Monthly Archives

November 2008

An example of freeconomics in action – the t-shirt economy

By | Business models, free | 4 Comments

Clive Thompson over on Wired has an interesting post about folks giving their video content away for free and making money on the t-shirts their fans love to wear.  This is similar to music merchandise, but applied to web video.

In 2003, Burnie Burns got together with three friends and created Red vs. Blue—an animated comedy series set in the world of first-person shooter Halo. Nerds loved it, and within months nearly a million people were downloading each week’s free show.

Burns & Co. decided they wanted to quit their jobs and work on the series full-time. So they figured out a way to do it: T-shirts.

Burns appropriated the comedy’s wittiest one-liners and set up an online store to sell shirts and caps. Within months, he was filling hundreds of orders a week, generating enough revenue to pay everyone a salary. “The shirts,” he says, “turned us from a hobby into a business.”

Burns is not alone. Increasingly, creative types are harnessing what I’ve begun to call “the T-shirt economy”—paying for bits by selling atoms. Charging for content online is hard, often impossible. Even 10 cents for a download of something like Red vs. Blue might drive away the fans. So instead of fighting this dynamic, today’s smart artists are simply adapting to it.

Their algorithm is simple: First, don’t limit your audience by insisting they pay to see your work. Instead, let your content roam freely online, so it generates as large an audience as possible. Then cash in on your fans’ desire to sport merchandise that declares their allegiance to you.

Paying for bits by selling atoms.

Mike of Techdirt would describe this as giving the abundant good away for free (i.e. the one with zero marginal cost to produce and distribute) and focus on making money on the scarce one.

As Clive goes on to point out the businesses that enable the selling of t-shirts are an important part of the story here.  Companies like CafePress and Spreadshirt enable people to start selling t-shirts with zero up front cost.  They make money on the first t-shirt they sell.

Maybe these companies are the infrastructure plays for the free economy.

As two final asides, a) I love the geekiness of the Burnie Burns story, and b) my favourite definition of a web2.0 business is ‘one where your customers build your business for you – that is Spreadshirt, CafePress etc.

Web investing – stats on round size and estimated pre-money

By | Venture Capital | 7 Comments

Last week Julien Wallen posted some interesting data on funding for web startups.  The whole post is well worth a read (including DFJs position as most prolific investor in this space over the last 4-5 years….) but the following two tables are the ones I found most interesting.

This first table gives the average investment size by stage, with the median Series A coming in at $4.8m.

In this second table Julien has worked backwards from the hard data about round size and rules of thumb guiding normal levels of dilution to estimate pre-money valuations, again by stage.  This is an inexact science so Julien has given wide ranges, it is still interesting though.  For a fuller explanation of how these estimates were calculated please check out the original post.

Moore’s Law is the fifth such law

By | Innovation | 5 Comments

I was in the US last week for a get together with all the DFJ folk from the 19 partner funds in the network, and as part of the proceedings Steve Jurvetson gave a presentation on innovation in which he showed the following chart.

It shows that Moore’s Law which has underpinned improvements in computer and network performance for the past four decades (including PCs and the internet) is the fifth such law.  By generalising the definition from transistor density to the cost of processing power ‘computing’ performance has been on an exponential improvement curve since 1900 – doubling every two years.

There are two obvious conclusions from this:

  1. There is no reason to think this will stop any time soon, innovation and progress will continue, even if Moore’s law comes to an end.  This article gives some thoughts as to what might be next.
  2. The progress over the last 100+ years has been even, continuing at the same rate through periods of economic boom and bust

One other point that Steve made which I liked concerns the nature of exponential curves (and forgive me for getting a bit geeky here).  He noted that if you plot an exponential curve on a linear scale it always looks like you are just past an inflection point, but if you fast forward a couple of years, stretch the y-scale accordingly and plot again it will give the appearance that you previously called the inflection point too early.  Hence it is only by plotting on a logarathmic scale and seeing a straight line that the true picture can be seen.

Companies attributing their success to being past an inflection point in something therefore need to be careful they are plotting on the right scale.

Planning for growth

By | Entrepreneurs, Innovation, Venture Capital | 2 Comments

For the past week or two I have been enjoying reading Judy Estrin‘s Closing the Innovation Gap, in which she describes how key elements of the innovation ecosystem in the US are failing and suggests some actions to rectify the situation.  As part of this endeavour she seeks to understand what it is that really drives innovation and how that is different from development and as such sets out the following framework for understanding the application of R&D resources:

  1. Current generation.  Maintaining continual incremental improvement through product or process change required to meet existing customer needs.  [NB This is the bare minumum to stay alive.]
  2. Next generation.  Making advances in science and technology or business processes as required to maintain market leadership or to leapfrog competitors.  These innovations might be incremental, orthogonal, or breakthrough.  [NB This is the minimum steady state requirement for most high growth venture backed businesses.]
  3. Future growth.  Even the most successful companies need to look beyond their current customers and markets to investigate potential areas of growth for the future.  They also need to be prepared to take advantage of radical disruptions in their current markets.  [NB This is where the opportunity to generate outsize returns lies, but there will be minimal short term return on investment.]

I like this framework for the way it sheds light on the detail of the returns from different areas of resource allocation within R&D budgets.  Judy’s main point is that as a society we need to spending more on 3. Future growth which I agree with wholeheartedly, but the framework also has application in resource planning for individual companies, particularly when times are tough.

Depending on their profitability, cash resources and prospects for raising further money many small companies are having to ration resources.  Analysing R&D spend using Judy’s approach will help if there are difficult decisions to be made – eating into 1. Current generation carries clear short term risks, sacrificing 2. Next generation might be sustainable for a short period of time but no longer if valuation progression (or even maintenance) remains a target, and any exciting long term plan probably needs to include 3. Future growth.

Why a Facebook-Twitter deal was always unlikely

By | Blogging, Exits, Facebook | No Comments

Kara Swisher of Boomtown has an interesting post today; When Twitter Met Facebook: The Acquisition Deal That Fail-Whaled.  That was news to me, although according to Techcrunch there had been prior rumours.

Apparently the deal being discussed was that Facebook acquire Twitter for $500m in Facebook stock at the ‘Microsoft valuation’ of $15bn, and it fell over because:

  • The lack of revenues at Twitter is an issue for Facebook, which has monetisation issues of its own to worry about
  • As are Twitter’s expenses on outbound SMS which could cost up to $75m if the service was taken up enthusiastically by Facebook’s 120m users
  • Twitter’s shareholders (which include Union Square, Charles River, Marc Andreesssen – also on the Facebook board, and Ron Conway) had an issue with the $15bn valuation being put on Facebook.  In their view the $5bn that has been reported for some recent investments in Facebook would be fairer.

Reading all of this I think a deal was always going to be tough because:

  • The valuation for Twitter is really only $166m if you use the $5bn valuation on Facebook and that is only a marginal uplift on the $98m valuation from Twitter’s last round.  This is not enough for a company which is performing well (they had 6m uniques on September, up 600% in a year) – particularly if it is taken in private company stock.
  • Twitter is better placed to find it’s monetisation model as an independent company than as part of Facebook.  What is required is a period of experimentation and Twitter would likely have got lost amongst the larger initiatives currently underway at Facebook – it wouldn’t have been significant enough to get the attention it deserved.  Therefore Twitter is worth more independently than as part of Facebook.

A couple of parting points are also worth mentioning.  Firstly as Jemima points out at the Guardian the Twitter community is still figuring out how best to use the service, and an acquisition by Facebook feels premature as it would dilute some of the ‘early adopter power juice’ (a gold star to anyone who figures out how to put that in a bottle….).  And secondly, as Alan points out over on Broadstuff there might be a parallel with when Yahoo!, a portal, turned down the chance to buy Google which was more of a commsnet.

LP money coming to Europe

By | Venture Capital | 4 Comments

LPs (or Limited Partners) are the people (typically institutions like pension funds and insurance companies) that invest the money in venture capital funds which then in turn gets invested in startups.  I have just returned from a week in the US where I have seen a significant increase in the number of US LPs expressing a desire to invest in Europe.  This has been a long time coming and is a welcome development as we are under-funded in this market and their capital could make a big difference.

I think it is the combination of enough evidence now that Europe works combined with the declining attractiveness of the alternatives (US venture and buyouts) that is driving this shift.

Despite earlier hopes to the contrary tech spend looks like it is heading south

By | Entrepreneurs, Google, Venture Capital | No Comments

To cap a week of gloomy news I have today seen a Changewave survey which suggests tech spend is about to fall off a cliff.  This comes despite earlier hopes that the tech sector might get off relatively lightly this time round.

There is a bunch of other data in the post where Changewave report these results which is well worth a read.  It all points to the same conclusion though, which is not a pretty one.

Ad watch – market still growing in US, but very slowly

By | Advertising | One Comment

The latest data from the Internet Advertising Bureau shows that US online ad revenues in Q308 were $5.9bn, 8% up on Q307 and 2% up on Q208.  The good news is obviously that it is still growing, the bad news is that these sorts of growth rates are not of the magnitude that will necessarily survive recession.

Nor are they the sort of growth rates that have made this space such fertile ground for startups over recent years.  A rising tide floats all boats, but when the tide stops rising…

This chart nicely illustrates the scale of the growth we have enjoyed.  Note also the similarity in the shape of the Q4 2007-Q3 2008 and Q2 2000-Q4 2000 curves.

I remain a believer in the secular growth story of the internet though, and the good times will return.

Firefox’s billionth add-on download shows the power of extensible platforms

By | Blogging, Business models, Innovation, Open Source | 4 Comments

I’m a big fan of open and extensible platforms (ideally open-source extensible platforms) – with for blogging and Mozilla/Firefox for browsing being my two favourites.

So I was pleased today to read Mozilla’s announcement that they had crossed the one billion mark for add-on downloads since they started counting in 2005.  See chart below.

Note also that this graph and the headline 1 billion figure are understatements, probably significant understatements, as add-on downloads from sites other than Mozilla aren’t included in the total.

This milestone shows both the popularity and the power of the model.  What I like about it most is the whirlwind of creativity it unleashes.  The vast number and variety of Firefox add-ons is testament that.  This post from ReadWriteWeb shows this very clearly.

For the record my favourite Firefox add-ons are:

  • Scribefire for blogging – I use this every day and it keeps getting better and better
  • Alexa toolbar (and been planning to add Compete for sometime)
  • Delicious
  • Tumblr
  • TinyURL Creator