On pitching

I attended TechCrunch (UK) Pitch last night. It was a well organised event so props to Butcher for putting it on. We were not pitching so we could relax and take it all in. It was interesting for me because I got an insight into how VCs see startups.

I think at some level all VCs think all startup founders are crazy or potentially crazy. The successful ones they put up with but I think there is a basic tension between the two. And it doesn’t go away even if you hit the big time. The John Sculley/Steve Jobs debacle is a classic example.

The basic difference between the two groups is startup founders don’t really operate in a world of rational calculation whereas investors do. Starting a startup is in itself irrational and to go through with it you have to be absolutely convinced that your ideas are earth shattering, otherwise you just would not put in the effort required. So even when you see someone pitching an idea you think is absolutely terrible, what you have to understand is that to the founder it is amazing. You know – all babies are beautiful to their parents.

I’m lucky in that my two co-founders are more natural sceptics than I am. They took persuading that we had a good idea but doing so was good practise. I think the main thing I have learnt is that 90% of investors you pitch your startup to will not be interested. And of the 10% who show any interest they won’t give you any money until you have actually achieved something. In the end business plans and pitches count for naught. Actually building a product is what counts. A good pitch will get across two basic points – what the idea is and how far you have got. Good investors understand that technical guys are often bad presenters and do make an effort to drag those two things out of a bad pitch.

Business models and honesty

A lot of the pitches yesterday were bad in that they struggled to get their ideas across clearly and tried to pack in too much extraneous information. That said there were a couple of promising ideas and potentially good businesses. None of them will be the next Google but the combination of great product/great business model does not come around very often. It would be refreshing to see a few more startups just be honest and say ‘we want to get a lot of users then flip it to a bigger company who can work out what to do with it’. A lot of the big European successes have done this – Skype, MySQL, Last.fm, Bebo  – so I don’t see the shame in admitting it openly. Even Google didn’t come up with their own business model – Bill Gross did.

Good business models are even rarer than good products, what last night taught me is that if you don’t have one don’t tie yourself in knots with nonsense like ‘freemium’ pretending you have.

Pic: Bowbrick

On stormy weather

I was watching a video of Mike Butcher, he said something along the lines of he likes recessions because they clear away the people who are out for easy money and leaves those who want to build something worthwhile. Thus while the clickmango’s and boo’s perish the Betfair’s carry on.

I’m not too sure about whether we are going into a recession, if so it seems quite mild to me (especially when the sun is shining like on Monday). Maybe its because I’m a startup founder and thus an incorrigible optimist but things don’t seem to bad. I was a little concerned the last time I rang my bank for a new loan, but, lo, they stumped up the cash without much sweat. Credit crunch indeed, it sounds like a new Arrington blog on finance.

Underpants gnomes

Nevertheless even the appearance of a recession does have its effects. Editechial wrote a good post about VCs starting to focus on business models and are being a little harder on the 1. Get users 2. ??? 3. Profit! approach much beloved of South Park’s Underpants Gnomes and web 2.0 startups. The NY Times also reports that VCs are finding both the public market and acquisition route drying up leading to some soul searching on Wall Street. Even the mighty facebook is getting the jitters as unnamed investors and employees rush around looking for a cut price exit.

I agree with Butcher. Slowdowns are a better time for good ideas as they reduce the background noise. Alongside our music product our developers are about to break ground on a new advertising product. Now I don’t want to get into specifics at this stage because it won’t be ready for launch until the end of the summer at the earliest. We are very excited about it as we think we have found the equivalent of AdWords for social networks. A big claim but stick around and you’ll get to judge for yourself in a couple of months when we release the app.

Pic: Archi3d

On $100m and $15bn

Facebook CFO Gideon Yu has just announced a $100m loan from TriplePointCapital which is bad news and good news.

The bad news is if FB was able to sustain a $15bn valuation you would always go for the tiny dilution that would represent rather than saddle the company with debt of any kind. It suggests to me that nobody was willing to pony up $100m for 0.67% of the share capital, not even investors who had previously invested at that level. To that extent I agree with Primack that the high valuation has hurt FB. With equity funds apparently cut off without climbing down from the big 15 it is now effectively forced into borrowing until it finds a viable revenue model and even then they are relying on a fairly small pool of potential creditors. With the credit crunch few banks would lend to FB at all and those that did would only do so at a punishing interest rate – perhaps calculating that if the worst came to the worst Microsoft would ride to the rescue and pump in more cash having shown considerable willingness to do so in the past. I don’t think TriplePoint is being any more generous.

This adds to speculation that FB is overvalued and the feeling that MS, Li Ka Shing and the Samwers will be left with with red faces. Maybe, maybe not. For MS it was a strategic investment. The stake was less important than the exclusivity deal which would keep FB banner advertising away from Google until at least 2011. For the others, who are rumoured by Blodget to have had a different deal to MS, it was essentially a bet that either FB would devise its Adwords or one of the outside developers would. As I said in my earlier post I think if FB or one of its outside devs works this out both will be in the money. This is why FB opened their platform in the first place and why VCs would be wise to continue throwing money at, or making strategic investments in (for any VCs reading), FB app developers even if not now FB itself.

What they are all aiming for is showing companies that FB can revolutionise advertising as much as Google did. Ultimately, all companies want to know is who is likely to be interested in buying their products. In the pre-Google days advertisers would blast adverts at everyone watching a particular TV show or reading a particular paper on the basis that some small proportion of those watching would be receptive to the message. There was some scope for demographic targeting but it was relatively crude. Google revolutionised advertising by showing companies they knew more precisely who was interested in buying what. FB has a chance of repeating this success because of the vast amount of information it holds on its users.

This brings us to the good news: the $100m will be spent on expanding server capacity. Now $100 is a lot to spend on servers but FB can fill it with some very valuable information that Google doesn’t have. Whereas Google gets a snapshot of what is on someones mind then serves ads relevant to that FB has much more depth, of course Google is not taking this lying down but FB is still in the box seat as it holds the data. Not only does FB know what an individual person is interested in it also knows what all their friends like and, most importantly in my view, it can link otherwise unconnected users through their stated interests. Put together, all of these patterns are fantastically valuable if they can be analysed correctly. Beacon was clumsy and met with outcry from FB users but that failure does not mean all attempts at analysing the user data FB holds to serve contextual ads will automatically meet with the same response.

People are perfectly happy to look at relevant, helpful ads if it’s done in the right way. Google proved this by separating its organic search results from its sponsored links, this is the reason why we are talking about Larry, Sergey and Google today, not Bill Gross and Overture (see Ch 5 of The Search by Battelle). I’m always interested in finding interesting, new films that I would not have come across otherwise. One way is to read niche sites like Ruthless Reviews but another is for FB to help me out. It already knows what my favourite films are and also who else on FB likes the same stuff: Moodysson, Clarke, Greengrass, Stone, etc.

Why not analyse my connections with other users through those lists and serve me suggestions of interesting new stuff which is on other users’ lists but not mine? I would be interested to see suggestions based on the favourites of other users with similar tastes, it worked for Last.fm so why not FB? I buy DVDs all the time, link me to a store and I’ll probably buy, FB takes a cut of the sale et voilà! A business model for facebook! I bought Sophie Scholl the other day on the basis of an Amazon reccomendation and a glance at the synopsis. It turned out I loved it. Amazon knew from my previous purchases that I was into modern German film, served up an approproate ad and made a sale. Once I had watched it I dutifuly added it to my favourite films on FB and yet the only ads I get is for stuff I have almost no interest in.

Why do you treat me this way Mr Zuckerberg? I have told you everything you need to know – give me relevant ads!

This point is similar to the one I was making about delicious in my On Yahoo post. Google was so sucessful at analysing the web 1.0 world because it had the best way to analyse the connections between pages. The Google sized spot for web 2.0 is still open and it will be filled by the company which can analyse links between people as well as PageRank does links between pages. It is that propsect which makes investors pay $15bn for facebook, it may not be FB which ultimately wins the prize but some company will.