Monetize . . . or Die?

What we say to dogs.jpgA few months ago, my pitch to Virginia’s Center for Innovative Technology (CIT) for their GAP funding program was turned down. I actually thought I had a fighting chance, having worked with the good folks there before and produced a plan that set the stage for their first $100k GAP disbursement. But my app-in-progress CHALLENJ was turned down, for, among other things, “We are unsure about your ability to monetize the site.” Gee, I thought — I had scoped out several alternatives . . . one of them should surely yield.

What I said was, “The revenue is, of course, dependent on my ability to acquire millions of users.” And what they heard was “I don’t really care about revenue.” Like the classic cartoon, listening, understanding — and in the case of investors, believing — are often completely different things.

I had built a financial model — I love building models — that suggested revenue somewhere between $10M and $20M was achievable in Year 3. (Maybe I should have given them an interactive model or web toolkit, that would let them dial in their own scenario.)

But truth be told, my focus was primarily on getting users. I was willing to bet on our ability to do so, and that’s fine for founders . . . but for CIT (and others), the risk was too high — certainly to place a $100,000 bet.

(Incidentally, I still recommend applying for GAP funding — it’s a relatively easy application, and structured as a convertible note, avoids issues surrounding valuation, which can be very touchy these days.)

The conclusion I soon reached — months before the economy flip-flopped — was to build and launch before resuming the quest for investment. (Now pretty much a fait accompli for any web start-up.)

Launchbox Digital co-founder (and most recently, Thummit co-founder) Sean Greene suggested an alternative at BarCampDC2 last week: sustainability with small numbers: “VCs need things to be big — you don’t. You might be perfectly happy with 10,000 paying customers. And if so, you don’t need a VC.”

Point well taken. For that matter, maybe you don’t even need angel financing.

In a recent BusinessWeek story, New York Angels chairman David Rose — and several others — remarked they’d like to see self-sufficiency on the initial investment. Jeez Louise, how many businesses can get to self-sufficiency on a couple hundred thousand bucks?

Maybe it’s my upbringing. My first venture-funded company was in the computer-chip business. Talk about a leap-of-faith investment — money comes in, and a year or two later, you hope to have a working product, a receptive customer base, and good market conditions. In that world, there are only two qualifications for investment: 1) the pedigree of the team; and 2) the gut of the VC.

Google was a gut investment; the founders were super-smart, but still in school. Twitter had a mix of both — the founders had proven their smarts and ability to execute with Blogger, which was acquired by Google in 2003; but well before the meme had proven itself with the masses (some say it has yet a ways to go) a few VCs — notably Union Square Ventures‘ Fred Wilson and Spark Capital‘s Bijan Sabet, were also trusting their instincts that Twitter was not destined to be another PointCast. They believed instead they were on the very brink of a phenomenon . . . even without a revenue model.

Recently, a bit of tempest in a teapot brewed around a comment USV’s Wilson made about Twitter, as reported in a Wired blog:

“œIt’s like the stupidest question in the world: How’s Twitter going to make money?,” said Union Square Ventures’ Fred Wilson, another investor. “It’s like ‘How was Google going to make money?’

Wilson subsequently apologized for being snippy, but I knew what he meant. Throughout my startup career, I rarely worried about revenue models — the hardware companies of course made products to be sold, so the only concern there was could we sell thingies for more than it cost us to build them. But even in the software and Internet companies, there was a general belief in the notion that if we produce something people use, we’ll figure out a way to make money.

It may all be moot, because most of you are probably thinking more about sustainable revenue models than ever before.

Call me crazy . . . but I’m still a fan of go big, or go home.

In any case, we believe in our ideas, exuberant (if not irrational) as ever. And we remind ourselves that, as David Hornik, of August Capital has said: “One VC’s next Google is another’s wasted hour.”

Which is why I continue talking to VCs. And in fulfilling my personal mission to improve the VC-entrepreneur dialog, I’ve organized my first OpenCoffee, where we’ll have two local VCs in attendance. Join us, if you can, for some stimulating discussion!

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Pony in the Pile

This week’s Interact 2008 conferencemad men 2.png — all things interactive media — began upbeat enough, with Ted Leonsis‘s inspirational keynote signaling an ‘anything’s possible, mix-and-mashup’ world of opportunity where entrepreneurs can offer (and perhaps find) fulfillment by providing one of the five keys to self-actualization: relationships, community, self-expression, giving back, or pursuing a higher calling.

But then, the sky began to darken.

With each successive speaker and panel, the mood turned increasingly somber, until by the end of the afternoon — terrabanged by the announcement of the failed bailout and a Dow plummeting 777 points — somber turned to sober . . . and the ad/marketing audience lit out to quench the condition at Happy Hour.

Actually, Leonsis foreshadowed the day’s drama with his own sobering statement: “Today, a marketing person needs to be a mathematician,” and not the English major that he was. Everyone knew exactly what he meant, of course. It’s about metrics, and testing, and deliverables that can be measured — a theme echoed several times during the day. Google VP of Search Product and UX Marissa Mayer talked about nuanced A/B testing, where reducing spacing a single pixel-width — or bathing paid search in a field of yellow rather than blue — resulted in 20% to 40% more click-throughs. Launchbox Digital‘s Sean Greene had asked the panel he was moderating on ‘The Evolution of Advertising Models’ what the near-term effects of the dismal economy would be on ad spending, and the unanimous response was “a shift to what’s measureable” (hopefully, social ads in search of the elusive ‘engage’ metric won’t be left twisting in the wind).

You could almost feel the room heave a collective sigh: “We know, we know — we need to bone up on this technical widgified social media stuff.”

But there was little letup. Avenue A/Razorfish‘s Joe Crump was nearly morose, acknowledging (in a talk aptly titled ‘Digital Darwinism’) that not only is the rate of change of technology overwhelming, but current org charts are woefully ill equipped to deal with it in creative organizations. By early afternoon, Adobe evangelist Duane Nickull and Clearspring CEO Hooman Radfar had applied a thick coat of glaze discussing SOA (tell the truth: did you know that it stands for Service Oriented Architecture?) and widget distribution strategies. Finally, the afternoon wrapped with a panel presenting a glass-half-empty outlook for interactive media employment that could be summed up as a grey-hair lament something like: “We need to hire more whiz kids that understand this stuff . . . but they’re a dickens to manage.”

Good thing we entrepreneurs are optimists. Why, there must be a pony in this pile!

The great words of someone famous come to mind: Out of adversity comes opportunity (or is it creativity?). Either way, there’s a dislocation, a discontinuity, a gap that begs for a solution. Here, the gap is agencies’ and marketing departments’ inability to keep up with technology of social media. So might be the solution?

Maybe training.

Maybe analytics tools or services.

Maybe app-building for hire.

Now, Crump shouldn’t actually be complaining — of Avenue A/Razorfish’s 500 employees, 200 are technical. But I’m not sure any of the best and the brightest (you know who you are) want to bury themselves in an agency with a salary and long hours.

So what’s the entrepreneurial play here?

Although VCs have historically shied away from service businesses — the multiples were usually far greater in product businesses — that scenario has changed. And in fact, it could solve several problems at once. If you’re dismayed that VCs want you to recite your revenue model (even though, like me, you expect you’ll figure it out once users have embraced you), there could be an alternative to raising money altogether: How about getting paid for what you love to do (and do well)? If in the course of providing your service, you’re also building a product, or developing some intellectual property (IP), then you’re in fact building equity in a service business.

I wrote about BuddyMedia creating ‘branded’ Facebook apps (They actually received funding from Bay Partners and others), and they’re a good example of ‘filling the gap’ for big agencies. But a better example may be Set Consulting. President/founder Jared Goralnick is passionate about productivity, and Set gets paid to improve clients’ productivity. But in the course of doing his work, Goralnick also built a product — AwayFind — aimed at avoiding ‘email bankruptcy.’ Voila! . . . a cashflow business, with an equity kicker.

And no VC. Ironically, when you get that combination working for you — and you really don’t need the money — is when the VCs come a-knockin.’

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