Being Anti-Social

Meet your new business partner
Business plan includes jumping out window in direction of North Star
Also pictured: your first angel investor

• You're late to the party - What I think is most sad about these ideas is that they are about 3-4 years too late. People look up, see the success in the marketplace and think, "Hey. I can do better than that" so they jump in with both feet. Nobody realizes that when these sites were getting started, there were no other sites. There was nobody around trying to be "me too". Here's an abbreviated list of over 100 digg-style sites, some of which are digg-type engines where you can set up your own site. The real number is easily twice that. Video sites number well over a hundred. For each public site, there are probably 10-20 in some sort of planning stage.

  You dominate a market by being one of the first in and learning from your mistakes. You can try to carve out a new niche -- perhaps you are the only social networking site for scientists with the last name of "Smith" who speak Albanian. Perhaps you have the only social networking site for albino skunk farmers.

  Look at it this way: for each of these people placing ads for partners, there are probably 500 people who are already in the social networking arena, have been there for a year or more, and have lots of funding at their disposal. Maybe as a fresh face you're going to be able to out-strategize 500 people with better information than you. Maybe Peter Pan will be your business partner. Maybe dogs have magic powers. Could happen.

  
  Daily reach of Technorati, in millions
  As the "energy" around Web 2.0 dissipates, except for the YouTubes, more and more sites
  will suck up smaller and smaller groups of consumers.

  Peter Rip over at early stage VC puts it like this:

  The apogee of this Web 2.0 hit me on Friday when I was having lunch with my daughter in San Francisco. There was a conversation at the table next to us between a 30-something and a 50-something, The younger was explaining to the elder that they had web site with the following attributes
  

  
  
  • Users can share any kind of information from files to photos
  
  
  • Storage isn’t expensive, so we don’t police it today, yet
  
  
  • Users can invite their friends; that’s how we get new users
  
  
  • We launched a few months ago and are doubling every month
  
  
  • We haven’t quite figured out our revenue model, but we think it is freemium (“Let me explain what that means…”)
  
  

  
  Of course, this is the generic Web 2.0 company template. Overhearing the dialog felt like the 2007 version of Joe Kennedy getting stock tips from his shoe shine boy. Web 2.0 is in the water, drink up.

  We now know the fourth quarter of 2006 witnessed the mainstreaming of Web 2.0. It began with the YouTube acquisition, followed by a rather incumbent-centered Web 2.0 conference, culminating with the coronation of user-generated media as Time’s Person of the Year.

  The notion of Web 2.0 as a wave is now rather long in the tooth, as cycles go.

  
  




• There are only so many consumers - Even with choosing a tight niche, there are just only so many eyeballs on the net. It's not like people are sitting around doing nothing all day. If they're the type of folks to surf the net, they're already surfing the net. Somewhere else. So you're not just trying to find people: you're trying to find people who want to stop what they are already doing and do something else. Let's see -- your customer already spends her lunch on MySpace goofing off, and you're going to convince her to try out the Romanian Lapdancing Clan site. Assuming you've actually found a Romanian lapdancer to pitch, why is she going to be more motivated to give up her MySpace time to spend it with the other lapdancers? You can only differentiate yourself so much. Honestly, what do you think the key driver for her is? Spending time with all her friends in a place with ten million users, or associating with some people who might share some demographic?




• The Web 2.0 Business Model sucks - Yes. Find the eyeballs, find the regular audience, and forget about monetizing until later. Sounds great and all, but here's the rub: who's paying the light bills while you wait around for "later"? And how long can you wait, anyway? You had better have some serious answers to these questions. If you're living under a trust fund and have a few friends who also have a few years to kill, then go for it! Otherwise, you've got to make the numbers balance somehow. It's called "business". That means you have to find money somewhere.

  I know it's really cool to read about the "Hot or Not" sites where the thing is coded in a weekend, takes off like a bolt of lightning, and all the founders are just hanging on for dear life. But guess what? You've got better odds of growing potatoes in your nose than writing the next "Hot or Not" If you can swing an exponential growth curve like that, then you can make that Web 2.0 model work like a charm. But if you're stuck with the rest of us mortals, the numbers don't work. Don't believe me? Run them for yourself. (I wonder how many of these ads actually have somebody with a marketing and cash flow plan)




• Advertising will not keep you afloat - So we'll do advertising, you say. Think again. Here's the word from a recent post in the advertising community:
  

  The big are getting bigger. At this event last year, there was a lot of talk and attention on research from Marketscape that determined that 88% of the gross online ad spend in the US in 2005 went to only four companies, Google, Yahoo, MSN and AOL. While some of this money ultimately was paid to independent sites through ad networks, it was a very sobering number. Well, Marketscape’s founder addressed the Forum today and told us that last year the “Big Four” received 92% of the gross online ad spend in the U.S. While this is great news for those aggregators, it’s certainly a very scary development for those thousands and thousands of ad-supported Web media companies. The landscape isn’t leveling, it’s tilting even more.
  

  Look. There are simply two basic kinds of commercial endeavors. There are the ones that are basically boring, but have a solid business foundation. Then there are the ones that are exciting, but don't have much of a solid foundation. The Gold Rush had prospectors (not so solid, but fun!) and merchants who sold them stuff (who made the real bucks). The Crusades had the Crusaders (very exciting, I guess, but most ended up with bupkis) and the merchants (who made a boatload of money). Yes. You can be the guy that writes the next great American novel. Or you can sell writing supplies and training into a tightly focused market where you own all the drivers. Being Stephen King would be really cool, but there are only so many of him. Google is ready to sell you your writing supplies, your war supplies, your prospecting supplies. They'll give you the blog space, they'll aggregate the ads for you. Only thing for you to do is all of the hard work associated with finding a readership. That's called marketing. For Google. Not you.
  




• Financing is not happening - Let's run the numbers, shall we?

  Assume that you're looking to run a company with $50 Million in revenue The blog over at Lightspeed Venture Partners has this to say:

  Here are three ways to get to $50m in revenue as an online media business; indulge me in some math:

  1. Be a site with a broad reach (say general social networking, communications, news). At large scale, without a great deal of targeting possible, a startup’s “run of site” or “run of network” advertising might be able to get to the $1 RPM range (Revenue per thousand impressions, including CPM, CPC, and CPA models). To get to $50m in revenue you would need 50 billion pageviews in a year, or just over 4 billion per month. According to Comscore, Bebo had the 10th most Pageviews in the US in Janurary 1007, with 3.4bn, so you would need to be bigger than that.

  2. Be a site with demographic targeting (say a Latino portal, or a sports site (targeted at men) or a social network targeted at baby boomers). Although in TV and in magazines, demographic targeting can generate double digit CPMs, online at scale, RPMs tend to be in the low single digit range. Lets assume a $5 RPM. To get to $50m in revenue you would need 10 billion pageviews in a year, or just over 800 million per month. According to Comscore, Microsoft had the 22nd most Pageviews in the US in January 2007, with 792 million, so you would need to be bigger than that. [Microsoft isn’t a demographically targeted site - i just use it as a comparison point for overall traffic size.]

  3. Be a site with endemic advertising opportunities (say a site about movies that movie studios will want to advertise on, or a site about cars that auto manufacturers will want to advertise on, or a site about travel that hotels and airlines and online travel agencies will want to advertise on). If you have a highly targeted audience that is interested in buying a specific product, you can command RPM’s well into the double digits. Lets assume a $20 RPM. To get to $50m in revenue you would need 2.5 billion pageviews in a year, or just over 200 million per month. According to Comscore, Adelphia.com had the 125th most Pageviews in the US in January 2007, with 198 million, so you would need to be bigger than that. [Adelphia isn’t an endemically targeted site - i just use it as a comparison point for overall traffic size.]
  

  As one commenter put it: "I would not want to a be a venture capitalist trying to play this game. It is awefully difficult to predict what kinds of models will produce these massive volumes of traffic economically. Investing in these types of businesses feels closer to buying lottery tickets than traditional venture capital. …Kudos to lightspeed if you can figure a model out where you folks hit even one out of 10 of these lottery ticket types of deals in a sustainable way."




• It's a pop-culture business, not a technology business - Lottery tickets is not the model. Making a hit radio station is -- where there are a thousand pre-existing radio stations. Lots will try, few will succeed. Those who do will have a bit of a cult of personality around them. The problem is, by comparison, it's a lot easier to kick around in your garage with an old Fender and a ham radio than it is to write a new social networking site. Heck -- it's easier to start a REAL radio station than create some of these sites. Have you seen all the cool features? So think of it as forming a really expensive radio station, that nobody wants to finance, that has basically no legitimate revenue model, and that everybody else is doing.




• Growth is going to be slow - I end with optimism. I think if you can tightly focus, measure your audience, and be patient, you can grow your way into a decent income. Not a Bill Gates kind of income, but enough to retire. That's worth pursuing, if you've done all the math, know your audience, know how to find them, and know how to keep them. But it is not going to be easy. Not by a long shot.

Look -- I'm not trying to be negative, only realistic. I know I've engaged in a bit of hyperbole, but it is in an effort to save people from wasting their time. I'd love to get in on this bandwagon too so I've done the research. I've ran the numbers. Yes -- I think you can have that specialty site that you slowly build up to monetize all at once. That's a workable model (but slow). And yes, there will be more FaceBooks, but not a hundred of them. Maybe 1 or 2 a year. And that's out of thousands of contenders. Might as well join American Idol.

People are tired of ads. They hate them on TV, they hate them on the web. They're tired of those stupid customer loyalty cards that every business has nowadays. They're not stupid: they know those cards help the businesses a lot more than they do the consumers. And they're going to get tired of digging, moderating, boinking, slapping, skirting, poking, winking, and whatever other synonyms websites can come up with to try to get folks to participate. Right now, there's a headlong push to get people involved in these Web 2.0 sites, but for every true convert, there are a hundred folks that just drop by to see what everybody else is doing. They're there because of habit, not because of bells and whistles.

So if you're writing the next Digg, or you've got an idea for a social networking site that has dancing bears, instant messaging, singing clowns, and stripping stars, take a number. It's going to be a long wait.

I'm in the market for a new adventure. So if you are looking for someone who can teach and well as perform software development, knows the business from bytes to IT portfolio management, drop me a line. If you think I'm not smoking crack -- you like my analysis -- I'm looking for serious partners who have resources (money) and are looking to start a promising venture with lots of upside. Write for details.