Web X.0

The Lighthouse

A key to a successful startup journey is to always know where you're headed. The company has to always have a single lighthouse that it is pursuing. More importantly - everyone on your team has to know exactly what that lighthouse is. This might sound easy, but in reality most startups fail miserably on choosing a lighthouse, communicating it clearly to the team, and sticking to it obsessively. 

A healthy lighthouse can usually be reduced to a chart. Curiously, the most trivial chart - the revenue chart - is hardly ever a good lighthouse to choose... I'll explain why below. The lighthouse, if properly communicated to every single person in the company, should determine pretty much everything that gets done by by each team member. In a company with a clearly communicated lighthouse, everyone - junior or senior, engineer or biz dev, in NY HQ or in the Israel R&D - should prioritize tasks nearly identically. If your company is struggling often with priorities, your problem is extremely simple to diagnose - you are most likely missing a clear lighthouse.

For a web company, the trivial lighthouses are - page views, unique users, etc. Choosing trivial metrics as the company's lighthouse is acceptable, but the problem is that it will likely be the same lighthouse used by many other companies. That means that that the faster/bigger boat, not necessarily the smarter one, will likely win. If you are the biggest baddest boat around (aka "Google") - you should be fine. If you're among the 99.9% other startups, you might want to dig deeper and find your unique lighthouse.

A good lighthouse is also clearly actionable. A lighthouse that implies action will help everyone focus on the biggest opportunities. For example - when all search engines were focused on ranking sites based on keyword counts, Google's lighthouse was to perfect the ranking of results based on the site's authority. Later when Google was a late entrant to the PPC search advertising market, their lighthouse was maximizing the yield of each ad shown while their main competition was focused on maximizing the bids. 

Which brings me to another attribute of a good lighthouse. And this one isn't always achievable, but it's beautiful when it is -

A great lighthouse is fairly invisible outside the company. In Google's example, it isn't immediately clear to an outsider how search results are ranked, and is therefore very difficult to play the same game. A good lighthouse let's you compete in a crowded market while playing a game that's completely different from your competition.

Revenue is therefore almost never a good lighthouse. It is not actionable and it does inherently not let you play a different game in the same ball field. But unless you're doing not-for-profit work, revenues is probably a primary goal for you and your shareholders. The right way to reconcile this gap is to ensure that your chosen lighthouse has a reasonable eventual linkage to revenues. For example, if your lighthouse is to maximize unique users, that can later (if successful!) be translated to advertising revenues.

The lighthouse cascade

Most importantly for startups - a lighthouse is *not* permanent. It should change as the company grows and develops its product. The important thing is to know when to transition lighthouses, how to do it, and most critically - how to communicate to everyone what the current lighthouse is.

Each lighthouse should have a logical connection to the next one. For example, your 1st lighthouse might be to focus on building a big user base, while your 2nd lighthouse might be to maximize the page-views (so the actionable parts are to grow both the user base, as well as page-views-per-user). Each metric should eventually be a supporter of those future metrics.

The lighthouse metrics should not only cascade logically from one to the next, but also eventually have a strong connection to revenues. Choosing a good lighthouse and planning how your metrics will eventually cascade into revenues does not ensure your company's success, but it is nearly impossible to succeed if you (and your whole team) don't know what your lighthouse is at all times. 

{image CC - mischiru. thanks!}

Best reality TV show format

So here is proof that something good can emerge from a war situation. Israeli TV has pretty much become 100% reality shows this year, importing all the American/European junk TV formats (Survivor, Big Brother, etc). Ugh...

It took a war in Gaza for Israel's Channel 2 to come up with an original, and incredibly good, reality show format. The kids in southern Israel have not been going to school for over two weeks now, and are at homes and shelters with not much to do. The idea for the TV show (named "Learning Together") is super-simple - Put cameras inside a classroom and bring the most interesting people in the country to give a lesson on a subject of their choice. There are several "classes" each morning, passed by people like: Presidents of Israel, book authors, etc. For example - as a kid (and even an adult) - could you hope for anything more interesting than getting a class in citizenship by Nobel Prize winner, President Shimon Peres?... Wow.

I'm not sure what the ratings are for this show, but I love how for a near zero production cost a new format emerged which is intelligent, educational and original. 

Moneyball - highly recommended

Last week I participated in a roundtable organized by Carmel Ventures, with probably 20-30 entrepreneurs in the room. I recommended they all read Moneyball by Michael Lewis - a book I read a couple of years ago. I think most of the people in the room didn't have a chance to take note of the recommendation, so I'm repeating it here. 

Moneyball is a must-read for any entrepreneur. It has nothing to do with entrepreneurship (it's about baseball), and it's not a very good book (in the literal sense, I mean). 

But if you read it with an entrepreneur state of mind, there are great lessons to be learned... 2 have been particularly useful for me:

1. Look at the same game differently - Most startups compete with many other companies for the same market share. In the online world in particular you are likely to be competing with hugely successful companies like Google, Yahoo, Amazon, etc. You can't win by playing their game. But you can absolutely win by playing a different game in the same space. An example that comes to mind is Yelp - while all other yellow pages and review sites are focused on getting readers and selling to advertisers, Yelp seems to be playing a completely different game. It looks like they are focused obsessively on their reviewers - giving them tools, recognition, community etc. Yelp is looking at the exact same market as all other yellow page companies are, but playing a totally different game.  
2. Understand what metrics really matter for your business - the metrics that *seem* to matter for your business might not be the ones that really determine your eventual success. Moneyball shows how the Oakland A's found that most of the metrics that baseball teams have been using for decades (batting average, # of steals, etc) had little or nothing to do with how successful the teams were. Another example is a post I wrote recently about how PV's and ad revenues might not be the best success metrics for publishers. 

Bottom line - highly recommended. Get it here at Amazon or here at Audible. 

Pricing Display / Demand Creation Ads

Following Fred Wilson's post about display advertising, and my post about demand-creation vs. demand-fulfillment advertising, I had another thought I'll share here regarding the pricing of "display" advertising (or in my terminology - Demand Creation Advertising)Fred Wilson says:

"...However, this study does not determine what the right price for display advertising is. Search is measurable by virtue of the cost per click and display is not. And if click thru isn't the right measure, then display has an issue..."

And I agree with Fred 100% on that... While auction-based CPC (cost-per-click) is a great way to price the value of demand-fulfillment-ads^[1], it is certainly *not* the right way to price advertising which is introducing a brand and creating demand. That's because the users are *not* in immediate shopping mode, and the effect of the advertising on them is not necessarily embodied in an immediate click.

So following my thread, I had an idea which is slightly theoretical at this point, but could serve as a way to price Demand Creation Ads in the future:
Search ad inventory is inherently limited. That is why CPC bids on search terms are bidded up over time. In other words, the bids advertisers place reflect the balance between the value they get from each click, and the amount of clicks available on their keywords.

If this is true, then a mechanism that creates a lot more search queries and clicks should increase supply, thus reducing the cost of each keyword. One such mechanism are Demand Creation Ads (or, if you prefer - display ads). These ads don't necessarily create any immediate clicks, but they should create more searches for the brand down the road.

Assuming all this could be aggregated and tracked efficiently (a big IF), you could then price display ads based on one metric - the increase they create in future searches.
Then the next step in pricing would be to identify a common denominator between the pricing of search ads and the pricing of display ads. So for example, as an advertiser I would know that I could pay $1 per search click, or I could pay 50c for display ads that created enough future searches to reduce my search CPC to 40c per-click.

Again - I'm not sure how doable all this is, but if it were - I think this would bring on the golden age of display/demand-creation ads on the web, making them suddenly as efficient as search ads are perceived today. 

 UPDATE: John Battelle just posted some interesting data from eMarketer on the effect of demand-creation-ads on the # of search queries ----------------------------->

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[1] It can be argued that CPA is a more perfect pricing model than CPC is, because it ties directly to the only real conversion metric that matters - the purchasing of a product. That is technically true, but I think that CPA has a few inherit deficiencies which make it a pretty bad solution for pricing ad inventory:

1. It moves all the risk from the advertiser to the publisher. CPC perfectly balances the risks on both sides.
2. CPC is a wonderful common denominator that allows all advertisers to participate in a single, easy-to-understand, marketplace. There is no comparable denominator in CPA.
3. CPA requires a LOT of data points in order to establish the value of each ad and its probability of generating revenue. That makes it completely ineffective for a centralized and efficient marketplace.

The two types of ads

Fred Wilson has a great post about display advertising discussing a recent comScore white paper about the subject. Fred's bottom line:

"The basic insight from the report is that display advertising does not normally result in an immediate click. That makes sense because the ad is not being presented in a moment of purchase intent, like a search ad is. But the ad does create interest in the product or service which is realized at some later date in the form of a site visit, a search query, and possibly on online or offline purchase."

I think that the common distinction between "display ads" and "search ads" is not the right distinction... The distinction should be between:

1. Demand Creation Ads - these are ads that notify the consumer about a brand, it's values and reasons to purchase it (whether factual or emotional). Display ads would typically fall into this category. 
2. Demand Fullflilling Ads - these are ads that offer the consumer an effective shortcut to fullfiling a purchase that s/he has pretty much decided to execute. Search ads would typically fall into this category.   

Demand Fullfilling Ads (DFA's?) is a fairly mature business on the web. Demand is best expressed through a search box, and search ads are an extremely effective way of fullfilling that demand. As comScore noted - the immediacy of conversion on these ads is very high, however in terms of raw volume - there aren't many of these ads. 

However, for Demand Creation Ads (DCA's?) there is no such Google yet. DCA's have to be interesting, not necessarily relevant. That's because the consumer has not yet expressed their intent, and therefore 'relevancy' is no more than an educated guess. 

To date, the DCA's on the web can be categorized into 2 categories:

1. Interruption ads - banners, etc are intended to capture an audience consuming content and interrupt them with ads. 
2. Contextual ads - text ads that algorithmically emulate search advertising on non-search pages. 

Contextual ads may be relevant but, they certainly are not interesting. And therefore they mostly fail at being effective demand *creation* ads. They are also not effective as being demand *fullfilment* ads because they are presented to users who have not expressed their commercial intent. 

We're only scratching the surface with Demand Creation Ads. The future lies in the word "interesting", not necessarily in "relevant" and I think there are exciting opportunities to displace and significantly improve on both interruption ads and contextual ads. 

On gentelmen and cowards

Anonymous comments (or - "talkbacks") on newspapers are one of the ugliest things in the online publishing world. In Israel the situation is even worse than the US, as it seems that the newspapers have zero concerns of liabilities over crap being published on their pages. The comments have been taken over by trolls to such an extent that it's nearly impossible to find a single intelligent comment by a person with a real name...

I've been reading some of the coverage lately of Gmul - a company acquired by Leon Recanati about a year ago. As with most stories, 99% of the comments are posted by anonymous cowards who haven't the slightest clue about what they're talking about. It infuriates me to see that crap being published, and reputations ruined, so easily by people who can't be held accountable. So as someone who actually knows Leon Recanati and has worked with him, I thought I'd provide my comment, under my real name. 

Leon is an investor (via GlenRock) in the two companies that I have founded - Outbrain and Quigo. We've been working together for the past ~7 years, and have gone through some great times (like selling Quigo to AOL), and some awful times (like running out of money in the early days of Quigo).

Leon made the first investment in Quigo when we were at some of our toughest and riskiest times. During 3+ years we pitched over 50 VC's (including nearly all VC firms in Israel) and were rejected by all of them. During those years (2000 - 2004), funds were too afraid to invest in un-proven entrepreneurs with a risky business model.

We were lucky enough to meet Leon Recanati (and the wonderful team at GlenRock), at the riskiest stage of our business. After having been rejected by 50+ funds, GlenRock was the first institutional investor to provide us with financing, literally saving the company^[1]. From what I could tell, Leon decided to make the investment in Quigo both because he understood the potential of Quigo's business (unlike all other funds who looked at us), and because he sees it as his mission to help young Israeli entrepreneurs.

Throughout the past ~7 years, GlenRock in general, and Leon in particular, have been a wonderful partner at both companies. They are there to support (financially and mentally) every time we hit a rough patch, and let us do our work quietly when things are well. For an entrepreneur, GlenRock is as good as an investor as you can hope for - supportive, honest and never ever stabs you in the back as many early-stage investors do.

In addition, Leon has been one of the biggest philanthropists in Israel, donating much of his family fortune back for charitable and educational causes in Israel (such as the National Science Museum in Haifa, for example). There are few people who have done for Israel - both for the business community and for charitable causes - so much.

It infuriates me to see anonymous cowards try to ruin a person's lifetime reputation. I am not familiar with the details of the specific situation at Gmul, but as someone who actually knows the people involved - I'm confident that this situation was fully inherited when the company was acquired. I'm confident that Leon & Co are doing whatever is reasonably in their power to fix the inherited problems. And I'm sure that -- *whatever* the outcome in Gmul -- the debt holders would be in a far worse situation had they had to deal with with the previous owners and not Leon.

It's a pity that anonymous ignorant idiots get so much exposure on mainstream newspaper sites these days... I hope this post provides a little balance on the subject matter.

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[1] I should also mention Jack Lahav and some of our other angel investors who supported us during the first 3 years and made it possible for us to survive through 2003 to begin with!...

Magnes Sisters handbags

Disclosure: I'm highly biased on the subject on multiple levels...

The Magnes Sisters are three sisters (surprise..) who design wonderful handbags. They are among the nicest entrepreneurs I've ever met + they are passionate about creating a wonderfully designed and crafted product. Their bags are in the moderate price range - $150 - 350 - but offer probably the best value you can find for a nice handbag. 

If you're not part of the handbag-ing 1/2 of the population - believe me - a Magnes Sisters handbag is a *perfect* gift for a special occasion.

I'm far from being a fashion expert (especially on woman's accessories..), but here are a few comments I picked up from this site:

• "Love these girls and love these bags - they are amazing, well made and very cool!" - Sari from Brooklyn, February 13, 2007.
• "These handbags are terrific, every detail is figured out, they are worth every penny." - Anne from NY, NY, February 14, 2007.
• "I own a gorgeous red on red Magnes Sisters Bag and I have more people stopping me and asking me about it than you can ever imagine!!! It is roomy and classy -- a perfect bag." - Lisa from NJ, February 14, 2007.
• "Such classy bags, perfectly finished, and goes equally with a relaxed jeans look or a dress! Wait till you open one and see every detail inside... amazing:) Love them!" - Jennifer from NYC from US, February 14, 2007.

Go here to read more. If you own a Magnes handbag and have any feedback, please submit a comment below. Magnes Sister handbags are sold at Nordstrom's and hundreds of other stores (a full list is on their site).

If you're in the NY area tomorrow (Thursday, November 20th 2008), you can meet the sisters (and buy a bag!) at a special event they are doing before the holidays. Full details are below (click the invite for a full size version):

Cosmic VC

Charlie Federman - a VC and a friend - has recently launched a new and excellent blog about VC's, startups, etc.

One post I couldn't agree more with:

"Try as you may, but no young company, founded with a growth oriented DNA, that I remember, has ever slashed their expenses to victory. Many companies appropriately encouraged to slash budgets find themselves with now unproven markets, or a value proposition which has not yet resonated. Nevertheless, if a company has momentum, this environment presents an incredibly capital efficient time to garner market share as distribution, R&D and customer acquisition expenses are in a deep downward spiral."

As bad as things are today, it's important to keep in mind that there will be big big winners in 2010-12, and those winners are being incubated right now. The smart companies are going to figure out how to provide clients with great value in a down market. They're going to have massive access to great talent and cheap office space. They're going to have the full attention span of their potential clients.

VC's that are panicking out of investments today are probably missing out on the companies facing the best opportunities in nearly a decade.

Publishing - the only metric that matters

Publishers (and bloggers specifically) tend to measure their business on two parameters:

1. Page views
2. Ad revenues

These are fine metrics, but I believe that they are derivatives of a much more fundamental metric which, if ignored, could be devastating to a publisher's business. Lets call this metric the "Reader's Goodwill Pot".

Lets assume an imaginary pot into which imaginary goodwill points can be deposited, and from which imaginary goodwill points can be depleted. Sort of like a bank account for goodwill. Now, as a publisher/blogger, imagine you are running this kind of 'goodwill account' with your audience of readers.

When you post great content you are adding points into the pot. When you provide your reader with a great user experience you are adding points to this pot.

If you build a big enough goodwill pot, with a big enough audience, then you can dip into that pot occasionally, take some points away and put them in your pocket. That is also usually known as advertising.

As a publisher, with every pixel you put on your site (or ink on paper, or frame on screen, etc), with every piece of content you produce, with every ad you take on your site - this is the single most important metric you should obsess over. Am I putting goodwill points into my piggy bank, or am I taking some away?

Great publishers understand that the need to keep this balance is far more important than the need to track any of the other metrics - PV's and revenues, for example - in isolation.

As we hit a recession, I suspect many more bloggers and traditional publishers are going to ignore this metric and will try squeezing the lemon as much as possible by cutting on the content and the user experience, and at the same time trying to maximize the number of ads that interrupt the readers. Publishers ignoring the 'Reader's Goodwill Pot' will not survive, not because of the bad macro economy, but rather because they failed to understand the micro economy of publishing.   

{Image CC by: Nieve44/La Luz . Thanks!}

Bluefin Tuna

My fellow outbrainer, John LoGioco, has just launched a site focused on the Bluefin Tuna and ways to help save it.

You are most likely to bump into a Bluefin on your plate of sushi. As demand for sushi exploded globally, this magnificent fish has become dangerously close to vanishing from the face of the earth. Over 90% of the Bluefin's population are already gone, and within a few years it is likely become forever extinct if we don't stop over-fishing it.

There is one simple way you can help in saving this fish:

When you eat sushi, ask which dishes include Bluefin Tuna and simply avoid them.

Here are a few more helpful links if you're interested in the subject:

• John's SaveTheBluefin.com website. You can register as a member here.You can also help us spread the word by putting the SaveTheBluefin badge on your blog (you can see the badge on the left-hand rail of this page). Grab the badges here.
• Tag-A-Giant is committed to reversing the decline of northern Bluefin tuna populations by supporting the scientific research necessary to develop innovative and effective policy and conservation initiatives. You can support Tag-A-Giant with a donation here.
• Professor Barbara Block's blog focused on the efforts around tagging and saving of the Bluefins.