On a year on

I missed my one year anniversary on 8 May. It is just over a year since I wrote my first blog post On Yahoo. My blogging has waned in recent weeks, primarily down to the amount of things I have had on since the start of the year. Now however my flat is finally redecorated after the flood and our startup is edging towards launch.

It may be that I don’t have the time to blog as much or at all after we launch. What I found interesting about blogging was that it allowed me to think about areas outside what we were then working on (music and p2p). It was the early posts I wrote a year ago which led me to think more about advertising and what was wrong with it online.

My basic thesis was, Google apart, nobody was doing anything different from old media. Grab enough attention then try to cram ads in as many nooks and crannies as possible. Nobody really seemed to be thinking differently about showing people advertising when they found it useful and in a useful context. Everything was geared towards a bait and switch with he who had the most traffic winning.

What is interesting to me is not how many impressions you can show but showing people commercial information in a helpful way. Volume becomes far less important if you can show ads in a way that people actually find helpful. I always thought why interrupt someone when they are trying to do something else? Far better to capture their attention in the moment when they are looking for something. That is what Google does he best and the reason it is so successful.

Even though we were initially not interested in advertising at all blogging allowed me to pursue some interesting thoughts and ultimately led me to the idea which we are now working on as our main project. So, even if I never write another post, writing this blog has been hugely important for me.

On Marines and Twitter

Image via CrunchBase

I’ve been reading a book about maneuver warfare as practised by the US Marines. This is based on principles such as focus, surprise, flexibility, tempo and boldness. In each chapter examples are given and what I have found interesting is they give examples on either side. On the face of it one may think that boldness would emphasise taking action over not doing so.

Applied to the current rumours of Google buying Twitter it may seem like the bold move is to go ahead and buy, but it is not. The bold move is to pass. There is no question that Twitter is the hot startup at the moment. It gets the Daily Show mentions, the celebrity tweets and the avalanche of tech blogosphere coverage. People urge Google into doing the deed and that $1bn is nothing against the cost of missing out. It is true that Google needs another giant revenue stream to continue its growth and that it hasn’t really diversified away from its original idea despite many attempts. The problem is that Twitter is not yet a business. And Google has already been burnt spending 10 figures on another not to be missed startup when it bought YouTube.

If the bold move is to pass the really bold move is to buy delicious from Yahoo. I noticed that Google has added a ‘bookmark this’ button. It is hardly well publicised and I suspect nobody uses it. Unlike Twitter whose value is in the immediacy of its content, delicious has quietly built an alternative index of the web. It doesn’t matter that it is far smaller than Google’s robot built index, its value is that it was built by humans. I only bookmark a few pages each day, on a good day, but those I do have far greater value than something indexed by a robot because I can understand the content of the page far better.

Each page I bookmark links me to a group of likeminded individuals and I am always interested to see what they have bookmarked under the same heading. This is in embryo a ‘PageRank for web users’ rather than links. It has the potential to be a powerful search engine but delicious is not hot any more. It got swallowed by Yahoo and left to rot.

The bold move? Pass on Twitter and buy delicious. They already have Schachter, might as well rescue his creation.

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On too much money

Fred Wilson says there has been too much money in VC and I agree with him. The truth is that there have been no grand slam businesses in the last generation of web companies. None have worked out a business model and become standalone, profitable businesses in the same way Amazon, eBay, Yahoo, Google and PayPal did in the previous generation. And between those there have only been two business model innovations: online auctions (eBay) and search marketing (Overture/Yahoo/Google).

The reason is that there has been no business model innovation in this generation is that there has been no pressure to come up with one. Companies which had built a large userbase would always be able to raise more capital, removing any pressure to come up with a reliable revenue stream. It is possible that the glut of VC money sustaining unprofitable businesses has actually retarded the growth of innovative business models.

However now there is reason to think this is changing. A severe recession increases the pressure to innovate your way to a reliable revenue stream rather than a cool new feature. The value of companies with such innovation will rise relative to companies with many eyeballs and no money. The collapse of CPM rates underlines the diminishing value of traffic.

Traffic is still important but it needs much better ways of being converted into cash. There is a theory that in the Internet age nobody will pay for anything any more. I disagree. If you create something valuable people will pay. And now the money is drying up we’ll have no choice but to work out what that is.

Pic:  Cobalt123

On predictions

It’s that time of year, here’s mine:

1. Kiva will break $100m in loans
2. Microsoft will buy Facebook
3. Google will buy Delicious
4. Microsoft will buy what’s left of Yahoo
5. Jerry Yang will leave Yahoo for good
6. Steve Jobs will step down as Apple CEO
7. Social networking will crack its business model
8. Google’s share of online advertising dollars will fall

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On Google’s artist

It turns out there is an artist at Google. It is interesting that a company so focused on gathering talented employees does not know anything about this person’s work and instead puts her to photocopying and typing.

On the wrong man for Yahoo

Silicon Alley Insider reports that David Rosenblatt is their pick as Yahoo CEO. Their reasoning is based on Rosenblatt’s successful tenure at Doubleclick, the argument goes: Doubleclick is good at selling banner ads, Yahoo has a lot of banner inventory, ergo Rosenblatt is perfect for Yahoo. That is my reason why he is exactly the wrong person to run Yahoo.

Yahoo has a lot of banner ad inventory but banner advertising is a dying business. It is old school newspaper advertising transposed to the internet. It does nothing new or innovative other than plop a message adjacent to something they want to read. Banners are dead and so is everyone who relies on them. In the future we will see far less advertising but it will be far more relevant. Google is the first company to crack this, a lot of Google searches don’t show any advertising and the ones that do show something relevant to the user. That’s why it’s a license to print money.

Google’s vulnerability

Yahoo should attack Google where they are most vulnerable: search. Conventional wisdom states Google is invulnerable in search and anyone who competes with them is doomed. The bones of Cuil and others litter the path of the next person foolish enough to venture into that cave. But recently Google has clearly signaled where they think their weakness lies. It was this weakness which let them to toy with the idea of buying Digg. Google search is built around the choices made by people who create webpages. But they know this is only half of the story, the other half is the web’s users.

Recently we started to see little icons appear next to our search results. One was a little up arrow ‘promote’ and the other a little cross ‘remove’. Google SearchWiki is intended to allow users to tailor search results to their own tastes. Google has recognised that the weakness of its search lies in what it once boasted about, the size of its index. There are now billions of pages on the web but what matters is showing me what I find useful. PageRank uses the natural architecture of the web to find relevant results but there is another way, using the bookmarks created by users. And which is the web’s favorite bookmarking site? Delicious.

Yahoo is sitting on a massive alternative index of the web created by its users and their bookmarks. To an extent they already do some analysis by assigning every link I save with the number of other users who have saved it. What nobody at Yahoo appears to see is that this is the beginning of a completely new form of search backed by a user built matrix of links. Yes it may be smaller than Google’s index but that doesn’t matter. It much smaller but much more relevant as it keys off bookmarks I have saved. It would not necessarily ‘beat’ Google but it would be the first viable alternative to PageRank since Google emerged and as such potentially its equal.

So the answer for Yahoo’s new CEO is simple: build Yahoo search around delicious. At this stage anything other than a game changer is no use to Yahoo.

On the end of Yang

Despite my hiatus I could not let this news pass. Jerry Yang has finally resigned as CEO of Yahoo bringing an end to a disasterous tenure in which he spurned a $33 per share offer to acquire the company only to see it sink to $10. Now this is not all Jerry’s fault, every stock has taken a battering since the summer, but it is mostly his fault. Every move he has made has been hedged around with vacillation and uncertainty because, in short, he is not a leader.

The real reason Yahoo is doomed is that it hasn’t really changed since 1994. Admittedly Google hasn’t really changed since 1996 but Google was built around a genuinely brilliant insight from Larry Page which spelled the end for the portal strategy of which Yahoo was the prime exponent. They may not have set out to do it like MS did with Netscape but make no mistake Google killed Yahoo.

The bottom line is Jerry Yang was never cut out to be a CEO. And like anyone stuck in a job they are not suited to the best thing to do is pack it in. I bet Jerry never felt so relieved as he did yesterday, what Yahoo needs now is someone who thrives in adversity.

On cash

Cash management is the most important aspect of running a startup. If you don’t have cash you aren’t doing anything. As we move towards launch we are starting to look at the costs we have to meet and working out how much road we have to get to a seed round. With no full time employees we have an extremely low burn rate even if we choose the deluxe servers we have enough to continue developing the product post launch. That’s bootstrapping kids!

We have some natural advantages. Although we are not hackers we have a good spread of skills amongst the founders. I am a lawyer so I can write the agreements myself and get them checked by our law firm. This saves us a huge amount of cash and ensures all our agreements are a perfect fit with our business. We’re also lucky in that one of my friends from Bar school is our lawyer which means we get the services of a serious City law firm which would normally be completely out of our price range.

My other two co-founders are an IT consultant and a management consultant. Although the former is not a hacker he can think like one and with our developers translate our ideas into reality. As well as being great at managing the development process his background means he also sees beyond software development to what the business needs in terms of IT infrastructure and how it will be able to scale. Having this operational insight at such an early stage means we are preparing ourselves as a reliable business from day one. And having a management consultant on board means we have someone who can look at the business with the eyes of an investor when we are preparing our presentations and plans. All in all it means we can run as a proper business without many of the associated costs.

The alternative to cash conservation: more cash

I was thinking about this generally when all the ‘advice from VC’ type blog posts started flooding in a few weeks ago. They all seemed to boil down to: conserve cash. One company which is pursuing the alternative route and trying to raise more is Facebook. Arrington points out they are in a bind, they are growing fast which so their costs are scaling but without a solid revenue model their income is not. This means CFO Gideon Yu is now looking around for alternative forms of finance. The options are:

• Loans: Absolutely no chance. Banks aren’t lending to anyone right now and even if things start to thaw Facebook will be right at the bottom of the list. No banker is going to lend to a company that is burning cash.
• Leasing: Facebook already has $100m in lease finance and I’d be surprised if they could get this extended to cover the type of infrastructure they need.
• Equity: Techcrunch rumours that Yu is in Dubai pursuing this option. On the plus side the type of cash I imagine he is looking for (low nine figures) is not a bid deal to a middle eastern sovereign wealth fund. On the minus side they won’t pony up at anything like the $15bn valuation and maybe not at the $4bn recently used for the staff sale.

So what’s going to happen? I think we may start to see a lot more ads on Facebook. MySpace is making far more money simply by expanding the inventory on pages, with My Ads they have folded it out to allow more advertisers easy access to the inventory. Even still, monetising MySpace is causing problems for Google who shelled out $900m for the privilege of showing ads on that network. This is probably not what Facebook wants to do as Zuckerberg is looking for a more innovative silver bullet solution. Beacon wasn’t it but it shows something as obvious as expanding the inventory would be regarded as a defeat.

Beyond that the only real alternative is drastically cutting costs which means reducing the headcount from 700. This may not be a bad thing as it looks to me like Facebook is getting overweight. This means it starts to get all the problems of a large business – bureaucracy, infighting, slower response times – and none of the benefits – solid revenue. In the meantime the wildcard is users. Facebook’s main attraction was its clean design, if this starts to get gummed up with more and more ads they may start using the site less or even looking to another network. Add all that to discontentment with the redesign it would be very interesting to see what happened if someone launched a network today which looked like the old Facebook. Maybe this is the time for StudiVZ to launch its English version.

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On benefits

Dan Lyons has written how every company will start spinning itself as well placed to benefit from a recession/downturn. Like him I detect a similar whiff of panic from companies who know deep down that they may not have a plan even after their cash runs out, layoffs or not. Raising capital is not a business. In this climate revenue is what counts and to get that you need this:

• Focus: You need to be very focused on a single product. When it has some traction then you can fold it out in ways which build upon the core product – not radical, unconnected departures. We had to make a decision whether to continue with Zoimusic and one of the reasons for suspending it was that it was, presently, too far removed from Zoiads. With the resources we had it would have been a distraction so we focused everything on getting our viable project, Zoiads, launched.
• Business model: No longer a luxury but a necessity. The old Web 2.0 way of users, …, profit! is at an end. If you can’t convincingly explain how revenues will scale with users then you are in trouble.
• Innovation: A genuinely new offering. Nothing is completely different from everything else, when Google came along there were other search engines. That said it had an important element, PageRank, which made it stand out from others. It has to be a genuine difference to stand out from the myriad of other startups. There is no future in doing basically the same thing as everyone else. Ad networks are the classic example. Selling banner inventory on websites is basically an old media business model transposed to the web. Anyone trying that is not entering a recession or a depression. It is the end.

The end isn’t nigh

Finally, how bad are things really? I remember the last recession in the UK and it was exacerbated by stunningly high interest rates (15% at the peak) which prolonged the agony and made things worse. This time rates are at 4.5% here and are poised for a number of cuts. Combined with the drop in oil prices and inflation this means that ordinary people who keep their jobs, which is most people, will actually be better off in the fairly near future. I know this because I have a mortgage and the one thing which affects me most month to month is the interest rate. I’m not saying people will start rushing to the shops straight away but they will have incrementally more money than in the past 12 months.

Things look a lot worse because we are going through a fundamental realignment in the world economy. The banking system is about to change and, more locally for tech startups, online advertising, content distribution and mobile are all about to come of age. It looks scary now but it is a necessary stage to get to 21st century capitalism. A lot of the squealing at the moment is the equivalent to the horse and carriage operators around when Brunel built the first railway. Those who know they have nothing new to offer like to pretend everyone is doomed but that is false.

The companies who will get through it and prosper are the ones who realise how the world has changed and build products adapted to it. And we won’t really know that until we are on the other side. What is certain is that we are at the beginning not the end and that there are great opportunities to be had for those brave enough to take them.

On Yahoo dying

I haven’t written about Yahoo for a while because there is nothing to write about. Yahoo is dying.

Mike Arrington reported the latest stock drop, it now stands at $13 after turning down $31 from Microsoft. With the markets in turmoil everything is down good and bad. But while most tech stocks will come back stronger Yahoo will not make it.

The basic problem is management. As CEO the buck stops with Jerry Yang. He is not a leader and it shows. He is constantly looking over his shoulder and conducting reviews. In this position a leader should know what needs to be done, have a plan and get on with it.

You can get away with muddled management in a truly great company. I don’t have that much more faith in Eric Schmidt, the money machine was in place when he got on board and he has done not much except ride it. Google has such a great business that it doesn’t matter that the rest of their plans go off half cock. You can’t get away with it in a company that is in trouble. Great leaders can turn around ailing companies. Look at Steve Jobs, Apple was on the floor when he went back, arguably in a worse position than Yahoo was in when Yang took back the reins, and it skyrocketed after he went back. Say what you like about him but Steve Jobs knows where he is going, when he went back to Apple he didn’t need 100 days to sort it out. He knew what to do before he arrived.