Lewis Gersh's Blog
Thoughts on Venture Capital, Digital Media and Transaction Processing.
August 15th, 2012
Today, Songza announced the close of a $1,500,000 round led by Metamorphic Ventures, Troy Carter’s Atom Factory, William Morris Endeavor, 1-800 Flowers, entrepreneur Brian Lee (co-founder of ShoeDazzle, LegalZoom and The Honest Company) former Ubisoft senior executive and former president of Jerry Bruckheimer Games Jay Cohen, NBA star Baron Davis, and Google Managing Director of US Sales John McAteer, as well as existing investors Amazon.com and 24/7 Real Media co-founder Geoff Judge. Metamorphic Ventures partner and ex-Googler David Hirsch joins Songza’s Board of Directors along with Amazon.com and Deep Fork Capital.
Songza also announced that Desiree Gruber (Executive Producer of Project Runway), Jeff Hennion (Chief Marketing Officer and EVP eCommerce of GNC), Gokul Rajaram (Product Director of Ads at Facebook), Tim Dierks (former Chief Technology Officer of Huffington Post), music industry veteran Julius Erving Jr. III and Mark Eisenberg (former EVP of Business and Legal Affairs at Sony Music Entertainment), joined Songza’s Board of Advisors. New investors and advisors will provide critical support in sourcing and evaluating growth and financial opportunities.
“Words make you think a thought. Music makes you feel a feeling. A song makes you feel a thought.” Famous songwriter E.Y. Harburg would agree that music has the power to inspire a wide range of emotions. Music can be both a form of escape and a way to brighten the mundane aspects of our day-to-day routines. But rather than thinking of the soundtrack to your daily life, shouldn’t your daily life simply determine its own theme music while you are experiencing it? That is, what if a service existed that eliminated the guesswork and the thinking, leaving you with the perfect song for any given moment based on the situation you are experiencing at that exact time?
Different situations call for different music. In an age where internet radio has become highly popular, the idea is that people should no longer have to actively find their way to good music. Instead, good music should easily find its way to people. As it turns out, investing in the music industry isn’t as taboo as many believe. A recent Forbes article, “Why We Shouldn’t Worry About the (Alleged) Decline of the Music Industry” (January 2012), discusses how the broader music industry is prospering even though the “big four” records labels have seen their revenues diminish the last ten years. Statistics indicate that the “broader music industry,” which consists of “revenues from music in radio advertising, recorded music sales, musical instrument sales, live performance revenues and portable digital music player sales” grew from $132 billion to $168 billion. Live music saw exceptional growth. From 1999 to 2009, concert ticket sales in the US tripled from $1.5 billion to $4.6 billion. This is important because it indicates that consumers are placing a strong emphasis on music as an experience; audiophiles continue to seek easy and innovative ways of experiencing new music. Moving forward, a growing share of our disposable incomes will be devoted to experiences rather than manufactured products. We are already witnessing this phenomenon: “spending on entertainment grew from 4.9 percent of household spending in 2000 to 5.6 percent in 2008” (International Federation of the Phonographic Industry).
However, in a space that is dominated by iTunes, Pandora, and Spotify, a glaring need continues to be unfulfilled in the digital music sector: all of these services demand too much active engagement from their users. Pandora, with more than 150 million users, has changed the notion of radio and digital music as we know it. However, in order for Pandora to tailor song streams to a listener’s taste, users must enter an artist’s name or song and constantly issue feedback as the music plays. The “Genius” feature in iTunes is similar, requiring users to enter a song or artist in order for the algorithm to recommend others like it. Is this truly the most effective way to discover new music? Songza is singing a different tune.
As the latest challenger to the traditional notion of free convenient internet radio, Songza is a playlist app with ready-made playlists hand-crafted by music experts for certain times of day or activities, such as getting going on Monday morning or romancing on Friday night. As Songza’s chief executive Elias Roman says, “The idea here is that we can get you to awesome music without you having to think.” Songza’s clean and easy to use interface combine with a fun and unorthodox editorial approach, resulting in over 100,000 unique playlists for any mood or occasion. The company has seen tremendous growth and retention since launching ‘music concierge’ in March 2012. In the first 10 days after releasing a dedicated iPad app in June, Songza saw more than 1,150,000 installs of their iOS apps. During the month of July, the majority of users who have ever used Songza’s mobile apps, which were first released in September 2011, were active users of the app. Since that time, two million new users have joined Songza and less than a week after going live in Canada, it became #1 iOS app in the country.
The reason we found Songza so interesting is that it is not, at its core, a music company. It is a situational targeted lifestyle company. Songza harnesses music’s inspirational nature and applies it toward enhancing the overall musical experience; it does the “thinking” for you. For example, the “epic film soundtracks” playlist is meant to help listeners plod their way through a day at the office. “If you’re at work, filling in cells in a spreadsheet, and you’re listening to the soundtrack to ‘The Last of the Mohicans,’ suddenly that changes everything,” says Peter Asbill, the chief operating officer. “It feels awesome, fun and epic.” Songza differentiates itself not by having elite features or by being more gamified. Instead, it goes back to the basics: Songza curates music that is more directly related to what you want at the time, thereby enhancing whatever you’re doing as you listen. CEO Elias Roman adds, “I think one of the revelations we had early on was we’re a lifestyle company. We care about the things you’re actually doing out there in the real world and how we can make them better. Music is such an incredibly powerful way to do that, that it’s a really phenomenal means to an end.”
Post created with Lewis Gersh by Gavin Pelling, interning with Metamorphic Ventures.
July 26th, 2012
What do Metamorphic Ventures, Justin Bieber, Eric Schmidt, Ellen DeGeneres, Ryan Seacrest, Baron Davis, Bain Capital Ventures, Google Ventures, CrunchFund, Tom Conrad, Scotter Braun, Brian Lee, Columbia Records, The New York Times, TIME, and New York Magazine all have in common? They are all investors in Stamped.
Stamped, as in stamp of approval, was unveiled today, offering a fun, simple, and useful way to record and share your favorite things. Stamped displays the best of your friends’ “stamps” in a visual and serviceable way, while integrating with third parties such as iTunes, Spotify, Rdio, Fandango, Netflix, Opentable, and Amazon. It takes a transactional media approach by enabling users to download music, buy movie tickets, add movies to their queue, buy books, and even view menus for restaurants.
Why is this important? Stamped plays in an area called local-mobile-social (LoMoSo). This means users with mobile devices that are connected to social networks can interact on a local basis based on their physical location and proximity. Strategically, 92% of consumer spending still happens at brick-and-mortar locations which are inherently local. Stamped bridges online to the physical world: users can stamp their approval where and when worthy and create their own social network of like-minded people. This is important because the local segment and everything related to social media continue to be the fastest growing categories of online advertising. As we say at Metamorphic Ventures, offline is the new online.
The value of someone’s personal crowd is evident: in contrast to the 14% of customers that trust advertisements, 90% of customers trust peer recommendations. Furthermore, there is an ongoing issue in local social media in which more people read reviews than write them. This creates a divide because reviewers generally fall into two categories: the first, who review every place they visit, and the latter, who only post a review when they have an extreme reaction. This begs the question: are these two sets of people systematically different? If so—and the obvious answer is yes—misleading reviews are a detriment to the general public. Stamp solves this issue by limiting the number of stamps new users may give out, gradually issuing more stamps through credit. A friend can give you credit when they thank you for introducing them to something or somewhere you stamped. Stamp’s core concept better organizes, localizes, and transcends social media than current offerings.
In addition to friends, as with Twitter, you can follow celebrities, tastemakers, and influencers…just like those investors who put their stamp on Stamped itself.
Post created with Lewis Gersh by Gavin Pelling, interning with Metamorphic Ventures.
July 16th, 2012
A crowdfunded baby? An accidental crowdfunded retirement nestegg? A crowdfunded solar light solution for refugee camps in natural disaster tent cities? No one would have thought these things were possible just a couple of years ago. Crowdfunding is enabled by the web, whereby any number of people anywhere in the world can give money to worthy causes. This is fast becoming a very large market on a global scale. Here are a few interesting examples.
Jessica Haley married her high school sweetheart Sean Haley, whom she met when she was sixteen. After twelve years of marriage, the couple desperately wished to complete their family with a child of their own. The odds were not in Sean and Jessica’s favor. Doctors informed the couple that they had only a 1% chance of successful natural conception. Because their insurance would not cover the cost of in vitro fertilization, they debated taking out a loan or placing the procedure’s expense on a credit card. They are not alone. The number one cause of bankruptcy in the U.S. is medical bills, with the number one category being medical procedures. With no other recourse, the couple turned to an online crowdfunding campaign, seeking $5,000. Jessica and Sean exceeded their goal by over 50%, raising $8,050. The couple was surprised to learn that their private struggle—which had long been concealed from family, friends, and the public—struck a chord with so many. It would be these same individuals who would help the Haleys make their dream a reality. In April, the couple received their miracle baby Landon, the world’s first crowdfunded child.
This wouldn’t be the last occasion crowdfunding impacted lives on a personal and touching level. A candid video of Karen Klein, a 68-year-old bus monitor, being mercilessly teased and tormented by students she was supervising, made waves last month. One viewer responded by launching an online campaign to send Karen on the “vacation of a lifetime.” The results? Unprecedented. The campaign has surpassed its $5,000 goal to raise over $680,000 from over 31,000 contributors in 80 countries and counting. Now, not only does Karen have the ability to take a greatly deserved vacation, she has inadvertently been afforded the option of retiring. Karen’s story touched a nerve on an international scale. Spotlighting the rampant issue of bullying and appealing to a universal sense of humanity, Karen’s campaign garnered media attention in over 2,500 news outlets. Moving forward, the implications suggest that the traditional notion of charitable fund raising has been democratized to enable anybody in the world to raise money for anything.
While changing the world for one person is a feat in and of itself, crowdfunding has gone a step further to help emerging growth companies revolutionize the world at large. LuminAID is a solar-powered light “designed to fulfill the basic need for light in post-natural disaster situations.” Andrea Streshta and Anna Stork focused on affordable renewable light because of its potential to vastly improve the comfort, safety, and survival of earthquake victims. The LuminAID light is simple to use, buoyant, features no movable parts, and works for up to three years without the need for replacement batteries. Its proprietary design inflates the device to diffuse light like a lantern and solves a pain point in that it shields eyes from glare and saves space: for every eight conventional flashlights, one can pack and ship approximately fifty LuminAID lights. The device is ideal for disaster relief, outdoor activities, or, as my children have discovered, the perfect nightlight/reading light. Andrea and Anna sought $10,000 to help give the gift of light, a goal eclipsed by raising nearly $52,000 on LuminAID’s crowdfunded campaign page.
These examples are a testament to crowdfunding’s potential, and explain my grounds for investment in IndieGoGo, where these three campaigns took root. We were the lead investor on IndieGoGo’s first round of capital approximately eighteen months ago, now joined by Insight Ventures leading their most recent round. The company is democratizing the fund-raising process in the same way that eBay democratized online selling. IndieGoGo’s open minded ideology has set it apart from other crowdfunding sites and has served as the backbone of the company’s success. As CEO Slava Rubin says, IndieGoGo is completely open to any campaign, any dollar amount, and any idea in the world without any judgment. The first ever Crowdfunding Industry Report (Massolution, May 2012) revealed that $1.5 billion was raised in 2011, instilling my belief that this space is huge and poised for continued growth.
Post created with Lewis Gersh by Gavin Pelling, interning with Metamorphic Ventures.
June 27th, 2012
Imagine you could build a credit score based on your social media presence. Now imagine you could take a personal loan, leveraging your online behavior, and apply it toward improving your life and fulfilling your dreams. Certainly, it’s a cutting edge concept. But let’s take this idea a step further. Now envision you are a citizen living in emerging countries where there is no credit score. And if this capability did exist, why would it be appealing?
There is an emerging middle class abroad and it is poised for vast growth. These are people who have enormous demand to improve their minds and who require relatively small amounts of capital to achieve it. However, lack of credit score and insufficient trust in the local economy and small banks make this all but impossible. Historically, bureaucracy stifles the endless possibilities associated with a small, albeit life-altering, personal loan. But whereas a pessimist sees the difficulty in every opportunity, an optimist sees the opportunity in every difficulty. That is, the current state of affairs in emerging middle class economies presents an opportunity to build relationships with these upwardly mobile trustworthy individuals. It opens the door for convergent thinkers wishing to solve an ongoing international issue. These problem solvers hope to provide loan recipients with a tool that enables them to work hard, be educated, build their own assets, and make their own families better, which ultimately allows such individuals to be more financially stable themselves.
These ideas were forming the basis for a venture with a friend, angel investor, and entrepreneur, Jeff Stewart. We shared office space for many years and evaluated start-up deals together, occasionally coinvesting and assisting entrepreneurs. Last summer, Jeff and I worked together with an intern, Jessica Nussbaum. Jessica spearheaded a summer research program with Jeff that focused on microlending, emerging markets, and the emerging middle class which gave rise to our portfolio company, Lenddo.
Lenddo is the world’s first online community that empowers the emerging middle class to use their online social connections to build their creditworthiness and access local financial services. “Lenddo seeks to improve the lives of millions of people in emerging markets,” says Jeff. “We witness the impact of our loans every day in the Philippines and Colombia. Members pursue education, help sick relatives and repair their homes after natural disasters—all made possible because of their positive online reputations.” In contrast to the detached and objective risk-assessment tools that currently preclude and alienate most of the world’s population, Lenddo’s personal touch has the power to revolutionize microlending as we know it.
Unfortunately, people in these areas generally do not qualify for the loan criteria established by commercial banks, a reality that has been a major pain point for emerging market countries with citizens aspiring to better their lives. The Internet remains a key way to gain massive access to both banked and unbanked populations, especially younger individuals with a greater preference for technology. Catering toward people who feel more comfortable with internet transactions, virtual offices stand to thrive the most moving forward.
Lenddo has solved this pain point and addressed latent demand by introducing a proprietary algorithm that analyzes risk, with remarkable accuracy, through a combination of social media data (Facebook, Linkedin, Twitter and Yahoo!) and community-based microfinance techniques. A recent report (EuroMonitor Feb. ’12) about consumer lending in Colombia speaks to Lenddo’s strategy, that “the most benefitted categories are likely to be those that represent an actual and lasting improvement to the quality of life, such as mortgages, home, education and durable lending.” In contrast to conventional processes, Lenddo works by responding with speed and less red tape. The more honesty, engagement, and candor applicants demonstrate, the faster Lenddo facilitates new opportunities for users. Likewise, the willingness of an applicant’s community to vouch for him or her, with an eye toward online behavior, serves as an invaluable barometer of personal character and loan recoverability risk. In doing so, Lenddo is fostering relationships that extend beyond financial transactions and promote goodwill and trust on a global scale.
As reported by TechCrunch, online reputation and financial services startup Lenddo has raised an $8 million Series A Round from institutional investors including Metamorphic Ventures, Accel Partners, Blumberg Capital, Omidyar Network, iNovia Capital, as well as angel investors such as Geoff Judge, David Kidder, Scott Heiferman, and Barry Silbert.
Post created with Lewis Gersh by Gavin Pelling, interning with Metamorphic Ventures.
February 1st, 2011
At a recent Chango board meeting, we were discussing recent hires (Dax Hamman as Chief Revenue Officer and Chris Dingle as COO) and the launch of the highly complex advertising platform. One board member pointed out that “NASA accomplished many great inventions and successful achievements on the way to the Moon…do we need to accomplish everything for the platform launch?” The immediate response from CEO Chris Sukornyk was, “Dude, the rocket ship’s packed.”
Well now it’s fueled too.
Today our Toronto-based portfolio company Chango announced it has raised a $4.25M Series B financing. The investment was led by Rho Canada, a division of NY-based Rho Capital Partners, and included participation from previous investors Metamorphic Ventures, iNovia Capital, Extreme Venture Partners and 24/7 Media co-founder, Geoff Judge. Our colleague from Rho, Roger Chabra, will join the board of directors.
Search Retargeting is a very interesting solution to a very large pain point in advertising. When people conduct a search, it provides an extremely relevant place to run texts ads. There is an extremely high demand for these search driven text ads, driving the price extremely (prohibitively) high for many search terms. Conversely, display ads are not nearly as relevant by themselves, have virtually endless inventory and much lower demand, driving the price extremely low. Chango’s platform targets display ads based on searches, taking the best part of advertising on search and expanding it to display.
How does it work? When a user conducts a search on Google, Yahoo! or Bing and clicks through on a natural or paid search result, the site they visit captures the referrer data which includes the keywords of the search. Chango aggregates this search data in large volume (now more search queries than Yahoo! or Bing) and each action of referrer data is matched to an anonymous cookie. This allows the platform to retarget advertisements based on any search action. The model greatly increases the ability of advertisers to reach their target customers they were unable to reach on the search engines.
Performance has proven itself, solving the pain on both sides of the equation. Publishers are seeing much higher yield for their less relevant display inventory while advertisers are finding new customers and achieving a significant return on investment. We are very excited about the trajectory for both Search Retargeting and Chango.
January 24th, 2011
Today our portfolio company Encoding.com announced the beta launch of Vid.ly, a service that solves the problem “how can I make my videos available to everyone on any device.” They put together a fantastic demo video you can watch here: http://vid.ly/5u4h3e.
This is a very large pain point for businesses that want their videos to play properly. It is estimated that up to 30% of videos called do not load and play successfully. The reason is mainly due to a fracturing of formats in the market, each with its own set of rules to allow videos to play. Think of all the different operating systems, browsers, mobile devices, screen sizes and shapes, and so on. If the video file’s encoding is not comprehensive or current, or the format is not properly detected, the video may not load and play. This results in a negative customer experience for the potential viewer, lost revenue for the business, and so on. In fact, it was in discussion with many of the 1,400+ customers that have done millions of encodes with Encoding.com that gave rise to the concept for this service.
Now, with Vid.ly, a publisher of a video can upload the file to vid.ly and have it encoded for all formats, keep current with encoding requirements, hosted in the cloud, receive URL shortening and tracking, and format detection for so the video will play successfully when accessed by any user, any format, any device, anywhere and anytime. One video, all formats.
Vid.ly is starting as a free service today, following with a premium professional service in a few months. The premium service will include API access, adaptive bit rate streaming for Apple devices (HTTP Live Streaming), ability to customize the 14 profiles, no source file size restrictions and premium CDN access or choose your own. If you are interested in participating in the beta launch free service, here is your invite code: HNY2011.
Two years ago Encoding.com launched as the first cloud-based encoding service provider and has quickly grown to become the largest encoding service on the Web. We are really excited about Vid.ly and the next two years. Congratulations to Greg and Jeff and the team.
January 4th, 2011
I have been discussing a concept called “The Velocity of Obsolescence” periodically over the last year in our partner meetings and with venture colleagues and was asked to share it for discussion. Essentially the concept speaks to the rate of speed that an innovation and/or the competitive advantage of an innovation will lose its value. Innovations may be in technology, product, sales, marketing, and so on. Ventures typically have many innovations they rely on at any one given time and each has a “shelf life” from its inception.
I believe the Velocity of Obsolescence has been accelerating dramatically in early stage ventures of web enabled services and this has significant ramifications for venture funds and portfolio companies.
Obsolescence is accelerating for a variety of reasons. Web infrastructure “plumbing” is now stable, enabling companies to launch with greater capital efficiency. Underlying business models have been proven so that we now see exciting new versions or extensions of them. Data has never been more easily available, especially with the growth of APIs, to leverage for value. The web has become ubiquitous, thanks in large part to broadband, wireless and the current shift to mobile. Time to market has accelerated greatly and large companies are willing to be beta-test customers for start-ups. It has never been faster and cheaper to start a web services company. There are a multitude of professional funding sources for start-ups. Start-ups can become large companies in a very short period of time. And so on.
In a very real sense, due in great part to the factors above, the velocity of innovation has increased dramatically which is itself a key variable in the velocity of obsolescence. Moore’s Law states that the number of transistors that can be placed on an integrated circuit will double every 24 months. Stein’s Law states that if something cannot go on forever, it will stop. What is the law for The Velocity of Obsolescence and are we in an acceleration mode?
An early stage web services company has a set amount of time to execute on its innovations (build, go to market and start to scale to gain defensible market share) before forces such as competition, market developments, technology advances, etc. render some portion or all of the initial innovations obsolete. The venture must continually innovate upon their initial innovations to stay ahead of the incessant waves of obsolescence approaching from all sides.
Web enabled services only really got going about fifteen years ago. In my experiences as an entrepreneur and a VC across that time, I think fifteen years ago a venture with innovations had about forty-eight months. That means if a good venture did not innovate upon its good initial innovations, on average after forty-eight months the venture and/or its innovation(s) would be obsolete. I think ten years ago it was probably thirty-six months. I think five years ago it was probably twenty-four months. I think today we are at about eighteen months. Interestingly time-to-obsolescence has probably been occurring faster as time itself progresses. This is the Velocity of Obsolescence and it has been accelerating. Time-to-obsolescence for a good innovation can never achieve zero and eventually the curve should flatten out, but we are not there yet in early stage web enabled services.
This affects our fund strategy and probably other funds in a number of ways. Entrepreneurs will require greater experience in the sector to be able to build quickly and innovate constantly. Venture funds are better being focused so they can add-value and help accelerate their companies as opposed to being generalists who police them. Valuations are best set to keep options open for future financings and/or exits so the venture can make fast choices and not be hamstrung into a forced binary path of success or failure. These are just some of the strategies to deal with a market in which the Velocity of Obsolescence is accelerating.
Do you believe the Velocity of Obsolescence is increasing for early stage ventures in web enabled services?
November 23rd, 2010
There have been several great posts recently on the state of current investment activity in early stage venture capital, including Fred Wilson’s post warning of “storm clouds”, then Roger Ehrenberg’s post on the “feeding frenzy”, and Brad Feld’s post on “percentage of 2009 seed deals not raising a next round”. There is something to add to Brad’s post and that is that most seed deals will not raise a next round because there will be a lack in supply of VCs there to meet the demand. Here’s why.
We have seen two incredible shifts happen in venture capital over the last two years:
First is the dramatic rise of the seed funds, super-angel funds and accelerators/incubators all focused on professionally funding start-up companies. There were only a handful of seed funds several years ago whereas today there are literally dozens including First Round Capital, I/A Ventures, Blumberg Capital, Zelkova Ventures, SoftTech VC, 500 Start-ups, lowercase capital, etc. And some larger VC funds have truly developed seed programs (they used to say they would do seed deals, but in truth rarely if ever did them) including Foundry, DFJ, Charles River Ventures, Polaris, FirstMark etc. There are also accelerators/incubators like TechStars (we are an investor), AngelPad and Y Combinator, etc. And the angel market has come back strong, both as groups and individuals. Just check out Angel List for example.
Second is the dramatic decline of the overall quantity of later stage venture funds. This inevitable contraction actually came from Bubble 1.0 in the 1990s when both the quantity and size of funds exploded at an unnatural rate to take advantage of the quick IPO exit market. As venture funds are measured on a 10 year return horizon, once the bubble burst in March of 2000, many funds were living off prior exits while ignoring their own equivalent of burn rate and runway – their returns on investment and multiple of capital. Everyone in the venture industry knew the 10 year returns on average were deteriorating rapidly and would even turn negative at the 2008-2010 timeframe. As many of these funds over-invested in the next crop of companies anxiously awaiting the next IPO boom that never came, they themselves became sitting ducks for disgruntled LPs as the global economic crisis occurred.
We sat in our partner meeting post-Lehman Brothers market meltdown and hypothesized that as many as two-thirds of all venture funds might cease to exist. LPs would confront funds with the lack of returns and put them out of business overnight, or they would reduce the available capital to call exclusively for home run follow-on investments, or perhaps just let them finish out the fund with no hope of a next fund. Many in the industry can confirm these occurrences from the empty offices they encounter every day. Recently Ernst &Young reported a 47% plunge in active venture funds in the first six months of 2010 compared with the same 2009 period. Active in the report means one deal per quarter, which is not really very active. We suspect 47% is low and will grow significantly higher (even with the addition of so many very active seed funds).
So this is the problem. We have a record increase of seed stage investment activity from seed funds, super-angels, angels and accelerators/incubators. And much of what is funded by this seed fund rise are B2C oriented ventures which by their nature are capital intensive and require significant capital to stay alive through the user growth phase that often far outpaces revenue. And many of these “sexy” B2C “bright-shiny-object” seed deals have been bid up in valuation with little or no diligence in a seemingly “what’s hot” contest seeking to be named on the investor roster in TechCrunch. And yet we have a record decrease of later stage venture funds to invest in these companies when they seek larger capital.
Probably starting in the Spring or Summer of 2011 it is going to look like a high school dance with a very lopsided boy-girl ratio. On one side of the dance floor there will be a record high number of seed funded entrepreneurs with high B2C valuations, corresponding seed investor egos that bid them up, a need for additional capital to survive, angel/seed investors that cannot provide the necessary capital (many don’t plan for or do follow-on investments), and intense competition for larger capital from the oversupply of these deals. On the other side of the dance floor there is record low number of venture firms with larger-than-seed capital to invest. This will lead to an inevitable scenario where only the hottest girls will find a dance partner and the rest will go home in tears.
June 1st, 2010
A big congratulations to the team at FetchBack for their successful sale to GSI Commerce! This deal is very special for me and Metamorphic Ventures as it validates and confirms so much of what we are about for our entrepreneurs and investors alike. Here are some perspectives on this deal.
Our investment strategy is greatly focused on the belief that the primary revenue source on the Web to date, technology driven advertising, is experiencing a long overdue shift closer towards eCommerce, and likewise we believe that eCommerce is experiencing a long overdue shift towards advertising. I was fighting for this in my first start-up in partnership with AOL in 1996 when we termed it content-to-commerce, and now this has evolved to what we call Transactional Media. Online advertising and electronic transaction processing are both rising tide markets and will be for a long time coming, so we focus on B2B monetization services that support this investment thesis. We have also built a charter towards capital efficient companies that reduce risk while increasing return at low exit burdens, all while being entrepreneur supportive.
It was almost exactly three years ago when Chad Little, Seth Page and I sat down for a lunch in Phoenix to discuss Chad’s new business idea over fajitas and beautiful mountain scenery. Chad had set his sights that FetchBack was to become a leading provider of retargeting services. Essentially, when a user visits an eCommerce site, the industry average is about 1% convert to a purchase. By running ads targeting the other 99% when they are subsequently on other sites, these conversion rates can average 8-10%. There is a good bit more to it than that, but you get the gist and Chad was planning incredible depth of technology-driven analytics and reporting to increase optimization and yield management. At the time, Fetchback was also taking advantage of the fall in display ad rates, the incredible infrastructure built by huge capital intensive Web media companies, the precipitous drop in start-up tech costs and the corresponding acceleration to market for new products. Advertising technology that drives eCommerce transactions with the opportunity for capital efficiency.
This was to be Chad’s third start-up and he wanted a capital efficient approach that gave him flexibility. Chad and I had both experienced raising large amounts of capital for prior ventures and know the positives and negatives (much debate online these days about lean vs fat start-ups). Our charter at Metamorphic is designed for lean, capital efficient start-ups. Chad and I discussed FetchBack raising a $1MM seed round and we quickly agreed on a reasonable valuation and for Metamorphic to lead the round (which included an LLC conversion to Delaware C-Corp). We introduced Chad to some great co-investors and board members, including Geoff Judge, Erik Matlick, Jeff Stewart and Bill Benedict. Coincidentally, we were also joined in the round by Bob Ellis who I co-founded my first venture backed start-up with, the second in partnership with AOL, back in 1998.
Chad and his team were all about speed and laser focused execution from day one. Get the product live ASAP so they can get customer #1 live, get revenue in the door, learn and improve. Repeat and accelerate this process over and over again. We spent a lot of time discussing strategies and tactical plans together – Chad was driven to take this over the goal line as FetchBack quickly became profitable and cash flow positive without the need for additional capital. As the market turned from an educational sale to a “why us” sale, FetchBack’s superior analytic and reporting began to shine against the competition, producing exceptional yield management on eCommerce conversions, proven by the 97% renewal rate across 500+ advertisers. And when Chad told us he thought it was time for FetchBack to partner up (sell the company) to accelerate FetchBack’s position in the market against ever growing competition, we discussed the reasons, the positives and negatives, and then helped him make it happen. As a capital efficient start-up, FetchBack was able to sell for a reasonable exit valuation and produce it’s investors a 9.7x multiple of capital invested – that could not have happened if Chad had opted to raise large capital. And GSI Commerce is a fantastic $1B revenue company and fit, where 1 + 1 = far more than 2. And more so, GSI is founded and run by Michael Rubin, a friend who was an angel investor in my first venture backed start up. Let me say that if you liked FetchBack before, you are gonna love it now with these complementary forces working together…unless you are the competition.
Thanks Chad and team, we enjoyed working together on this one, learned a lot from it, and look forward to the next one.
April 26th, 2010
We recently invested in Tynt as part of an $8M financing with Panorama Capital, Greycroft Partners, iNovia Capital, Disruptive Ventures, Newport Coast Investments (Chad Steelberg), W Media Ventures (Boris Wertz), Joe Apprendi (Collective Media), Allen Morgan (Mayfield Partners), Erik Matlick (Madison Logic), and Yen Lee (Uptake.com). It’s a great team, most of the investors we have known for quite some time and/or co-invested with on a number of ventures. Here are some insights into why we invested in Tynt.
Many think of Tynt as the “copy-and-paste” company because of their patent pending technology that enables the tracking of copy-and-paste activity on Web sites. Tynt has discerned there are basically only three reasons users copy-and-paste information from Web sites: (1) to search by pasting it into a search box, (2) to promote the information by pasting it into an email to send to someone else, or (3) to archive it for future reference. In general, assume the proportions are 45%/45%/10% respectively. Tynt’s algorithms essentially “know” which is which in real time. The copied information may be text from an article, a product form an ecommerce site, and so on.
Approximately 87% of Web users copy-and-paste every month and Tynt’s network already has over 450,000 thousand sites, tracking almost 10 billion page views a month (see recent post by Fred Wilson on the 1 billion page view mark, albeit different traffic). This in turn generates about 200 million copy-and-paste actions, which in turn result in hundreds of millions of search queries and email forwards a month. And Tynt has another 40 billion or so page views of publisher installs in the works now and an expanding pipeline. The product is less than one year in market, and monetization services are launching– here are some examples.
If the copy action is for a search, the publisher may use Tynt’s SpeedSearch product, which enables a fade-up window to appear before the paste is made into a search bar. This is important for a publisher because that activity almost always results in a Google search where the publisher loses its visitors and all chance for monetization of the associated traffic (John Battelle wrote on this attribute). SpeedSearch serves the publishers site/network search results first, as well as the option for syndicating in paid search and adding display ad units. This retains and monetizes traffic for publishers, solving a huge pain point.
If the copy action is to promote publisher information via email, when the visitor pastes into any email client, Tynt appends a link back to the source on the publisher site. Upon clicking the link, the user is taken to the exact location of the page where the copy action happened and the copied information is highlighted in yellow. These link-backs enhance search engine optimization for publishers, drive valuable traffic (often new users) back to the site, and present the publisher an advertising opportunity below the link in the email.
Perhaps most important in Tynt’s data is the measure of user engagement on a Web site. Page views and time spent per page have been the typical metrics to date and are fairly blind. Tynt goes much deeper. A publisher of a Webs site can now know in real time what the most important information is to users by the copy-and-paste activity – this is a level of engagement and relevancy measurement that previously did not exist. This allows the site manager to tune its content, headlines, tweets, newsletter subject lines, and so on for far greater efficiency to site visitors and monetization. This can also be extremely useful for publisher ad targeting as well as third party targeting based on the real time relevancy of the information on a per user basis as well is in the aggregate.
The engagement and relevancy real time data has endless uses. SpeedSearch is one great example where the product truly displaces a Google search based on the new real time data at the publisher site level of interaction. We ran a test on how relevant the copy-and-paste data was as a measure of user engagement. We set up a search engine with algorithms using only this data and ran searches on it and compared the results against Google search results. The Tynt data produced far more relevant search results, so much so it was truly shocking.
User-driven engagement data is extremely powerful and Tynt has barely begun to tap the opportunities with data mining and licensing, advertising and targeting, search and so on. Many third party companies are coming up with their own uses, from ad networks to publishers, content and eCommerce sites, portals and search engines. One thing is becoming obvious from the uses that are already in-market and/or being developed: This real time data actually quantifies user engagement in a tangible and actionable way, and that engagement data is truly displacing previously real time data into latent data by being a step ahead in the process.