We live our lives by routines.  In January, we all make resolutions for the new year.  In November, we give thanks for the bounty of the harvest at Thanksgiving.  And for those in the tech industry, in October we go to the Web 2.0 Conference and try to outdo each other with our declarations of "Bubble 2.0".

Today’s NY Times story declares that "Silicon Valley’s math is getting fuzzy again."  This sounds somewhat similar to their story last year which concluded that: "Web 2.0…has in recent months become the focus of dot-com-style hype in Silicon Valley…"

As people leave the conference this evening to write their obligatory "we’re in a bubble" story, I thought it would be
helpful to provide them with examples from the last few years, so they can find new ways to express the same thoughts…

2004

"To be sure, conference organizers seemed aware of the possibility of a
looming hype machine. One panel early Wednesday featured stock analysts
mulling the thesis: Is it a bubble yet?" - CNet News.com

"The web is entering another bubble of optimism…" - Read/Write Web

"No greater shroud hangs over Web 2.0 then the fear that we’ll repeat
the financial mistakes of the past…" - IT Conversations

"The Web 2.0 conference was an online lovefest, where an array of speakers
repeated that the Internet is still in its infancy. A panel of financial
analysts and venture capitalists questioned whether the industry is going
through another bubble.." - SF Chronicle

2005

“The industry is still tingling from the loud and sweaty Bubble 2.0 — whoops, excuse me, Web 2.0 — conference here late last week.” - USA Today

“No Web 2.0 Bubble? Hmmm…. even the backers of the recent Web 2.0 conference warned that things were getting frothy” - Business Week

"I heard many people say it felt very bubblelike. in fact, every party or event seemed like a lead in to this topic." - Mark Pincus

“What was a budding movement three years ago, at the dawn of the revival in technology, internet, and silicon valley, has become a full blown mania.” - Fred Wilson

"At the Web 2.0 conference, I’m sensing the buzz of a bubble" - Read/Write Web

2006

"Are we in a bubble? Absolutely" - Read/Write Web

"Web 2.0 was the same dance all over again: this tech bubble, boomy, exuberant thing that happens when money hangs like a bumper crop in an orchard.  At the conference, I swear there was a ka-ching sound in every techie’s step." - USA Today

"For industry players, many of whom lived through the dot-com crash, the surging wave of new Web companies and the corresponding media buzz can mean only one thing: an investment bubble where too much money is chasing too few good ideas." - CNet News.com

"(Did someone say bubble? Not at this conference, please!)" - SFgate.com

"It isn’t dot-com bubble level, I’m told, but darn close." - Forbes

Even a broken clock is right two times a day.  By proclaiming a bubble every year, everyone can say they "called it." 

No I haven’t abandoned blogging.  I’ve just been a little swamped lately.  So, one of my New Year’s resolutions is to blog more.  (Hopefully I’m able to fulfill that resolution more than my prior resolutions to exercise more or eat better).

Anyhow, I just want to shoot a quick congratulations to a few of our portfolio companies.  First, to Mint.com, for being selected as one of the 25 Most Innovative Products of the Year by PC World.  And second, to RockYou for being selected by Fortune Magazine as one of the "Six Leaps of Innovation" to "keep an eye on in 2008".  (Although, the list clearly can’t be very selective if they also selected this).

Finally, I was amazed to see that our companies have been nominated for a total of nine "Crunchie Awards" — and if you haven’t already voted, I encourage you to vote for Like, Pleo, Weatherbill, Attributor, 1-800-FREE-411, OpenAds, RockYou, Mint.com, and Lance Tokuda.

I wish you all a happy, healthy and prosperous New Year.  (And stay tuned for some new blog posts in early January, as I usually keep my resolutions for at least a few weeks)…

I recently returned from a family vacation, and while I tried not to do much "work", I did find that a hotel can provide an interesting ecosystem to observe some interesting pricing dynamics. 

Pick a Price, Any Price
Despite my best efforts to kick the habit, I still find myself addicted to Diet Coke.  And while I was able to lower my intake on vacation, I still found myself craving a Diet Coke or two during the day.   What surprised me was the multitude of different places — and different prices — a single hotel sold the same product for.  The mini-bar in the room sold a can of diet coke for $3.50 (ouch!).  The soda machine down the hall sold it for $1.00.  The gift shop sold it for $2.00.  You can order it in one of their restaurants for $2.50 a glass (with free refills) or you can get it delivered poolside for $2.50 (with no refills).   And you can order it via room-service for $2.50 plus a $2 delivery fee.  Five different prices (ranging from $1 to $4.50) for the same product.  The only difference is the method of delivery — and the convenience each method offers the consumer. 

And this got me thinking- can this model work online?  Are there examples of online services which charge differentially for the exact same product?  Let me know what you think…

The Anti-Penny Gap
I’ve written before on "The Penny Gap" — where I discussed the challenge in converting a user from free to paying.   In that post I concluded that the hardest part of an online business was "getting your users to pay you anything at all".  Well, after this vacation I have to add an amendment to my theory. 

My wife and I wanted to go out to dinner without the kids a few times on the trip, so we asked the concierge if they could recommend any baby sitters.  The provided me with a list of three services - Capable Caregivers, Affordable Assistance, and Reliable Babysitting Agency.  There was no description of the services.  No references.  No recommendations.  No listing of "years in business".  Just their names, prices and contact information. 

So how am I to choose which one to select?  Do I trust my kids lives with "Affordable Assistance" for $12.50 an hour?  Or do I select the more expensive "Capable Caregivers?"  Well, in the absence of any comparative information, I chose the Capable Caregivers.  (As did, it appears, everyone else in the hotel — my informal study of six other families who hired babysitters from the hotel concluded that everyone chose the most expensive option).

So I hereby amend the Penny Gap theory — when a decision involves (1) safety/security/risk, (2) children, and/or (3) information assymetry, the highest price is often chosen over all over options.  Let me know any other places where the "Anti-Penny Gap" applies.

I was going through my music on my computer the other day, and I came across two old radio commercials from the Half.com days.  I got a laugh out of hearing them, so I thought I’d share.  Click either of the buttons below to hear the commercials…

boomp3.com

boomp3.com

Most VC’s typically “pass” on a deal with a line like “you’re too early for us, but let’s stay in touch as you execute your plan and hit your milestones.”  Why wouldn’t they?  This non-pass pass gives the VC a second opportunity to see a deal – and let’s the VC avoid the finality of declaring: “Nope, we’re not ever going to fund you.”  In a business that’s all about maintaining options, the non-pass pass has become standard practice.

At First Round Capital, we can’t follow this standard practice.  We prefer to see (and fund) companies early – after all, we’re not Second Round Capital.  We are comfortable with “Powerpoint Risk” (ie, funding powerpoints) and are used to funding incomplete technologies, teams and business models.  Our fund’s average initial investment is just under $500,000.  So I found it ironic last week, when, I ended up passing on several startups using a line like “you’re too late for us – I wish I had seen you six months ago during your angel round.”

Since our inception, First Round Capital has always been focused on early-stage, seed investments.    Just last week we closed a new fund.   And as rumors spread that we might be raising a larger fund, we’ve already started to get more inbound requests for larger, later-stage, deals – ($2+ million funding rounds).   But while our fund is larger, our focus remains the same.  We plan to continue to make the same early-stage, seed investments we always have.   The same initial investment size.  The same investment style.  And the same investment strategy.

Our average initial investment will remain around $500,000.   And our investment goal remains the same – to help an entrepreneur validate, “de-risk,” or disprove his/her hypothesis…and to do so as quickly and capital efficiently as possible.   The only real difference is that we won’t be raising a new venture fund annually (as we did in the past), allowing us to spend more time with our portfolio companies and looking at new deals.    So in an election year where everyone seems to scrambling to embrace "CHANGE", we’re looking forward to more of the same in 2008 and beyond.

(And keep the Powerpoints coming – you can’t send them early enough!)

I see many consumer Internet pitches these days where the basic marketing strategy is to (1) get covered by Techcrunch, (2) get tens of thousands of users from the "Techcrunch Bump", and then (3) "grow virally".  While a positive Techcrunch review has the potential to send thousands of consumers your way, it does not represent a marketing plan.  Munjal Shah at Riya found this out after the launch of Riya back in 2006, when he wrote about "the cocaine like high and subsequent crash of the Techcrunch effect":

The Techcrunch article got put on Digg and read in thousands of feed readers and viola… the Techcrunch effect begins. Michael’s blog is the single more effective vehicle to get the word to the online blogosphere about new technology companies on the planet..The unfortunate fact was that the initial hammering [our servers] took was just not the reality we would see later. The number of photos uploaded per hour began to fall and then stabilized near the end of the 22nd at around 25,000 photos per hour and would continue to fall for weeks to come. - Munjal Shah

So while a positive reception from the blogging community is valuable — and can generate a lot of initial activity/interest and a nice looking Alexa chart — it is not the only ingredient in your ultimate marketing success.  When I see a post-launch consumer Internet startup, I basically look for a few simple things:

1)  Usage Growth — how many unique users are visiting/engaging with your site and product, and how is the rate of growth evolving over a several week period of time.  I also look at the source of this growth — is it scalable, repeatable and systemic?  Is it event-driven (ie, PR)?  Is it organic or driven by marketing (ie, is the company buying growth via Adwords, etc)?

2)  Virality — So many people misunderstand virality.  Virality is not "word of mouth".  And having a product go viral is not easy — nor is it something you can just "sprinkle on a product" after creating it.  If making a product viral was as easy as adding a "share with your friends" button, there would be no reason for the $100 Billion advertising industry.  (I can see companies asking themselves — "let’s see, should we spend millions on advertising…or should we just add virality…Hmmm").  I believe a viral product is one where a consumer’s basic usage of a site/product brings new users (and therefore additional utility) to the site/product.  Facebook, LinkedIn and Paypal are all great examples of viral products.  If you’re pitching your business, you should know your viral coefficient.  That is, how many new users get added virally from each additional user.  And if you can get your viral coefficient greater than 1.0, then you’ve built something really special. 

3)  Engagement Level — Do your visitors actively engage in your site?  How long are they there for?  How many pages do they view?  What is their user experience like?  One of the easiest ways I’ve found to evaluate a company’s engagement level is to have them (temporarily) share access to their Google Analytics account — this gives us the ability to get the data/insight we’d need without having to bother them to run each and every report. 

4)  Repeat Usage — User retention tends to be an area where people pay the least amount of attention, but I think is one of the most important to monitor.  Specifically, how often do people come back to your site.  While there are a lot of different ways to measure retention, my preferred way is to look at a cohort analysis.  Say you’ve had your site running for five months — you now have five "first month cohorts", four "second month cohorts", three "third month cohorts", two "fourth month cohorts" and one "fifth month cohort".  And you can see, what percent of your users come back in each subsequent month.  A simple chart is below.

You can also plot it out graphically — I’ve attached a generic Cohort Analysis Excel document.  From this data you can learn a lot.  Not only do you see how many people are returning this month, but you can see the trends over time.  For example, in this model spreadsheet you can see that while the site is still just retaining a small percentage of their overall users, the rate of retention has gone up by over 250% over the course of the year.  And while this example cohort analysis is shown by month, immediately post-launch I’d recommend that you create and track cohorts by week.

A little over a year ago, I wrote a blog entry about Google’s OneBox feature — and it’s potential to impact other vertical search engines.  Danny Sullivan’s SearchEngineLand blog has a detailed post that shows how Google has shifted from OneBox towards Universal Search.  If you’re interested in search or content discovery, Danny’s post is well worth the read…

Back in November, Facebook launched their new SocialAds platform.  Like many other folks, I decided to spend $50 to check out

the platform.  Like Fred, I decided to advertise for my fund - First Round

Capital.  Unlike Fred, however, I decided to test Facebook’s targeting mechanism by running targeted ads to employees of large

Internet companies — including Yahoo and Microsoft.   

One of the nice parts about

Facebook’s platform is their realtime statistics.  Back in November, I saw that my Yahoo ad received 21,291 impressions with only 64 clicks —

a clickthrough rate of 0.30%.  And my Microsoft ad received no clicks with 1,058 impressions.

So when Microsoft announced they wanted to acquire Yahoo, it got me (and everyone else) wondering.  Specifically, I wondered

if YHOO/MSFT employees were indeed more likely to "look around" for new jobs — and if so, how much more.  Since I had

baseline data from just 90 days ago, I decided to run the ads again.

On the Yahoo side, there was a 260% increase in clickthrough rate — from 0.3% to 0.86%.  That is not surprising.  But on

the Microsoft side, I was really surprised.  When I ran around 1,000 impressions before, the ad did not receive one click — now the same advertisement received

15 clicks.  Microsoft’s clickthrough rate increased from 0% to 1.19%.  Maybe it’s not just Microsoft’s shareholders who are unhappy. 

I acknowledge that this data is probably not statistically significant — however, it probably is a good leading

indicator of the exodus that will occur.  And, while there has been a lot of discussion of whether a Microsoft/Yahoo

combination would help or hurt Silicon Valley, the impact of this coming exodus has been largely ignored.   

As talent leaves the big Internet/technology companies, there will be

a flood of experienced folks looking to join (or start) startup companies.   And that’s a flood I look forward to.