financing, only to shut down this past week. Edgeio shut down because investors no longer wanted to fund operations.
Arrington was an investor in the company. In his latest pontification on the matter, called The Twice Shy Entrepreneur, a few quotes and passages stand out. First, commenting on the 1996-2000 era, he comments:
Life was good in the “old days.” Venture capitalists, flush with cash and a little unsure how long the good times would last, encouraged entrepreneurs to raise money and spend it as fast as possible. Literally. The goal was to get revenues up to a million dollars a quarter and start the IPO process. By the time they got out the door, valued by the market on forward revenue estimates, they’d be a billion dollar company.
That meant raising money, hiring everyone in sight and paying for business development deals that could bring in revenue. Those deals were usually not profitable. You’d pay AOL $10 million per year, for example, to get access to their users in some form.
In fact, I was a witness to some of those deals, but stood on the other side of the field. At the time, I was VP of Ad Sales for a mid-sized men’s lifestyle ezine that did not have VC money, but an angel’s $500,000 in funding to get us through. We could never afford such deals, so we saw from the sidelines and wondered who was foolish enough to do it.
It was part of the institutional imperative: basically jumping off a bridge cause others were doing it.
The companies that did, however, were not always dot coms, but actual business like Esquire, a unit of Hearst Magazine, who initially gladly paid AOL those kind of fees. Esquire was one of our competitors, so was dot com startup TheMan.com, who also struck similar deals.
The truth is, TheMan.com was dead upon arrival because the Highland-backed company wanted to scale overnight, as Arrington alludes to now:
The goal was to get revenues up to a million dollars a quarter and start the IPO process. By the time they got out the door, valued by the market on forward revenue estimates, they’d be a billion dollar company.
TheMan.com’s day of infamy came when Time did a cover story on them. In that piece, founder Calvin Lui mentioned that TheMan.com would be a Walt Disney kind of company. Ultimately, TheMan.com burned through $17M of funding and shut down in November 2000.
By then Nasdaq no longer rewarded sheer stupidity, and no one was there to pay AOL et al. such money.
The market opened up for us. By November 2000, we had gone through about half of that $500,000 in funding, by that time the next year we were breaking even. By late 2001, we were larger than Esquire, Maxim, GQ, etc. TheMan.com was on F*ckedCompany. Again, referencing Arrington:
The intense pressure entrepreneurs were under to get revenue at any cost led them to make decisions that, with hindsight, were blatantly foolish. And when the market crashed on April 14, 2000, those same entrepreneurs had to lay off most or all of their employees after making those decisions. And face outright humiliation on F*ckedCompany, the site that chronicled the downfall of the Internet bubble.
Once TheMan.com landed in the deadpool and Hearst balked at AOL’s upfront fees, what did AOL do then to please its millions of daily users?
ART OF BUSINESS DEVELOPMENT
It turned to my old company that had all of the content AOL and its users needed. Simultaneously, so did MSN. That’s right, without having to fork over any money, we managed to get two of the world’s largest portals (Yahoo! being the holdout) to carry our content.
That was the distribution we sought, and once we did, it made our company. Oddly enough, Esquire and TheMan.com had that distribution, but
a) they could not maintain the frequency that AOL or MSN sought and
b) they could not make the numbers add up… ultimately,
c) the market crashed, and reason came back into the picture.
BUSINESS DEVELOPMENT DONE RIGHT
In fact, another reason why VCs need to operate at arm’s length is because VCs chase elephants and look for overnight hits, but sustainable and successful business take time to build. VCs pretend to be in it for the long haul, they’re not. Don’t get me wrong, they’re not as near sighted as public shareholders who have a quarterly time horizon, but they’re not that different, either…
Reporting from the front lines, this is important: for example, I could sign multi-year business development deals, but sometimes that means giving up more value than I’d like. By taking my time (wow, am I actually becoming patient) and doing a shorter length deal, I get to strike a better deal for our company.
This last comment and this paragraph in itself merits a stand alone post, but the point is, it takes time to maximize value and optimize deals… and a VC’s pressure might be counter intuitive.
But, don’t take it from me, take it from an investor who’s backed successes like Geocities, Tacoda, Feedburner, Delicio.us and others. Fred Wilson says that the main reason VC-funded startups fail is because:
Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business.
That is arguably the most important (and true) thing I’ve ever read as an entrepreneur and company builder.
BEST TIME TO BE IN BUSINESS IS TODAY
Interestingly, while Arrington calls that era the good old days, as a content company, I don’t share that view. Today is the best time ever to be in the media business. Why?
Business development is not dead, but it has changed. AOL, MSN, Yahoo!’s party has been crashed by sites like Myspace, Facebook, YouTube… and even within each one of these spheres, a plethora of competitors have spawned, effectively making distribution a commodity and making content more valuable.
WHEN VCs DON’T HELP
The VCs - some of whom get it, many of whom don’t, but all of whom have more money than they care to find out anything differently - might maintain that you need to burn through oodles of money to scale, but the fact is that regardless of whether:
- you have a service or product,
- operate in technology or media,
- rely on software sales or ad revenue,
the rules have changed because distribution is quite easy.
There are established communities and massive audiences already out there, you just have to find them and match them to your offering. That has removed a considerable layer of cost: marketing. Alluding to Arrington’s post, again:
Such deals may only spreadsheet out to a million or two a year in revenue. But the board would approve it anyway - and write the $8 - $9 million loss off as a marketing expense. Since the market was only valuing based on revenue, it didn’t matter anyway. Capital was cheap. Only revenue was valued. Even if you paid $10 to get $2.
As such, today, any startup that burns millions of dollars to reach an audience is going about the problem the wrong way… but to each their own. Forget what I say, sure, but if you connect this last quote with what VC Wilson says, you start to wonder if VCs hurt companies as much as they help. In fact: If I have to ramp up numbers overnight to excite a VC (in Arrington’s example, boost traffic - let alone revenues), then it means doing so at the cost of profits or even sustainable revenues or traffic. Since a VC-funded startup is doing so with other people’s money, they usually end up burning through a lot of money before knowing what the successful business model is, or will be.
VCs MAKE MONEY FOR VCs, NOT ENTREPRENEURS
When I talk about ad networks, I usually say that ad networks don’t make publishers money, they make ad networks money. In the same vein, while good entrepreneurs do make money for investors, I don’t think it’s a guarantee that VCs make money for their entrepreneurs. More often than not, when VCs do have their 1 grand slam hit, it comes at the expense of the entrepreneur… because the entrepreneur/founder’s objectives usually run counter to those of the VCs.
Taking risks doesn’t mean raising more money than you realistically need. It doesn’t mean hiring 20 people to do what 4 can do just fine. And it certainly doesn’t mean taking massive losses in exchange for a small amount of revenue.
But it does mean that you should raise money when it makes sense, hire people when you need them, and grow the business with a bold, take no prisoners attitude. Those are the entrepreneurs that change the world and ensure that their great grandchildren have massive trust funds.
I’m not criticizing VCs, they’re in the business of maximizing returns… but indeed as an entrepreneur, you should have a very clear sense of what defines success…
The main point is, Arrington’s inspiration for the post came from the fact that some VCs think that entrepreneurs are not as trigger-happy as they were in the previous era of euphoria:
Across the board [VCs] agree - many entrepreneurs from the first bubble are overly cautious, and hurting their businesses.
Apparently, before the bubble, when VCs said jump, entrepreneurs asked “how high”:
In general, the venture capitalists were the ones demanding growth at any cost. And the entrepreneurs did exactly what those venture capitalists asked.
I don’t know, but I’d argue that a lot of entrepreneurs are just as hungry and risk taking as ever, but they recognize that what is best for the VC is not always what is best for the entrepreneur, or the company.
Taking this argument one step further, the conclusion I draw is that entrepreneurs who ended up landing on F*ckedCompany.com or got f*cked by their VCs realize that just because a VC says you have to jump doesn’t mean that you should ask them how high… but rather, what have they been smoking?
Businesses take a very long time to build. If a VC gives you the entrepreneur the feeling that he’s more of a car salesman than a homebuilder, then maybe you should do yourself a favor and say “thanks, but we’ll pass”.
Maybe if Arrington had better - or more appropriate - financial backers, then Edgeio would not be relegated to the Deadpool… but clearly, now we’re the ones doing the pontificating.
