The coffee shops of Mayfair

Thefunded.com: Empty vessels make the most noise

There's a bit of a hoo-haa right now about the impact of thefunded.com. See here.

I would claim I am in a pretty unique position to comment on this story.  For 5 years I worked with a series of start ups with, amongst others things, the job of raising VC for them (Glasses Direct, Reevoo, Rawflow, Zeus, OmniPerception).  I negotiated with numerous VCs and sat in hundreds of pitches. Literally.

I have seen the good the bad and the ugly of VCs.  Nowadays, on the other side of the fence I see the good, bad and ugly of entrepreneurs.

Adeo Ressi (CEO of thefunded) claims to have two main aims: To make the funding process easier “entrepreneurs should pitch to 10 firms at once, closing in 2 months, having reasonable economic terms.  none are true now” (I think this is factually incorrect). Secondly he aims to get a wider breadth of firms funded. 

Lofty ideals indeed.   Let’s analyze the two things he’s doing:
1)    Giving presentations advising entrepreneurs on how to raise funding
2)    Running thefunded.com

Giving Presentations

Giving useful advice to entrepreneurs is great.  Especially if it is sage advice from people who’ve done it before. Even better if its fresh from the current market.

•    Lots of what Adeo presents is fundraising 101.  It is a useful footnote to the great stuff from the likes of Guy Kawasaki .

•    Some of what Adeo presents is good: Stuff like “its OK to walk away from a VC offer you don’t like, run fundraising discussions in parallel not in series, try and get multiple offers” etc.

•    Some of what Adeo presents is plain wrong.  For example the stuff about VCs deliberately trashing companies they want to invest in, or a rule on only ever pitching to general partners.

•    Some of what Adeo presents is dangerous. For example “always go for a 20% option pool” or “ never give two board seats”. All companies are different and this “advice” is woeful.

So my advice to entrepreneurs when listening to Adeo’s current presentation on the conference circuit is to listen with interest, don’t take it as gospel, and get some advice from someone who really knows what they are doing.

TheFunded.com

This is a vibrant community that aims to help entrepreneurs raise money.  That’s a great aim.  I also like the way its bringing more transparency & visibility to the VC industry which despite all the efforts from VCs  (most notably Saul Klein) remains a tough world to get your head round. 

My central problem with thefunded is that it doesn’t actually help entrepreneurs that much.  At best it’s something to use after you have made a long list of people to go and talk to.  At worst it’s a stack of incredibly subjective views that are plain wrong.

Why isn't much use? Accuracy. The wisdom of crowds needs a crowd.  The US VC market isn't massive. By comparison, Europe is small.

I will save the long essay till another day, so here are some bullets:

•    Some VCs can be very difficult in meetings.  This ranges from mild arrogance through to yawning, falling asleep or being proactively obnoxious.  Some VCs need to pull their socks up and thefunded.com helps with this.

•    However, some VCs see aggressive questioning as part of their selection criteria. Its not my style but I know some VCs, who have helped their entrepreneurs make a lot of money, who aren’t the easiest of people to deal with.

•    Just because a VC is rude in first meeting, doesn't mean they won't add lots of value when on your board. Being a VC requires a range of skill sets: analyzing strategy, negotiating contracts, making intros, running acquisitions, leveraging brand. The funded.com doesn’t give much insight into this.

•    One meeting wonders.  The problem with thefunded.com is that it gives poor execs who crash after one meeting a disproportionately louder voice than those who have had 2 years of experience. For example, I doubt that the Skype guys have written on the site? 

•    VCs say “no” more than “yes”.  Some people simply don’t like to be told “no”.  To quote venturebeat; “VCs say “no” to a lot more entrepreneurs who request backing than they say “yes” to, which suggests the ratio of critical reviewers to positive reviews will be quite high.”

•    There’s a theory in VC land that the noisiest entrepreneurs who complain most about investors “not getting it” are only those who didn’t get funded.  I wonder if there’s a link there….?

So this post has been inspired by a question from Mike Butcher on twitter musing if thefunded would kill the European VC scene.

My response is that there is not a cat in hell’s chance.

It’s a useful tool in that it gives a bit more visibility to a sometimes impenetrable industry.  It’s also nice to see a bit more power with the execs.

But it scares me that entrepreneurs will read the funded .com and either believe it to be truly representative or treat it as proper advice.  This is very far away from the wisdom of crowds.

Right.  I’m off to try and persuade some investee CEOs to stop focusing on executing the business plan and instead write reviews of VCs on thefunded.com (ahem)

The affiliate network is dead: long live performance marketing

The idea
This is the idea that affiliate networks are struggling to justify their margin on each click or referral.

The problem
Theoretically affiliate networks allow advertisers to get to niche consumer needs by leveraging the long-tail of smaller specialist web publishers. In practice this is bunkum.  The 80-20 rule persists and this threatens affiliate network’s market position.

For example.  A large UK retailer uses one of the largest UK networks and is able to “see through” the affiliate network to understand which publishers send it the most traffic.  The results show that 80% of the traffic that this retailer gets is from 20% of the publishers. Consequently there is a big trend in the market for merchants to approach the publishers directly to strike deals, cut out the middle man and split the margin.

This completely flies in the face of the affiliate network model.   Affiliate networks traditionally argue that the value for merchants lies with a large number of smaller traffic referrers: Merchants cannot cost-effectively build links to this vast array of referrers and therefore pay a margin to a network to do this connecting for them.

If merchants can answer yes to the following, the future looks bleak for affiliate networks:
1)    Does most of your traffic come from a small number of high volume referrers?
2)    Can the technology (click monitoring) be created in-house or bought (e.g via direct track) cost effectively?
3)    Is the “missing 20%” low quality traffic.

The solution

Firstly, I have checked this out with a few networks and the message is that it is very unlikely that 80% of their merchants will go direct anytime some.  Nevertheless it is an issue and the networks have a few things up their sleeve:

Networks are offering a wider-array of value-add services & better software to their merchants and affiliates in order to retain them.  This is stuff like stats, bad affiliate alerts, online content tools such as reviews.

Affiliates are evolving to overall “performance marketing” networks.  This will mean they will be offering the whole range of CPA, CPC, CPM, Lead Gen, email marketing, cash-back (like quidco) etc.
We have recently seen a few acquisitions which are not about scale but about breadth (e.g. Buy.at acquisition of xyz).  I also expect to see more acquisitions of analytics and marketing tools.

Opportunities for growth companies.

Affiliates themselves continue to be growing revenues across the board, both organically and by acquisition.  As they evolve into performance marketing networks, I am interested to understand which part of these businesses will end up being most valuable:
•    The databases they own on consumer behavior
•    The margin they take on advertising clicks
•    The optimization and analytical tools they offer to advertisers.

I wonder if any CEOs of affiliate networks or their investors know this?

There are also some interesting lessons for the web-publishers / affiliates.  The message coming from the networks is that the simple “google traffic sites” know for their CPC focus are less and less effective.  I think there will continue to be a flight to quality where traffic from rich, valuing-adding publishes like moveme.com will accrue value.

If your site is proactively sought-out by consumers as a valuable resource to influence their buying patterns, then the quality of your traffic will get top-dollar from the networks (just look at the valuation of MoneySupermarket).  This is the type of affiliate that I’d love to invest in.

The Post-Google VC

I have been spending some time with some great entrepreneurs across Europe as part of the FOWA Road Trip and yesterday in Copenhagen was no exception.

In particular it was great spending some time with Nikolaj Nyholm and Nicolaj Reffstrup.

Nikolaj Nyholm made one comment to an entrepreneur which really resonated with me.  To paraphrase:

“You need to raise money from a post-Google VC.  An investor who has lead a company in the last 5 years since Google has been so dominant.”

At one level this is another contribution to the discussion of what makes a great VC (I will leave that one to Fred et al.)

It is, however, of far more significance for entrepreneurs with a web app or offering.

Working for Reevoo and Glasses Direct, both very different businesses, taught me the significance of distribution, and the dominance of Google.  Some examples:

You need first rate SEO?  That will be >£100k p/a for a 19 year old whiz kid.  Someone who will be impossible to manage but can transform your business with organic traffic.

You need to bolster traffic in certain niches?  That’ll be a potentially bottomless pit of adword spending.  (Particularly true if you’re late to a competitive market: look at the differential in adword spend between gocompare, moneysupermarket and confused)

That’s not to mention the possibility of Google using some of their warchest of come after your particular market.

Many entrepreneurs are so focussing on building such a great offering that they also assume virality of distribution is inherent or inevitable.  Unfortunately its not that easy, and Nikolaj is dead right to warn that getting help from people who “get it” is crucial.

Reevoo is a trust filter for the web

Reevoo today announces a $5mn Series A fundraising* from Eden Ventures and a raft of experience angels. There have been a few questions about what is this investment  is all about.

 
Let me give a view.

 
A massive problem with the web is knowing who and what to trust. Not only because of the growth of dodgy review sites and spoof blogs / affiliates but also because “kosher” ecommerce sites themselves want to increase the levels of trust consumers place in them. They have worked out that higher online trust = higher online conversion.

Reevoo is solving this problem with a two pronged attack;

 
1) The ReevooMark product is a service to collect reviews from retailer’s customers who have already bought goods. ReevooMark aggregates these reviews around products and serves these reviews back to the retailers sites. (see Dixons , Currys , Jessops etc ).

 
2)Reevoo.com, which is still very much in Beta, also provides a destination for consumers to read these reviews to help choose what to buy. Price comparison engines were the first generation in helping consumer WHERE to buy.

Reevoo provides a trust filter to help consumers work out WHAT to buy.

I have blogged before about how much value there is in delivering what the consumer wants without them having to ask for it. For me this remains an area of white space on the web and one where VCs have been making their bets this year. Last.fm does exactly the same thing for music.

The other exciting thing is that if Reevoo can dominate the part of the purchase process that focuses on WHAT to buy rather than where to buy it will become an enormously powerful platform for shaping purchase decisions.  Ben Tompkins is the General Partner at Eden Ventures who I negotiated the
Reevoo investment with. In his previously life at Broadview Ben was the guy who sold Kelkoo to Yahoo  for €475 million. Ben understands what the value an investment in a second generation site like Reevoo could yield.

 
*First Capital advised Reevoo on this fundraising.