Another Texas VC

My quick advice to entrepreneurs trying to make money off of banner advertising is to stop. I recently got an analyst report that puts the average remnant CPM at around 35 cents. To put that into practical terms, your average web-page with an ad-sense banner page only earns $100 for every 286,000 impressions. Boy that’s tough!

But wait, can’t you make money off of targeted advertising? Well, maybe. The same report listed Premium CPMs at $15. But to earn those higher CPMs you have to do one of two things

1.       Get enough impressions to justify joining a specialized ad network / yield builder. Pubmatic won’t talk to you unless you generate at least 100 million impressions a month. On the other extreme TribalFusion requires just 5000 uniques a day [but good luck trying to get a $15 CPM].

2.       Hire your own ad sales rep. Assuming that you earn the $15, and pay the rep around $80K (+ 50% for benefits), you have to be sell around 670K units a month to break even on the rep.

Scarily, that premium CPM has been dropping like a rock, and will be even lower next year, making this an even harder business to play in. You can compensate for the lower CPMs by adding even more advertising to your site like TechCrunch which crams 20 ads into a single story.

So what is a website owner to do? In my view you have a few choices to get out of this brutal game:

·         Charge for access to your content. The WSJ has been doing it for years and openly encourages everyone else to do so.

·         Make your content a lot cheaper, and by cheaper I mean practically free. YouTube does it splendidly.

·         Stop charging CPMs and start earning CPAs. Zynga makes a lot of money doing just that. Just be sure to be ethical and transparent about it.

Some folks will make a lot of money with advertising on their pages, and my hat goes off to them. It’s just a very tough business to succeed at.

The iPhone is an incredibly impressive device. Much how the Blackberry put email access into your pocket, the iPhone has provided the first usable mobile browsing experience. As the first mover in the space, Apple exercises a near monopoly in the space with an impressive 40% market share in mobile internet traffic. Kudos to everyone involved in the effort at Apple for setting a high bar for any potential competitor.

Some would put Apple’s early success in historic terms, claiming the iPhone has the fastest user growth in tech history. That is taking it a bit too far.

You have to do two things to reach that conclusion. The first is to combine iPhone device shipments with iPod Touch shipments, which gets you 60 million units. The actual iPhone number is 33 million units. Although the iPod Touch runs the same OS as the iPhone, I wouldn’t combine the two numbers together. Touch numbers are artificially inflated by the massive number that was given away with Mac purchases, and compete in a very different product segment (mobile phones versus gaming). I don’t consider my Tivo and Netbook similar products either (they both run on Linux).

Second, you have to ignore a slew of other products. Just three years ago, the Motorola Razr moved 50 million units in even less time (eventually selling 110 million units). For true market dominance, take a look at Sony’s Walkman which eventually moved over 300 million units. The point is that in historic terms, the iPhone launch wasn’t particularly historic, even within the mobile phone category.

So the iPhone currently dominates the web-browsing mobile phone space. If history is a guide, someone will come out with a better phone that will force you to throw it in the same drawer as your Motorola Razr. Colin Gibbs seems to think that it will happen this holiday season. The iPhone developers I talk to have already started switching to the Android platform. I don’t know if Android is the answer to the iPhone, but definitely know it’s possible.

I watch a few tv series pretty regularly, but to a show I have no idea what time they are scheduled to be on. With the exception of Longhorn Football, all of the stuff I watch is pre-recorded by my DVR. I am not alone, with a third of Americans now using DVRs. So when NBC decimated their primetime schedule to push Conan O’Brien and Jay Leno up an hour or two, my life was completely unaffected, except that NBC had one less show to offer me to pre-record.

The other day I accidentally deleted my DVR recording of Mad Men, and went to AMC on-Demand to pull the episode back down. Unfortunately AMC doesn’t post episodes until they are a week old, so I resorted to grabbing the torrent version off the web. The torrent version had higher resolution than the on demand version, downloaded faster than AMC on-Demand (15 minutes versus about 45), and already had the commercials stripped out.

The show that seems to understand our new pre-recorded world the best is The Colbert Report. Colbert smartly bakes sponsors into the meat of programming and offers episodes on colbertnation.com  within hours of broadcast where I get exposed to even more advertising opportunities. A TV show is worth as much as what you can do with your audience, and Colbert has proven that he can leverage his audience to do just about anything.

So NBC just bet their entire network on the faulty premise that viewers care what time shows are on. The battered network is in talks to be sold to Comcast, a programming speedbump that can easily be circumvented via the web. Billions of dollars are about to change hands, but should anyone really care? To me this is about as important as a printing press company getting bought by a newspaper.

My office in Houston is a microcosm of the world at large. 2 of the 4 VCs in our office have converted from PC to Mac. I begrudgingly used Windows Vista because it came on my Kellogg laptop, while the other PC user had Vista on his tower while stalling to buy a new laptop. Our CFO uses Windows XP because he uses Quickbooks and is afraid of Vista.

Our CFO isn’t entirely irrational in his fear of Vista. Prior to Vista, Microsoft had a two tier release structure for operating systems. The ‘New Technology’ operating system (aka NT) would be released to businesses first, with a simpler OS released to consumers (remember Windows 95, 98, and ME?). These lines were merged into the business line in 2001 with Windows XP, which essentially merged consumers onto the Windows 2000 business OS line. This worked well because Microsoft had a chance to work out the kinks of Windows 2000 before bringing consumers on board. Deluded by the success of the XP rollout, Microsoft internally resolved to abandon the two tier release structure and upgrade all users together for the next OS release.

As a minor digression, I want to point out that this is a uniquely Microsoft problem to have. Apple is, ironically, strictly a personal computer (PC) company. Large companies (enterprises in IT lingo) require centrally administered directories of users with varying degrees of access to corporate networks. When someone is hired into the company you add them to the directory which gives them access to parts of the corporate network while also allocating email and intranet access. When the employee leaves the firm, you need a centralized way to take away all of their access. Microsoft solves this problem with Active Directory Services, which neatly integrates access to PCs, the network, Microsoft Exchange (ie Outlook) and a host of Web Services from a console. Apple simply doesn’t play in this space.

So out came Vista in 2006, which had some cool features for the enterprise, but nothing for your average PC user. The end user experience was woefully buggy, bloated, and complicated. Although several major issues were cleaned up with Service Pack 1, the damage was done, and consumers knew to avoid Vista. Why put up with all of the bugs in exchange for features you don’t care about like enterprise application deployment which rolls out an application to every member of your network?

So here comes Windows 7. For the first time since 2001, Microsoft is focusing squarely on end-user enhancements. I have been using the OS for the past month and it’s faster, smoother, and easier than any other OS out there (including the Apple Stuff). For folks on Vista, Windows 7 is a no-brainer. For Windows XP users like our CFO, 7 represents the simplest and best upgrade strategy to really work the web. Although it isn’t bathed in unicorn tears, I could see it attracting some Mac converts based on its ridiculously low price point (about half the price for an apple to pc comparison).

How similar is my job to the TV show Shark Tank? Not similar at all. Like most reality TV shows, Shark Tank is designed to maximize entertainment, not educate viewers.

Your first clue is that none of the ‘sharks’ on the show are venture capitalists. Instead, these are successful business (wo)men who are deploying their personal cash in completely unrelated fields from their expertise. (The opening implies that O’Leary is a VC, but he really runs a mutual fund).

Your second clue is the mismatch between traditional VC investment domains and the businesses pitched on the show. Per NVCA leading categories for startup investment are clean tech, biotech, and software. Shark Tank focuses on consumer goods that viewers can relate to but seldom ever get funded.

Your third clue is the bizarre deal structuring. The Sharks are obsessed with 51% control and squashing the entrepreneur’s equity stake in the company. Any VC worth his salt will tell you that 51% is irrelevant and that cramming down the entrepreneur’s equity stake is toxic to the company’s future.

So watch Shark Tank as an entertainment show, but please don’t confuse it with Venture Capital.