The following is a blog re-post from Raj Kapoor’s , Managing Director at Sillicon Valley’s Mayfield Fund. Raj is an energetic type A personality that likes to explore, learn, question, and enjoy. The original can be found here. Contact Mayfield Fund here. Thanks Raj!
PREDICTION: Social Networks Will Make More Money Off Site vs On
by Raj Kapoor.
Social networks are here to stay…100s of millions of consumers now use them as an indispensible tool to stay current with friends and interests. There has been a lot of debate on how they can make money. Let’s keep in mind that they ARE making money today (facebook over $300M annual revenue and LinkedIn well over $100M) – more than most internet sites – but just not a lot on a per-user basis.
I believe this is because the traditional ad model doesn’t work well here – social networks are a communications platform at the core.
People log on daily to check messages, photos, and videos that were added by interesting people for them to view. They are not coming to view content as much as people would have hoped, nor are they using it as a main portal or launching point for all web activities (Google won that so far…)
Communications sites have never monetized well because the consumer is focused on communication and is not going to be diverted by ads.
I experienced this firsthand running Snapfish and trying ad sales for 6 years against online personal photo pages. We got advertising up to 10% of revenue but that was about it.
Why? Lack of performance and attention from users… they were too busy viewing photos vs clicking on ads. Many social networks suffer the same issues as shown by their dismal click thru rates.
THE DATA ECONOMY:
That said, I do believe there’s a big opportunity – it’s in the Data that is captured explicitly (entering info on yourself in your profile) and implicitly (the groups you join, the content of the messages you send each other). In some social nets like Facebook and LinkedIn, the data is very deep and for the most part true. The profile page itself is a treasure trove of information on age, gender, location, interests, work experience, favorite movies, tv, etc – all the attributes a great brand marketer wants to target when reaching an audience.
The advertiser may not have measurable success reaching the user in the social network, but if they had access to the data when the user is on other sites – more conducive to engagement with ads – the advertiser would be in nirvana.
The data economy is developing fast where data is decoupled from ad inventory and used to target audiences where ever they are (Mayfield companies Audience Science, Adchemy, and Rubicon Project are leading the charge here). I think the big social networks are aware of this but are treading carefully given the privacy concerns. I do believe when they find the right mix of user privacy and sharing of this data, they can provide it to advertisers, networks, and publishers and profit handsomely from it. They can make more money on a user by charging a tax for the data each time its used vs the pageviews from that user on their site.
Let’s do the math and make some assumptions to illustrate:
I used the following estimates on ad impressions/user/mo on top social networks:
- Facebook: 356
- Tagged: 387
- Myspace: 452
….Avg: 403
…And I assume $.50 as the assumption for eCPM (which I believe maybe high). Thus, on average a social network makes $.20 per user per month on ads on their site.
USING SOCIAL NETWORK DATA TO MAKE MONEY OUTSIDE THE SOCIAL NETWORK
Now, let’s look at how many ad impressions the typical internet user encounters in a month – I’ve found it to be about 1,650 per month. Let’s also assume the following:
- 50% of these impressions could be targeted using the vast amounts of profile and friend data from SNS
- $2 eCPM for such a data targeted ad
- the social network keeps 15% of this revenue for its data (which seems like the going rate talking to data players).
That’s about $.25 per user per month. So, if my assumptions hold true, then a social network can monetize their users $.25 offsite vs $.20 onsite….
Social networks will make money on their site – thru ads, virtual goods, etc – but the real big opportunity is freeing all the user data and enabling it to target them wherever they are on the web.
Today, driving short-term revenue is the only thing on a startup’s mind.
Since the economy dove into the dumps, the Silicon Valley fairytale of huge valuations for startups that acquired users by giving everything away for free (thinking advertising was the one-way street to the revenue promised land) is over.
It’s been over since Sand Hill Road had a “come to jesus” moment with its funded startups – and the message was heard loud and clear across the startup world: cut costs, generate revenue, and keep a safe amount of money in the bank at all times.
Now let’s counter that message with the mantra that a recession is the best time to start a startup.
So for those of you who’ve taken the plunge, and didn’t accept tens of millions of VC dollars before the collapse, how do you generate revenue while keeping costs low in order to build a resilient startup with long-term potential a profitable future?
Manish Chandra, CEO, Kaboodle moderated the discussion asking some great questions, including:
“If you were to give the Twitter team advice for turning on short-term revenue, what would you say?”
The speakers included: Karl Mehta, Founder & CEO, Playspan Lance Tokuda, CEO, RockYou Munjal Shah, CEO, Like.com Rebecca Lynn, Principal, Morgenthaler Ventures
Some Highlights from the Conversation:
* Smart Revenue vs. the Quick Buck: Driving revenues in the short term without abandoning your focus:
“When the economy collapsed, we decided to focus on releases that could make us revenue within the next six months, if not – it was canned.” Karl Mehta.
“…If someone is willing to give you money right now, take it. Don’t fear diluting your stake in the business and refuse investment if someone is willing to give you a cheque. What’s worth more: a bankrupt startup founder or a founder with a startup that’s alive?” – Munjal Shah
“A sure fire way to revenue is by building something people are already paying for, but making it better, faster, cheaper and more compelling than anyone else has to date. You don’t all have to be YouTube’s.” Rebecca Lynn.
…Karl also pointed to an example from one of the attendees who took corporate investment in hopes it would fund their larger goals, but it came with so many development deliverables for the funder, it drove his entire company down the wrong path for nine months, losing precious product development time.
* New Ways to Monetize Your Product: Is virtual currency the savior? Are there other new revenue channels you’re not tapping?
…Karl, Lance and Munjal all agreed strongly that virtual goods are a proven way to revenue, pointing to the long-standing adoption of virtual goods in Asia over the past 7+ years.
…Freemium, subscription, lead generation, revenue shares, etc.
* Beyond the Ad: For ad-driven startups, what more can you do when advertising is down? Is it all or nothing at all?
…Lance argued strongly that unless you have a top 20 Comscore rating – the chances of generating enough ad revenue to keep your business afloat are bleak.
“No one should rely only on ad dollars. You need other revenue streams such as subscriptions, premium content, etc.
…….
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The team over at Docstoc (an LA based startup headed up by Jason Nazar), announced a new program the other day that piqued my interest: DocCash.
Docstoc is already home to a HUGE number of professional documents, presentations and templates uploaded be people like you and me – then searched, shared, embedded, etc around the world for free. The rolling out of the DocCash program means members who upload documents can now get a slice of the ad revenue pie.
DocStoc says, “The DocCash program pays you for uploading documents. After you join, we’ll spit (50/50) the Google AdSense revenue that we earn from the documents you upload to Docstoc.”
Check out the demo video (complete with the smooth radio-friendly voice of Jason himself)
Under the Radar past presenter, imeem talks to Digital Media Wire about how they’ve successful rolled out monetization strategies for their social music network.
About imeem: imeem is a social network that enables users to discover, interact and express themselves with media, including music, video and photos, and form connections based on shared tastes and interests. Investors include Sequoia and Warner Bros.
In talking to hundreds of startups each year, I know something like this is running through many first-time founders’ heads:
“Legal schmegal! I’ve got a company to build… I’m sure an all-nighter over the books is enough to clean them up before a VCs due diligence. I promised my co-founder he’ll be “fairly compensated” if we get acquired. So I’m good, right? I don’t need to spend my much-needed cash on a lawyer.”
Au Contraire, mes amis. You’re building a business. Working with a lawyer in your early stages can prevent a lot of sweat on your brow later down the road.
THE VALUE OF LOOPING IN A LAWYER:
Unsure about working with a lawyer when you’re first kicking off?
Here’s a few key reasons working with a lawyer can be incredibly valuable:
They help you get your share structure right and properly document it the way investors expect. Straight from the get-go. If you’ve ever had to go through a company re-structuring, or tried to clean up mistakes at the time of a financing or sale. it’s painful. Avoid it at all costs. A clean, well documented company makes for easy due diligence and faster (and less expensive!) deals.
They can help you make sure you actually own and continue to own the IP that makes your company work. Really good ones can help you develop licensing and partnering strategies you can use to get paid.
They have connections. Run away from any lawyer who promises to get you financed, but do look at firms to see who they’ve helped negotiate deals with. Is their Rolodex packed with potential investors or customers? Can they make a warm intro and get someone to focus on your business plan or get you candid feedback?
They can raise red flags and help you fix them up BEFORE the due diligence process.
STARTUP LEGAL ADVICE:
To help you out, I spoke with Ivan Gaviria, a partner at the Silicon Valley office of Gunderson Dettmer, a law firm that focuses primarily on entrepreneurs, emerging growth companies and venture capitalists. Now, Gunderson’s army isn’t your typical team of lawyers. We’ve worked with them on numerous occasions, and they are authentic, cool, business-savvy folks. They kind of people you want in your circle of real-life friends (not just your 500+ facebook friends).
Ivan laid out a number of tips and legal advice for startups. If you have further questions, let me know and I’ll be happy to connect you with Ivan or a member of his team.
TERM SHEET 101
Definition: A Term sheet is typically a non-binding commitment to do a deal based on the terms laid out in the term sheet.
Benefit: The deal isn’t binding until definitive agreements are signed, but the term sheet allows the parties to reach agreement on key deal points up front and (hopefully) makes for a more efficient and cost effective deal with lawyers working on fine points and not hashing out major business issues, says Ivan.
A Common Misconception About Valuation: Ivan says there’s a common misconception among startups that valuation is the most important item on the term sheet. The truth, he says, is that startups shouldn’t get too hung up on small differences in valuation and should focus on choosing the right partner. Especially in the early going, getting an active, engaged VC with domain expertise and with whom you have a good fit can make a huge difference in building a successful business and weathering the ups and downs that every start up will inevitably face.
What IS the Most Important Term? Don’t get bogged down with boilerplate terms such as registration rights that have little economic impact and are highly standardized. Focus on the liquidation preferences, says Ivan, and understand the fine print.
In the context of a venture financing, a “liquidation” is deemed to include a sale of the company (via merger or otherwise) or a sale of its assets, and the liquidation preferences govern how the proceeds of such a sale are distributed to the stockholders.
Do the preferred investors get their money back first – ahead of the common stock typically held by management? Twice their money? Three times? Do they get to take their money of the top and then participate in the distribution of the rest of the proceeds along with the common? When does an investor’s downside protection turn into a double dip? Seemingly minor tweaks in this section of the term sheet can have an enormous impact on how much a founder actually receives at the exit.
Ivan points out that with the current state of public capital markets, startups are finding more than ever that selling their company is the far more common path to liquidity than an IPO. That makes it all the more critical to understand and carefully negotiate liquidation preferences.
Many thanks to Ivan and the Gunderson Dettmer team. If you have questions or want to connect, let us know!
ABOUT GUNDERSON DETTMER: Gunderson Dettmer is a leading law firm for entrepreneurs, emerging growth companies and the venture capital firms that support them. With 125 lawyers in four offices – Silicon Valley, Boston, New York, and San Diego – we represent companies in every stage of development from incorporation through entry into public markets and beyond. We provide counsel on general corporate and securities law, mergers and acquisitions, venture capital services, intellectual property, strategic alliances, and tax matters. We combine our experience, industry relationships and expertise to provide practical, business-oriented advice tailored to the needs of the emerging growth company marketplace.
