The NYSE looks good in red

Perhaps it's nothing more than a sign that there are long stretches in between my blog posts, but my last entry featured a photo of the NYSE's regal facade draped handsomely in blue. Well, I think it looks just as good in red. I wonder where they put those giant banners when they're done with them?

Congratulations Reid and the LinkedIn Team

Feeling Around in the Dark

A recently hired executive at one of my portfolio companies sent me this picture today to explain how he feels on the new job. I told him that, indeed, it can be a pretty crappy experience while one is still feeling his way around in the dark, but eventually he'll get a handle on things...

TechStars New York likes my blog

As I approached the TechStars Demo Day event in New York yesterday, the first thing I noticed was my blog title in lights. (Thanks, TechCrunch, for the photo.) The second thing I noticed is that no two "N's" were alike. The sloppy Webster Hall sign stood in sharp contrast to the incredibly well-polished pitches from the 11 startups inside. If the products and business models of those startups are even half as refined as their on-stage presentations, there will surely be some interesting winners from the batch.

Suckers Must Be Trading Facebook Stock

If you have ever owned a fax machine, then surely you received an occasional spam fax from a stock promoter. The typical one or two page stock-pumping fax proclaims the "sure thing" of potential profits from buying some rinky dink stock you've never heard of at the bargain basement price of $1 or $2 per share. "It's definitely going to $5, maybe even $10," so buy now "before it's too late."

I never could understand who actually responded to these faxes and bought the promoted penny stocks, but there must have been enough suckers out there to justify the expense of sending the faxes. I haven't received one for a while, so I thought maybe the world had finally "wised up."

Turns out I was wrong. The stock promoters have simply shifted to email (thankfully, I've got Postini to protect me). But much more remarkable is that the promoters are now pumping private company stock. Here's an unedited email offer my friend received a week ago:

http://techcrunch.com/2011/03/21/facebook-85-billion-valuation/

We have not had a chance to speak recently so call me or let me know a good time to call you so I can let you know what is going on with Facebook. Bottom line is this is the very last time we will have Facebook stock to offer to investors - We are closing next Tuesday at $31 per share on our Facebook fund. This will be the very last close we will ever do in our Facebook fund - THE VERY LAST - GAME OVER. The stock we are closing on is attractively priced compared to the current market of $34-$37. It is my opinion that we could see a 3-4x return over the next 12-24 months. It is also my opinion that Facebook, will at the very least, double from this level (which would be a major disappointment) and certainly will not trade lower from the $31 level. What other investments are you aware of today that offer this kind of risk reward ratio over that period of time?

This is the last bite of the apple - take it!

If you have any questions or intend on investing please let me know as soon as possible.

I guarantee that you will not be hearing from me regarding facebook again!

Best,

[Name redacted]

If you believe cheesy stock promoters tend to flock to where the suckers are, I guess the implication is that the private market for Facebook shares is full of suckers. I just wish I knew whether the suckers were the ones buying or selling.

Enjoy Dumpster Diving?

I was greeted at home this evening by a violation notice from NYC's Environmental Control Board -- aka the "garbage police." My building was fined $25 because one of my neighbors disposed of paper and cardboard in the trash instead of recycling those materials.

Here is the exact hand-written text on the violation notice dated 8:17pm on Aug 31:

"I did observe 3 white bags placed out for collection. Upon inspection found paper & cardboard mixed with household garbage."

Are our dear city's finances really in such dire straits that Mayor Mike now employs garbage inspectors? I can't believe it!

Bessemer's 10 Laws of eCommerce

A few years ago, my Bessemer colleagues Byron Deeter, Philippe Botteri (blog) and David Cowan (blog) led and synthesized a lot of our firm-wide views on what it takes to build a great software as a service (SaaS) business. They have since published several versions of a white paper entitled Bessemer's 10 Laws of Cloud Computing and Saas. Based on the number of press hits, the thankful compliments from SaaS executives, and the quality of the feedback and criticism they received, their effort to "open source" our thinking has been extremely successful.

Given the exceedingly high quality bar set by our colleages, it is with some trepidation that Sarah Tavel and I set out to do something similar for online retailers. We just began publishing (on Sarah's blog), Bessemer's Top 10 Laws of eCommerce, and we intend to share the full paper over the next several weeks.

We welcome your feedback, criticism and, most of all, experience with what believe are the most important rules for building an online retailer.

A belated thank you

When I started leading venture capital investments for Bessemer in 2003, I was scared out of my mind. I suspect a lot of young investors feel similarly. It's incredibly frightening to commit millions of dollars of other people's money to a young (typically loss-generating) startup. There's a good chance you'll never see that money again. It's nerve-racking. I learned to think of the concept of being a "fiduciary" in the following manner: it's actually a lot more painful to lose a bunch of someone else's money than it is to lose your own.

My response to the fear -- which, after nearly a decade in VC, hasn't subsided much at all -- was to start slowly and conservatively. My first investment was $50,000 in a two-person startup called Hypertag. The founders and I decided to shut it down 6 months later, and I got back about $35,000. I felt like crap, and in an effort to cheer me up, one of my partners jokingly told me to think about it as a 70% return. Two of my next investments were much larger but in later-stage companies: Gracenote and Gerson Lehrman Group. Those worked out well and helped to increase my confidence.

A couple of years later, I started to do some "traditional Series A" venture capital deals, which I define as 7-figure investments in companies that have raised no more than a few hundred thousand dollars and have little or no revenues. It's the scariest type of investment one can make because there's enormous risk combined with serious dollars at stake. Of course the tremendous upside justifies the risk, but it can easily take 4 or 5 years to know if a Series A investment was wise or foolish.

After seven and a half years making venture capital investments, I tasted my first Series A success a few weeks ago. The founders preferred not to disclose the news, so we kept it quiet, but somehow the sleuths at TechCrunch got the dirt and published it here.

I helped Fabrice Grinda get started with OLX in early 2006, and after he brought on co-founder Alec Oxenford, I led the Series A financing with General Catalyst's Joel Cutler later that fall. At $10 million, it was a very large first round of capital, and, like every other investment I have made, it was scary.

But Fabrice and Alec are a fantastic tag-team, and it was a pleasure to watch them in action over the last four years. It was also relatively low stress because the business metrics improved almost every single month since the day we invested. When the company's web sites surpassed 100,000,000 unique visitors in a single month earlier this year, I knew some large Internet leaders would soon come calling.

Despite it's $15 billion dollar market cap, I didn't know much about Naspers until recently. They're based in South Africa and have a uniquely global perspective that I've rarely seen in Internet management teams. Naspers proposed a strategic deal to OLX a few months ago that was too compelling to pass up.

It is with mixed feelings that I celebrate my first Series A success. On the one hand, it's nice to earn a profit and see validation of an early-stage conviction. On the other hand, we sold our stake in the company, so I no longer get to work with the talented founders and their star executive team nor will I get to benefit from the upside that lies ahead for OLX. I've become fond of Joel Cutler's comment that as investors, we were "invited guests." Together with the founders, we decided it was time for us to depart.

Now that the news is out, I submit a public statement of gratitude to Fabrice, Alec, Ariel, William, Mark and the many other key contributors. Thank you for all the fun and capital gains!

There's an App For That (on your TV)

Ever since the initial iPhone release in 2007, I assumed Apple would eventually extend its consumer device operating system to televisions. Benchmark's Bill Gurley predicted it here and even included a nice living room mockup.

To date, Apple has only delivered a mediocre tv attachment called Apple TV. Samsung, on the other hand, has delivered the real thing -- a television set on which you can load apps in much the same way you load them on your iPhone. To motivate developers to come up with some creative app ideas for its new line of TVs, Samsung is sponsoring a contest with $500,000 in prize money, and I'm delighted to serve as a judge alongside Mike Maples, Bob Borchers, Roelof Botha and Samsung's own Eric Anderson.

The winners will be announced at CES next January, and I hope to see some cool new concepts.

World's Greatest Cloud Service Provider

Along with several of my colleagues, I am particularly attracted to our cloud computing roadmap, and I spend a fair amount of time exploring related ideas and companies. It came as a bit of a surprise to find that the world's greatest cloud service provider was a virtual unknown just a week ago:




(Credit to my friends at Parallels for sharing this image with me.)

Spam is everywhere, not just in email

About five years ago, I focused on building highly valuable businesses on the back of user-generated content. I led my first related investment in 2005. It was in a San Francisco-based startup called Yelp. Over the following 18 months, I led three other Bessemer investments based on the same fundamental roadmap: Wikia, OLX and LinkedIn.

One nice thing about the roadmap approach to investing is that when you discover a compelling roadmap, follow it and identify talented entrepreneurs who share your conviction, you end up investing in some great companies. LinkedIn, Wikia and Yelp are each now among the top-100 ranked websites by Quantcast. It's a bit harder to measure the size of OLX because it’s largely used by consumers outside the USA across several domains (http://www.olx.com.br, http://www.olx.pt, http://www.olx.ru and many others), but it is probably the largest site in my portfolio and reached more than 100,000,000 unique visitors last month. As satisfying as the success these companies have had pleasing consumers is that that each has a proven, working business model. I wish all of my investment roadmaps were as productive as the one based on user-generated content.

But it's not all happiness in user-generated content land. There are lots of challenges with it, and perhaps at the top of the list is that you don't actually control your site's content. That leads to troublesome spam.

Spam at Wikia

Wikia is a giant collection of wikis that anyone can edit. I think it was about a month after we invested that one my colleagues rushed into my office to ask when I last visited Wikia's home page. Without hesitation, I pulled up the site and was greeted by a massive image of two naked adults exploring one of the more creative entries in the Kama Sutra. Sadly, it feels as though for every well-meaning Internet consumer, there's at least one evildoer. (The ratio is probably much better than 1:1, but the evildoers each seem to make the "contributions" of 10 or even 100 people, and so the "effective" ratio is probably much worse than 1:1.)

Spam at OLX

OLX provides free classified sites in almost 50 languages in 100 countries around the world. They now collect more than 100,000 new free postings every day. These posts advertise the likes of a used car for sale, an apartment for rent or a job opening. Incredibly, OLX's computer algorithms automatically tag 50% of those new postings as spam and delete them immediately. FIFTY percent! Even more incredible is that OLX tunes its algorithm to be extremely conservative: if it might not be spam, they don't delete it. Once the computers are done reviewing the content, a crack team of customer service agents in Buenos Aires manually reviews every remaining post. The human reviewers end up tagging half of what's left as spam too! That means for every useful post, there are three pieces of spam. Left unchecked, the spammers would completely destroy the utility of OLX because you'd have to wade through gobs of crap to find real posts.

Spam at Yelp
Yelp is a site where consumers post their subjective reviews of local businesses. Yelp identified the spam problem early in its development, and came up with a highly effective way to filter out spam on its site. Spam in the context of Yelp is most often a shill review written to make a particular business look great or (its competitor's look horrible). The sentiment embedded in Yelp reviews about most local establishments feels real because most of the spam has been removed. The opacity of Yelp's spam filter frustrated a number of business owners, and so Yelp just launched a new feature to let consumers look at the reviews that were automatically removed.

The result is amazing. In a random sample of business profile pages I just visited on Yelp, the "filtered" reviews account for anywhere from 10% to 50% of the total! Much of the spam is truly shameless. My favorite reaction to Yelp's new feature was from The Next Web, and it's priceless:

Looking through the reviews that Yelp’s algorithm filtered out brings to mind a single thought: ‘Wow. It’s like viewing Yelp through Citysearch goggles.’

Everyone knows that not a day goes by when spam doesn't invade our email inboxes. We use filters and other defenses to prevent spam from destroying the utility of email. It is less obvious that, if left unchecked, spam would also destroy many of the most useful properties on the Internet. Thankfully, some of the best user-generated content sites have developed sophisticated techniques to keep the spam at bay. Let's just hope they keep innovating fast enough to stay a step ahead of the bad guys.

Leaders Can Fall Fast on the Internet

Just a few years ago, the industry-leading incumbent in the Internet local search category was IAC's CitySearch.com. It had an apparently unassailable position in local search with no meaningful competition.

Well, times have changed. San Francisco Mayor Gavin Newsome gave a speech earlier this afternoon during which he mentioned a number of leading Internet companies such as Google, Twitter, Yelp and eh, er, um, one other which he couldn't quite remember.

New year, new blogs to read

Over the last few months, I added three new blogs to my reading list, and they're all related to venture capital and entrepreneurship.  Some are not new, but they're new to me, and I think they're all worthy of a regular reading.  Let's hope the respective authors each do a better job posting fresh content than I have been doing.

Jeremy Stoppelman, a founder and the CEO of Yelp, is offering up a smorgasbord of book reviews, humor, and observations as an entrepreneur on his relatively new blog.

Adam Fisher, one of my partners at Bessemer and the leader of our Israel office, started Savants in the Levant to blog about VC, entrepreneurship and politics with an occasional Israeli bent.

And last, but not least, Brian Feinstein, one of my Bessemer colleagues in New York, already has a year's worth of great posts on topics ranging from startup lessons to market opportunities on his blog.

The NY Times Says Yelp has Arrived

It's not often that the venerable New York Times publishes a glowing piece on one of my portfolio companies. This is a welcome bit of good cheer amidst the backdrop of a generally gloomy economy.  When I invested in the young company founded by Jeremy S. and Russ S. back in 2005, Yelp had attracted about 100,000 San Franciscans to its site.  Today, with more than 15,000,000 monthly visitors, it seems to have "come of age" -- at least enough to get serious coverage from the NY Times.  Yelp has more or less been a household name in Silicon Valley for a couple of years already, but I'm especially excited to see it turning heads now in New York as well.  

As the article points out, Yelp is not just about restaurants. It's good for everything from hair salons to insurance brokers. The courageous Megan C. even used Yelp to share thoughts on the doctor that performed her anatomical modification. Now that's what I call broad coverage.

Among the many reasons Yelp is succeeding is that it easily passes the multiple choice test for consumer internet startups that I blogged about 18 months ago.  Later this week, I'm hoping to post a similar multiple choice test for enterprise software companies, though I don't anticipate success with that test will lead to any articles in the NY Times Dining Section.

Humor without the lies, please

I admit that I'm a frequent reader of Valleywag, a low-brow blog full of silicon valley gossip.  It's often pretty funny, and I know many of the people referenced in the stories, which only adds to the entertainment value.

Last week, however, the blog ran an entry containing a fabricated story.  The entry was meant to embarrass Jimmy Wales, an entrepreneur we backed two years ago.  If there is such a thing as an Internet celebrity, Jimmy is surely one of them, so he is accustomed to being attacked by web "journalists" -- particularly those at The Register, where they seem to attack him on a daily basis.  If he read the Valleywag piece, I'm sure he just shrugged it off.  But since the piece referred to me, I would like to set the record straight.   

A few months after we invested in his company, Jimmy transitioned from CEO to full-time executive Chairman, and he and I were fortunate to recruit Gil Penchina, a long-time eBay executive, to assume the CEO role.  Valleywag reported some nonsense about Jimmy getting fired because of a bogus expense report. Nothing could be farther from the truth.

If it weren't enough that Jimmy founded Wikipedia and Wikia, he impressed me even more so a few weeks ago when he volunteered to forgo his Wikia salary to maximize the company's flexibility during this lousy economy. I wonder how many Valleywag staffers would ever consider such a sacrifice.

I hope Valleywag continues to entertain readers with witty observations and curious photos, but I wish its writers would substantiate offensive claims before clicking the "publish" button.  I wonder how many times I have laughed at fabricated Valleywag stories in the past.  Now I know to laugh but not to believe.

Portfolio Company Politics

I got nervous today when I heard one of my consumer internet portfolio companies had posted a political advertisement on YouTube. It seemed obvious to me that any consumer company is likely to alienate half of its customer base by making a political statement. No matter how well-executed the ad, it is guaranteed to hurt business as much as it helps.

It appears that I may have jumped too quickly to a conclusion.  This is the first political ad I have seen that appeals to both Democrats and Republicans.

Money fears

Doesn't this new version of the dollar bill do a perfect job capturing the essence of the Treasury Department's current state of mind?

Oh my Goldman

I got a first-hand sense of how badly Goldman Sachs felt the pressure of the crumbling financial markets this morning.   

At the start of a private company's board meeting I was attending, a director received a call on his cell phone.  One member of the board had not yet arrived, so the director answered the call in case it was the missing attendee.  He dispatched with the caller after about a minute.

The caller turned out to be his broker from Goldman Sachs who was calling to relay a simple message: If Goldman goes under, don't worry, your assets will still be safe.

I almost fell out of my chair.  The senior executives at Goldman decided the perceived threat to the investment bank was so great that they instructed brokers to call clients proactively to address concerns about the company's failure.  Wow.

He has no credibility, but I think he's 100% correct

For several months now, I have been privately telling anyone willing to listen that search advertising, though incredibly effective, is over rated. At first glance, it would appear that advertising to someone in context of his search activity is an utter utopia for marketers. What better time to advertise a DVD player, for example, than when a consumer types "DVD player" into Google's search box. I agree that in context advertising is as close to utopia as marketers will ever get, but they cannot ignore their other marketing efforts.

What many search advertisers are failing to consider is the impact all their other marketing spend has on their search spend. Back to my example: when you search for "DVD player" on Google, there's a reason why you're 100 times more likely to click on a link to Samsung rather than a link to Apex. For starters, you have heard of Samsung but you've probably never heard of Apex. Second, when you researched various DVD players over the prior few days, you read a lot of positive reviews about the Samsung product but saw next to nothing on the Apex product. Finally, Samsung has a high-tech, high-quality brand. Apex has a cheap, made in a low quality way kind of brand.

Today Bloomberg news reported that Brian McAndrews, an executive at Microsoft, predicts ad buyers will switch away from search advertising and towards display advertising. At face value, it looks like a desperate attempt from Microsoft, which is badly trailing Google in search, to pooh-pooh the segment where it is weak and try to persuade advertisers that banner ads are more important. It's definitely a convenient argument given Microsoft's massive quantity of unsold banner ad inventory and weak search market share.

However, there is an element of truth in the statement. Advertisers are failing to examine the impact their non-search advertising is having on search. They are attributing all of their advertising success to search simply because it is usually the last ad seen by a user before the purchase. Just because it's the last ad doesn't mean it's the only (or even most) important one.

What advertisers need -- and what I would like to invest in -- is a company offering a web-based analytic product that helps bring banner ads, email marketing and search marketing all into a single dashboard/framework. It would allow an advertiser to measure the impact of increased banner advertising on the efficacy of its search marketing. In other words, the tool would allow advertisers to properly measure and allocate performance across ad media.

I have yet to come across such a product. Have you?

What are you reading?

I always like to know what smart, tech types include in their daily reading. Yesterday, I learned that a very successful entrepreneur (and good friend of mine) named Chris Dixon put up a web site with links to a few dozen of his favorite blogs and websites, and this afternoon I finally got around to studying the list. I have been particularly curious to know what Chris reads because he always seems to know about the latest new idea at least a few weeks before I find out about it, and when I do finally learn about the new, new thing, it's often Chris that tells me about it.

I already knew about many of the links on Chris' new web page, but as expected there were a few gems that I hadn't yet discovered. I hope he keeps this up-to-date. Maybe it's time for someone launch a meta RSS feeder so I can get a feed of changes to other people's RSS readers.

My Click Fraud Theory

With the astounding growth of auction-based pay-per-click (PPC) advertising led by Google and Yahoo over the past several years, there is a great deal of discussion about click fraud. I think most people are completely missing the point. Those who are complaining about the issue really have nothing to complain about. Bizarrely, those who are getting screwed haven’t even uttered a peep.

Click fraud takes place when someone clicks on a PPC ad with no real intent of actually following the link. The result, of course, is that an advertiser has to pay for a bogus click. Many advertisers are complaining about being charged for bogus clicks and are even demanding refunds. Somehow they managed to force Yahoo to settle a lawsuit for about $5 million and Google actually coughed up $90 million in a similar instance.

This baffles me because any reasonably sophisticated advertiser shouldn’t really care about click fraud. Why? Because if they’re using any of the dozens of off-the-shelf tools to measure their PPC ad conversion rates, they would be automatically lowering their PPC bids to maintain an acceptable ROI. An advertiser simply shouldn’t care if he pays $1 per click for 10 clicks that yield 10% conversion and a single customer or if he pays $0.50 per click for 20 clicks that yield 5% conversion and a single customer. In either case, the advertiser has paid $10 to land a new customer.

Given the real-time tracking capabilities inherent in auction-based PPC, click fraud gets priced into the equation automatically. In my example above, the bogus clicks drove conversion down by 50% (from 10% to 5%), and advertisers adjusted their bids from $1 to $0.50 per click. Yes, in theory the advertiser may suffer temporarily from fraudulent clicks before he has a chance to adjust his bid downward to compensate for the lower conversion rate, but today’s automated systems figure this out pretty quickly. Any real damage to the advertiser is inconsequential.

So why are advertisers complaining? I don’t get it. Perhaps they haven’t all figured out how easy it is to use tools from search engine marketing (SEM) experts such as Efficient Frontier, SearchRev, iCrossing, iProspect (or many, many others). These SEM experts offer reasonably cheap software to solve the problem through automated bidding.

Perhaps some advertisers believe only their ads are being clicked fraudulently. Click fraud targeting a specific advertiser, does, in fact, hurt that advertiser. He can reduce his bid to maintain his conversion rate and ROI, but now he will get a much lower number of clicks because his competitors can afford to bid higher if they aren't suffering from the same click fraud. Though I acknowledge that advertiser-targeted click fraud is possible, I believe most click fraudsters are just trying to make money for a certain publisher rather than trying to deplete the ad budget of a certain competitor. So, I'm at a loss to explain why advertisers seem to care so much about click fraud.

Even more confounding, however, is that the companies who are really getting screwed haven't started screaming about it. In fact, we haven't heard anything from them. The companies on the losing end of click fraud are high quality web site publishers. When an unscrupulous publisher engages in click fraud to increase revenues, the result is reduced conversion rates for advertisers, who, naturally, lower their bids. Because of the way most advertisers participate in Google and Yahoo PPC auctions, when they reduce their bids, the reduction applies to every publisher in the Google and Yahoo networks.

If publisher A is engaging in click fraud, which causes lower PPC bids from advertisers, publisher B gets screwed. Publisher B doesn't generate any additional clicks, but now he's getting less revenue for each click. In a sense, publisher A just stole money from publisher B. My theory is that the publisher getting screwed the most is probably AOL.

I suppose it's not too surprising that high quality publishers aren't complaining because it's virtually impossible to detect this phenomenon. This is especially true because Google provides publishers with such a minimal amount of information about their advertising performance. Perhaps one reason Google is holding on so tightly to the lack of transparency in its system relates to keeping click fraud off the agenda of high quality publishers.