The coffee shops of Mayfair

On Qype, The Southampton Echo, a dodgy swimming pool (or Regional newspapers, business models and Qype)

I make a conscious effort to never write adverts for portfolio companies, but bear with me on this one.

A few weeks ago I wrote a long review on Qype* for a swimming pool in Southampton (read it here and in news paper form here ).  I was so delighted with the review (and so angered by the crappy swimming pool) that I decided to cut and paste the review into a letter to the editor of the local rag, the Southampton Evening Echo. 

I am stunned to say that last week it was published as the star letter on the highest circulation day for the paper (ah me, I have finally hit the big time).  

Why am I telling you this? 

Because it’s a perfect illustration of how traditional business models are under attack by something they can’t defend.  Look at the quite stunning evidence here  and here.

The Daily Echo loved the Qype product so much they (unwittingly) reproduced a review straight from its pages.

Qype has loads of great content. My review was a rambling monologue against local government masquerading as a swimming pool review, but Qype is packed full of really well written, relevant and trusted content.  Stuff that regional press love.   The Southampton Echo loved it so much they took it lock stock onto their old fashioned news paper.

Just imagine how much US regional press would love to have ads from craigslist.

Just imagine how much Yell.com would love to cultivate a community of users as loyal or innovative as Qype or some of its competitors.

This begs one of the most annoying questions from VCs: “if this is such a threat to local news papers**, why aren’t they just doing it themselves?

And there’s the answer right there.  They could.  But they don’t.  And that’s why there’ll always be great opportunities for smart entrepreneurs.

One other reason for wanting to write about Qype is it’s an excuse. For not writing here much recently. For me, Qype is the new blogging.  I am stunned (and slightly embarrassed) that I derive so much self satisfaction from spouting off opinions on things from croissants at The Wolseley to the local plumber.  But writing reviews has got me hooked.

*Qype is a portfolio company of Advent Ventures.
**of course you can interchange this with MySQL & Oracle, Bebo & AOL, BT & Skype etc. etc.

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)

CPC, CPA, lead generation does not work

Idea
This is the idea that the old CPA and lead gen models are inadequate measures of performance and therefore their pricing needs to change.

Problem (s)

The problem here is knowing when a user clicks on an ad, and then buys a product, if it is as direct result of that ad.

What lies behind these issues is that click-through does not correlate to purchase.

It is worth a brief diversion to say a bit about why click-through does not correlate to purchase:

1) Clickers
Research shows that some users are just “clickers” and will click on anything. Clickers make performance marketing less accurate. Clickers are not stupid, they are your wife.  And they skew results.

2) Non clickers
Non-clickers make performance marketing less accurate:

“respondents said they were twice as likely to notice a web ad, not click on it, but visit the advertised site later (61 percent) as they were to click on an banner ad to reach a site (30 percent).”

DoubleClick Touchpoints survey, 2006

3) Click before purchase

The last click before a purchase is not the reason why that purchase was made.  Intuitively this makes sense: I am personally more likely to click on an ad for Dixons than I am for ABC Online electrics ltd. This is a result of 20 years of brand-building from Dixons.
The question then becomes: why should I pay a lead-gen fee or CPA to an affiliate if they have not done the work? This is the most potentially disruptive one to all those elegant business models that we are backing.

Solutions

How are people solving the above problems?

1) Clickers & non clickers

Agencies are trying to solve the problems posed by clickers but it’s not easy. One of the most compelling is that from Double Click who offer ”view-throughs”.  With View-throughs, lead generation / CPA is paid even if the browser buys within 30 days of viewing.  The problem is still far from solved.

2) Paying rewards based on effectiveness

If advertisers and their agencies are able to come up with one generic and widely accepted measure of effectiveness, then results can be paid.  This is a fascinating area and I have covered here  .

3) Media mix optimization
Due to the quantitative holes in performance marketing, some advertisers are seeking to attribute value to “total exposure” rather than pay for specific clicks: paying for exposure across the media mix.
NBC is trying out a metric called “total audience measure”, which tallies TV and online impressions: “you have to understand, every medium has a different effectiveness level”. Beth Comstock, president of NBC Universal Integrated Media

Opportunities for growth companies

The big issue for many start-ups with a revenue-model based on CPA or lead gen is the question of whether the last click before a purchase is the real reason for that purchase being made. I personally believe that the current system is the least-worst mechanism that we have and therefore PRICING WILL STAY THE SAME:  The downward pressure on CPAs that would come from recognition of additional brand building will be netted-off by the overall shift in spending from mass to performance marketing.

It doesn't concern me too much that the last click before a purchase is not the reason why that purchase was made.  Why?  Because a great web app will act as a "noise reduction agent" to cut through the advertising clutter. This is one of the compelling things about Moveme.com (Advent Portfolio company): there is a clear development towards reducing the noise and concentrating on signal strength from publishers.

Affiliate Networks themselves are seeing some questions from advertisers about the true effectiveness of affiliate network campaigns . I have previous posted on this.

All web properties; from small blogs, through growing media-networks (like glam.com) to massively trafficked ad-driven models like Dailymotion will have to continue building bigger and more comprehensive databases of their users: profiles, demographics, likes, dislikes.  Advertiser demand for this data will only grow.

I am also convinced that we’ve not seen enough from companies targeting specific influencers in key communities.  I’m excited about businesses helping advertisers go after influencers in specific niches or providing horizontal tools to go after influencers in multiple verticals.

Finally, the enormous shift away from mass marketing and into analyzing performance marketing and targeting will create fascinating opportunities for growth:
•    Managing customer data-bases
•    Analysing customer data
•    Automating the measurement and performance of advertising dollars on-line and offline

The advert is becoming the product

The idea

This is the idea that we are at an inflexion point in the development of new forms of advertisement.  These new “advertising objects” are hybrid models: a mixture of a number of existing methods and media: part website, part TV commercial, part live event, part community.

“Online advertising may be sexy – but its hardly penetrated the big advertisers.  It takes a long time for people to shift inertia and legacy systems.  The white sheet of paper brigade has an enormous advantage”. Martin Sorrel, WPP, May 2007

The opportunity

The advertising industry today is today characterized by both incredible sophistication and complete naiveté:

•    Advertisers are incredibly sophisticated about creating brands & ideas that resonate with the subtleties of consumer psychology.   
•    There is naiveté and (in places utter confusion) about how the still new medium of the web, can be used to help consumers buy products in the short, medium and longer term.

So strategically we’re state of the art Bang & OIufsen, but tactically we’ve only just discovered the LP.

How is advertising so sophisticated?

Brands are moving further and further beyond plain old vanilla adverts. Russel has a great blog post on this and here are some more examples :
Events: Innocent have the fruitstock event to identify with all that’s middle-class and wholesome. O2 & Virgin have their festivals.
Social campaign: Dove have a pseudo-pressure group “campaign for real beauty” to get us all to realize that Kate Moss isn’t the pinnacle of beauty (thanks for that).
Sports events. Nike manage to persuade thousands of runners to become giant advertising hoarding for them in twice-yearly races (for extortionate entrance fees).
Charities. Amex Red and Starbucks with Perk up Your Life are piggybacking the current consumer trend for social responsibility with compelling charities.

Advertisers are only just starting to “get” the web

There are masses of examples of terrible ad ideas on the web.  My favorite example is the Pepsi worldwide multi-million on-can promotion with a Youtube-esque site during the world cup encouraging customers to upload their own versions of the Pepsi TV.  Just 23 were submitted, 14 of which were from the same family in Romania.

NikePlus is the single best example. This is a website which synchs to your pedometer and ipod so that when you come in from a run you will automatically get linked into a social network of other runners.  Customers have gone mad for it.  People are joining simply so they compete against other people in the social network (for more on getting a social network to work right see here). The convenient thing about competing in the network is that more running shoes and ipods are also bought.

So it’s one big advert for Nike.  And a very good one at that. Its not a TV ad, its not a social network, its not an event.  Yet it has elements of them all. It’s a completely new advertising object.

Widgets are of course the other big web and advertising crossover.  Want to get your brand embedded half a million myspace pages?  Sure, just write a nice widget and the kids will ship it out for you.  Just think of what that inventory would cost you….

Web2.0 = advertising2.0

Some commentators go so far as to say that Nikeplus is a case of the advert becoming the product itself.  As a venture capitalist I am fascinated by this concept.  When we look at backing a web-app or publisher we always look for some virality inherent in the web property. I’ve never looked at web2.0 as a series of advertising objects and the future of advertising, but I’m beginning to think it might be.

Opportunities for venture backed businesses?

When we first started looking at this area it was hard to see how VCs could make money from new advertising objects.  They are currently being made by small innovative young agencies.  Going forward all the signs are there that they’ll be being made by large innovative agencies.  Agencies are people businesses with no scale nor operating leverage: not traditionally great hunting ground for venture capital-esque growth.

Having seen the way that the ad is becoming the product, the growth of widgets and the vitality of many web2.0 companies, I’ve realized that we’ve already been investing in advertising2.0.

Why most Web2 businesses are doomed

The contention is that:
1.    Most web2 business models rely on advertising
2.    The advertising market is barmy at the moment; agencies, buyers & brand managers don’t quite know what to do.
3.    Hundreds of web2.0 companies are essentially making a wide range of very different bets on the type of web property will command top dollar from advertisers.
4.    Not many will get it right.

I first said something along these lines at the Essential Web conference a few months ago, and I have been getting a hard time from some quarters so want to explain. 

Firstly I will talk about exits for these web properties and then about their business models:

Exits
Since joining Advent I have been asking a lot of people their view on who corporates will be acquiring and IPOs be valuing highly in 3 – 5 years.

Right now it is obvious that the hot area for investment and realizations is users and communities (Last.fm* on an exit P/R of 56 proves that. Plus Fred proves it on the back off a fag packet here ).

These valuations are predicated on our old friend “first mover advantage”: Could News International develop their own job-site?  They could, but why not just buy someone already doing it? It saves the time, risk, outlay and focus (like this). Admittedly there is also a fair degree of panic on the part of some media companies that they don’t have a large or strong enough online audience.

Will web properties still be madly buying like this in 3 years?  I don’t think so.

By that point, it is all about monetization.  This is not to say they’ll be straight EBITDA valuations but exits (both M&A and IPOs) will be based on studies of the methods and metrics of monetization.

Models
And so to start ups.  When I look at some of the advertising-based monetization models from some start ups I meet, I get very nervous. For example, will you really be able to hit the $40 CPM 2 years after launch on remnant inventory? Will you really be able to gross £135 for every warmish lead you give to that high street solicitor?

Other than this granular view, there is also a more strategic view. Consider this:

1)    There is a MASSIVE increase in ad space coming online (from start-ups, through the new dominants (like Facebook) through to the old school giants like FT.com).
2)    There is only a MILD up-tick in online ad spending.

At a basic level the law of supply and demand says that price will go down.
(There is a further possibility of consumer spending falling off a cliff, but with the current market poised where it is, who can call this one?)

The end for ad-based web models?

Not at all. I’m as bullish as ever on making investment into ad-driven web models.

I just think that most of the businesses setting up to today have got it wrong.

What I’m really excited about seeing is how the ad market is becoming more sophisticated and how some start-ups are taking advantage of these new models.  All of this is based on some research we’ve been doing in-house and over loads of coffees and breakfasts (I am a stone heavier since April).

We have found a number of key ideas that seem to be moving the world of online and offline marketing.  Brace yourselves for a stack of posts over the coming weeks with my conclusions...

Apple is the evil empire, stupid

The iPhone will be the nail in the coffin for Apple's credibility.

I have hated Apple ever since I tried to get AAC files to work on a new MP3 player, then a new pc.

I hated Apple even more when I tried to play iTunes tracks in an opensource media player.

Lock-in! Proprietary formats! No flexibility! The bastards.

Yet I was a voice in the wilderness. Whenever I asked either developers or other consumers they loved Apple.  The iPod was a piece of achingly beautiful design. Steve Jobs was cool.  Macs kicked Microsoft's proprietary ass.

The iPhone is changing everything. Developers are beginning to hate Apple and I think consumers will be next.

What's the problem with iPhone?

Mike Arrington at FOWA was half way there today when he said Apple is pissing people off by limiting them to one network.

I think there's a much bigger problem. The genius of the iPhone is that it provides an interface for people like my dad to access and use mobile apps. The problem is how hard it is to do this.

Great technologists like Sutha  are livid that developers can't even officially write to the OS X layer.  They're officially limited to a not-so-rich web-browser in which they can build very simple apps, but that can't take advantage of any of the power of the iPhone. These apps can't run offline, can't take a
peek at your address book, or anything else. They certainly can't do any of the slick graphical things that are making people generally salivate over the iPhone.  You CAN create native OS X apps that do much more but this means hacking the iPhone.

So my dad can have some widgets but they're not really useful.

In essence Apple is going against all the principals of openness and interoperability that so dismays developers and eventually consumers.

And now hallelujah! People are starting to dislike Apple. I am pleased for two reasons:
1)Wonderful opportunities for entrepreneurs.
2) Finally I feel vindicated ;)

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.

Calling Copenhagen: Entrepreneurs & Angels

Are you based in Copenhagen and doing something cool on the web? If so come on down to the FOWA Road Trip tomorrow at The Dubliner .  Ryan Carson has put together some cracking evenings to date each with a whole bunch of great people. It’s sort of like Open Coffee but with beer, more entrepreneurs, more angels and local VCs (apart from us ).

If you wanna have a word or meet up before hand.  Ping me.

Why we love seedcamp

I am back to work this Monday and have a stack of seedcamp applications to process.

I think there are two particularly exciting things about Seedcamp:

1) Ecosystem

Seedcamp is a terrific opportunity for some young and bright entrepreneurs to spend a week meeting the most incredible set of people.(This speech and this link gives a flavor on the board, but I understand Saul will soon be revealing some incredible mentors flying in).

The power of a network is fascinating.  Some people seem to think that it’s an end in itself.  I don’t agree. 

A network is not a set of business cards.  A network is not someone you’ve met once at a rabid networking do.

The best people I know, I have worked with.  Working in their company, with their board, negotiating a deal on the same side or the opposite side of the table. Sharing my opinion and experience.  Having it shouted down, debating and sometimes being listened to ;)

What is wonderful is that the successful seedcampers will get to meet a cracking set of people and engage with them. Hearing their opinions and experiences inside successful businesses.  Strongly disagreeing, debating and sometimes agreeing;  The closest thing to actually working with them.

2) Thinking big

Seedcamp gives entrepreneurs the opportunity and a very supportive environment to think big. 

I am a strong believer that the “go big or go home” mentality is absolute rubbish. Entrepreneurs should not feel obliged to manically strive to create businesses that change the world.  Its just not the right path for some people, some business models or some risk profiles.

However, if you don’t consider how you can build your idea into a billion dollar business at the start, its very hard to turn it into one halfway through. If you don’t “just go for it” when you’re young, it’ll be much harder when you have a mortgage and a nice car to drive to a comfy job at a business park in Bracknell.

That’s why I’m excited about seedcamp.

European Venture Capital: What have we learned?

Now that I am no longer an advisor (albeit still on gardening leave) I can look back with some detachment on the whole process of raising capital or selling your company.  I want to do two posts: what does the VC market looks like today, and to answer the question, what is it with advisors anyway?

The market today:

Over the last 8 years I have been privileged to work with some incredibly talented management teams and entrepreneurs.  Through-out each process I have sat through some meetings with remarkably astute, insightful and experienced VCs and corporate acquirers and also some incredibly rude and clueless investors.   (I have also met a similarly diverse range of entrepreneurs!)

Let me focus on VC: I will cover M&A in another post.

I think that the European VC scene is a notably better place and that  THNGS ARE GETTING BETTER ALL THE TIME. 

• The ecosystem for entrepreneurs is getting better: from uni spin-out hubs & clubs to booze fuelled dinner table debates.
• The quality and segmentation of investors is getting better; from international success-stories like Index to small, ultra focussed funds like Eden Ventures. 
• The DIALOGUE is getting better; I doff my cap to initiatives like open coffee club which fosters mutual understanding. I believe VC –entrepreneur relationships are far less adversarial and far more informed than they were 8 years ago. (Fred has a nice angle on this too)

It is this last point that raises the question: what is the point of advisors? Let me explain. In the bay area there are no corporate finance houses running Series A B or C rounds.  This is done in-house, by an NED or maybe by the lawyer. European VCs ask me: why do European entrepreneurs need people like First Capital?  I will turn to that in the next post.