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It’s easy to monetize through advertising. But it’s hard to make a lot of money monetizing through advertising. You need to be high value, high volume, or both. Here’s a chart that helps illustrate why.
The numbers are rough, but the model is a useful one. (I’d welcome feedback on the numbers and the model.)
The (somewhat dated) estimates of YouTube’s revenues, for example, range from the high ($15+ RPM) to the possibly under-valued ($0.50 RPM). (RPM = Revenue per Thousand Impressions, whether CPM, CPC, or CPA based.)
It’s also helpful to consider this model when painting a vision of your startup, regardless of whether you are the ultimate monetizer or volume driver, or someone else is.
Sites with high volume recognize that they need to monetize better. This is one reason for Yahoo’s acquisition of RightMedia, and Fox Interactive Media (FIM)’s acquisition of Strategic Data.
One more MySpace user or a few more impressions doesn’t do much for MySpace revenues. But better monetization works across the entire user-base. By monetizing a little better, for example, MySpace could go from say $200M a year in revenue to $400M. That’s by “just” adding 10 or 20 cents per thousand impressions.
A high volume site would love to become a high value site. There’s more than one way to make this happen. Keep reading to find out how.
In contrast, sites with high value (such as those related to finance, IT, health; and lead generation – mortgages, debt consolidation, etc.) focus on increasing their user-base. Adding a few cents to their RPM won’t matter much. But adding more users really matters a lot. That’s because these sites are already doing a good job monetizing.
High value sites do a good job monetizing because they are serving some kind of highly valued niche. A niche by its very nature has a smaller number of users. It’s vertical, rather than horizontal.
High Value AND High Volume
Nirvana would be a site that is both high value and high volume.
Adding another monetization mechanism could also really change the game for high volume sites. That’s because additional monetization applied across a huge user base really matters. High volume sites are primarily third party â€“ paid today. That means the sites and its users interact, but the site makes money from advertisers: the traditional media model.
But if a high volume site can get its millions of users to take out their credit cards, cell phones, check books, or cash, they can add a large amount of revenue. Such a site can move from being ad-supported only to user (customer) supported. Users might pay for a wide variety of things, from virtual or digital goods, access to additional features, or even products.
It’s not just the high volume sites that can try to get there. High value sites can too.
High value sites can broaden their user base through a variety of mechanisms. They can add more capabilities to their site to make it more broadly appealing. They can add more sites and create a network, then try to get their users to cross-over between sites.
Or they can simply do more marketing, advertising, and lead generation activities to drive more users. The risk is churn: many coming in, but few sticking around or monetizing.
This volume-value equation is not a new one. Enterprise IT die hards and old line media companies have understood it for years. The infrastructure — broadband adoption, technology building blocks, low cost of entry, monetization methods — has changed. But the model hasn’t.
What kind of company are you building?
When I ask, “what kind of traction do you have,” that’s short for a larger set of questions. Here’s what I’m really asking. (More about the picture below in a moment.)
- Is your product/web site in market? If not, how long till it is? What does it take to get there in terms of people, time, and money?
- Do users come to your site or is your traffic really part of someone else’s site? Are you a destination, a widget, or a hybrid?
- What are your stats?
What’s the split in your traffic between paid and organic?
What’s the month over month growth?
How many uniques per month?
How many impressions?
How many registered users? Active users?
What kind of online marketing do you do (SEO? Paid ads? Nothing?)
Relative to your competitors, how are you doing?
What’s the domestic/international split in traffic?
- Are you a sticky site or a transaction site? Do you try to get users to come back over and over or do you try to complete a one-time transaction?
- What does success look like for you? If you’re about driving page views, what’s your goal this year, order of magnitude. 10M/Mo.? 100M/Mo.? 1B/Mo? 1B/Day?
- If you’re thinking about or currently monetizing your site, what form does that take? If advertising, what kind of RPMs? If other forms of monetization, what are they?
- What’s your strategy for growing the business? (This can be simple – get users to refer their friends… keep doing no marketing… etc.)
In case you’re wondering… that’s a 1910 traction engine, which according to wikipedia is “a wheeled steam engine used to move heavy loads, plough ground or to provide power at a chosen location…. Traction engines tend to be large, robust, and powerful, but extremely heavy, slow and poorly maneuverable.”
That sounds pretty apt… except for the last part of course!
A lot of asking questions as an investor is about evaluating the how of someone’s answer more than the what. A lot of what I look for is the non-answer. The non-answer is dangerous because it fails to articulate and quantify risk.
Venture capitalists evaluate risk. The discussion of a company can cover a lot of ground. When we get the discussion right, it really boils down to our ability to articulate the risks associated with a deal and evaluate them.
The key to successfully identifying and evaluating risk is frank discussion with an entrepreneur. If you can’t talk about the risks of a business with the person driving the business, who can you talk with them about?
That’s why I dislike the non-answer.
In the answer to the question, “what kind of traction do you have,” the how of the answer is as important as the what. An Internet entrepreneur who dodges this question worries me. It means that either the traction isn’t there, they don’t know the answer, or there’s something to hide.
Same with, “with the customer base you have, how do you scale?”
While I can evaluate someone’s approach to scaling given my technical background, I am not the best person to do so. That’s why I try to evaluate the how. A brush-off or a lack of directness in answering this question worries me.
“But I’m afraid to talk about the risks to my business, because the investors might not like them…”
The good investor, the investor you want to work with, will identify many of the risks to your business with or without you. The best entrepreneurs identify the risks to their business themselves, think about them, and discuss them with their potential investors.
They seek help. They say “I don’t know” when that’s the case. They surround themselves with people who remove risk.
It takes a lot of guts to have that discussion. But since we’re in the business of evaluating risk, it’s a productive discussion that we like to have.
Beware the non-answer. It doesn’t remove risk. It creates it.
It’s not easy staying healthy as a VC. But you can do it if you try. Here’s how.
Just last week I had breakfast twice at Buck’s, once at Cafe Barrone and twice at the Sundeck. CafÃ© Barrone was at 7:30 one morning followed by the Sundeck at 8:30. Why only have three lunches when I can have two breakfasts as well?
One thing I’ve learned eating all these meals is not to order off the menu. You got that right â€“ peruse the menu and then order what you want. That scrambled egg plate with four pieces of toast, a slice of ham, and bacon may sound appealing on paper.
But eat five of those in a week and you’ll be looking for a new wardrobe. No thanks â€“ just scrambled egg whites, a cup of fresh fruit, some unbuttered toast, and a large glass of water, please. That keeps me going till— you guessed — my 12pm lunch.
Lunch is a tough one. Order the half plate, order a salad, don’t eat the bread, and drink a whole lot of water. Stick to that plan and you can get through lunch (even two or three of them).
Before becoming an investor, I rarely if ever ate dessert at lunch. But the reality is, if a conversation is going really well, it may be good to eat dessert because it gives you time to wrap things up. The fresh baked cookie and vanilla ice cream sound great, but it’ll add a belt size faster than you can ask whether Microsoft is going to acquire Yahoo. Instead, ask for a bowl of fresh fruit or a single scoop of sorbet. It’s still calories, but a lot fewer of them.
Dinner is the real danger in the VC diet plan because a good dinner can last an hour and a half or three. A Monday night dinner, for example, after starting with a 7:30 breakfast and a partner meeting stretching into the late afternoon can really put me over the edge.
The real enemy is dehydration. That’s why a good sized plate of fresh fruit or a banana, and a whole lot of water mid way through the afternoon can go a long way toward making sure I don’t over-indulge at dinner.
Do I ever over-indulge?
As Monty Python said… Oh no, no, no … yes! But only occasionally. I can’t fund every deal I see no matter how appealing it looks, and I can’t eat every meal I’m presented with no matter how good it might taste.
But there was this one time up in the city when…
A couple of weeks ago, for example, I hosted a dinner up in the city with a group of Stanford CS graduates. What a wonderful way to indulge for a night “and I don’t mean in the food” I mean in the topics of conversation. From discussing the latest hot deals, to sharing past startup stories, to talking technical details, it was a blast. I brought with me an angel investor who is in several deals with us. For him it was a great way to meet a number of entrepreneurs all at once, the entrepreneurs were able to meet him, and everyone had a fun time.
Exercise is also important, but the fact remains that you are what you eat. I’d love to write more on the subject, but I’ve got to run.
Dinner is waiting.
Consumer-embedded widget companies are fool’s gold. Here’s why.
A widget, according to Wikipedia, is:
“a third party item that can be embedded in a web page.”
A widget company is the third party ““ a company that builds an item that is primarily meant to appear on someone else’s site. (I’m referring, specifically, to consumer-embedded widgets, not those that are embedded by the publishers themselves.)
The implications of this are three-fold:
1. Most visibility for the company appears in the form of the widget on other companies’ sites.
2. The widget company becomes highly dependent on the other company or companies for its traffic and display of its widget.
3. The widget company is at the mercy of the other companies for its traffic and its ability to monetize its traffic.
Widget companies look like gold. The traffic is there and continues to grow (sometimes to astronomical heights), and until these companies try to monetize it, it’s no big deal. It seems like the real thing. It seems like a mutually beneficial relationship, like that of the butterfly and the flower in the picture below.
When these widget companies try to monetize or when a large supplier of their traffic (such as a social network) simply decides for other reasons to cut off that traffic, widget companies are seen for what they really are.
Why might such a “platform” company disable a widget’s functionality?
- It might be to show who is boss if the widget company is trying to sell
- It might violate some aspect of the platform company’s monetization strategy or policy (such as if advertising within a widget conflicts with an agreement the platform company has with another large advertiser or platform company)
- The platform company may simply have decided to implement the functionality of the widget itself
- The platform company may have selected a single widget player in a particular category, with one company getting the win and others being shut out.
I love widgets, but…
They are cool, fun, and provide huge amounts of functionality for blogs, social networking sites, and web sites in general. Some companies do make the leap from widget to destination.
The reality, however, is that it’s very hard to do. If at the end of the day you are not a stand-alone destination, and instead users primarily interact with your offering on someone else’s site, you will eventually run into trouble.
Your investors will too. That’s why I don’t understand investments in companies that are primarily consumer-embedded widgets and not destinations. It’s one thing to accelerate your growth through a widget that appears elsewhere. It’s another to be highly dependent on a very small set of other sites for your traffic and your ability to monetize.
As I mentioned earlier, publisher-embedded widgets are different. They are knowingly and contractually (even if via a self-serve model) embedded in a web site by the web site’s owner.
Real world miners have mistaken fool’s gold for the real thing for years. Internet miners may only just now be learning to tell the difference.
Don’t be fooled.
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