The "free" business model

Chris Anderson does a nice job of summarizing the rise of the "free" business model starting with the Razor/razor blade to the world of the web where he argues that all services eventually get priced at their marginal cost. And as Chris rightly describes, that price is quickly going to zero in a world of technology where Moore’s Law continues to hold and where storage costs are declining rapidly. 

Among the many great examples in Chris’ article, the one paragraph that stood out most for me follows:

There is, presumably, a limited supply of reputation and attention in the world at any point in time. These are the new scarcities — and the world of free exists mostly to acquire these valuable assets for the sake of a business model to be identified later. Free shifts the economy from a focus on only that which can be quantified in dollars and cents to a more realistic accounting of all the things we truly value today.

In a world where everything is free, what is the most valuable asset?  I couldn’t agree more that "attention" and "time" are two scarcities that every company offering "free" services has to overcome.  There is only so much time in the day for all of us to join another social network, add a new widget, and try out a new web service. And this fight is not only for a consumer’s web time but for their overall leisure time – time to spend with their family, time for sports, and time for entertainment.  Given this competition for such a finite resource, you better have something incredible for me to try which will either provide awesome entertainment or provide an awesome utility that gives me a 10x improvement over existing ways of doing things.  Without that, I am sure you will get people to sign up and try your service, but I doubt you will have many active users 6-12 months down the line.

And my final point is that "free" is great and what consumers expect many times, but at some point in time dollars do have to come from somewhere whether it be venture capitalists (who will surely expect a big return on their investment), advertisers who will expect the same, or some other source of capital to sustain the business.  So in concept I agree with the notion that the world is getting cheaper by the second, but on the other hand don’t forget Chris’ points that free only means that dollars do eventually have to come from somewhere to pay the bills.  Oh yeah, one other point-as we move to this world of free, there will be lots of carnage and the road will be littered with many dead companies, as only a small percentage in a growing pie will be able to make this model work and viably consume your time and attention to deliver the money.

Top tech M&A advisors for 2007

I just got the 451 Group’s summary on the top M&A bankers for 2007.  As with 2006, Goldman Sachs was #1 on the list.  Take a look:

Top five overall advisers, 2007


Adviser Deal value Deal volume 2006 ranking
Goldman Sachs $79bn 43 1
Credit Suisse $75bn 29 3
Morgan Stanley $74bn 29 6
Citigroup $61bn 23 5
Lehman Brothers $56bn 21 4

Of course if you break down the numbers, you can see that the average deal size for all of these banks range from $1.75 to 2.75 billion.  Let me translate back for the startup community.  As I have written before, I am a firm believer that companies are bought, and not sold (see an earlier post).  In other words, I am not a fan of hiring a banker to shop a company around but rather find it better when a portfolio company receives an unsolicited offer and you then bring a banker in to leverage that bid to create a more competitive situation.  Assuming you are in this position, every startup I know says, "Let’s go get Goldman or Morgan Stanley."  While in theory we would all love to have these guys as advisors, the chances are that you are not going to get them on board.  First, they typically have high minimum thresholds of exit value typically in the $300mm plus range and secondly even if you fit that criteria you may not get all of the attention you need since a $5 or $10 billion dollar will clearly trump yours.  What I would advise is that you find a banker that has the recent experience selling companies in a price range that you are seeking, will give you the PERSONAL attention that you need to make the transaction successful, and has the network to reach out to the right people on a timely basis.  Based on my experience, I have found that some of the firms like Thomas Weisel Partners and Jefferies Broadview who are not bulge bracket but with strong reputations in the technology markets can be a good fit.  I am sure there are many other great firms that I am missing but you get the idea.

What a Microsoft Yahoo deal would mean for startups (continued)

What a great move by Microsoft! This has been floating around for awhile and the last time I wrote about it was in May of 2007. Anyway, I thought I bought at the bottom for Yahoo months ago in which case it fell another 25% from there. When I saw the news this morning I was quite happy to sell my shares and make a slight profit. As we all know when it comes to the Internet and advertising, scale matters. What this potential deal could mean for startups are two things. One, when Microsoft finally integrates its 3 or more advertising platforms with Aquantive, adcenter, and Panama, they may just be able to offer startups a decent or even better alternative to using Google Adsense to monetize their inventory. Secondly, that huge collective sigh you are hearing is one that is based on the fact that there will be one less independent multi-billion dollar acquirer for the thousands of startups out there. In fact, this integration could take awhile and take Microsoft out of the running in the near term as well. So if you are a startup depending on a quick flip, I would do what you were always supposed to do – focus on your fundamentals and figure out how to build a real business. In addition, given the uncertain economy, I would be very careful on ramping up your business too quickly unless you have the results to justify your growth in fixed costs. Moving on, it will truly be interesting to see how Microsoft integrates Yahoo and what parts of Yahoo it decides to sell like Kelkoo or kill like possibly Zimbra. All I know is that there have been lots of senior Yahoo resumes on the street so it will be interesting to see where they all end up.

Need homework help – try

I got an email from George Cigale, CEO of, yesterday to check out the New York Times article on his company’s service (full disclosure-my fund is an investor in and my partner Dan is on the board).  The article, "On Demand, On Time and for a Fee, an Army of Tutors Appears," highlights Michelle Slatalla’s experience with’s service where her two daughters were able to get instant homework help by going to, logging in, and clicking on their grade level and subject matter to find a qualified instructor.  Thankfully Michelle had a pretty positive experience as we have had time to hone the service and continue to find great tutors as we currently complete thousands of sessions each day.  Anyway, next time your child asks you for help on Algebra, you may want to visit and try another method.  From a thematic point of view, this is another example of how companies can leverage the power of the Internet to offer an on-demand service leveraging a distributed and free agent workforce.  I just love those types of models!

Social networking and ads-who's paying attention?

First of all, Google announced some amazing numbers growing its revenue over 50% and its earnings around 17%.  That being said, investors in Google have high expectations and the stock fell in after hours trading.  One note that many in the blogosphere seemed to pick up on is the higher cost of traffic acquisition from partners and the fact that social networking is not delivering results as expected( read Between the Lines for more)

CFO George Reyes said social networking advertising is not monetizing as expected. When questioned further Sergey Brin, president of technology, said: “We don’t talk about individual partners or anything like that.” Brin noted some things were tried that didn’t pan out. While Brin won’t talk about partners it’s fairly obvious that MySpace is an issue. Google is obligated to pay at least $900 million in minimum revenue guarantees to MySpace through 2010. Later, the question was revisited again. He noted that Google also has Orkut and other social networking partners. “We have an incredible amount of this inventory,” said Brin. “I don’t think we have the killer best way to monetize social networks yet. We have had a lot of experiments (and some disappointments).”

I wouldn’t ring any alarm bells yet for social networking sites in general, but it is clear that there is much work to be done to get these sites to monetize.  We all know that social networking sites mean that people are there to interact with each other, not to click and view ads.  I remember one of our portfolio companies in the early days of the web had automated bots for instant messaging where we could insert ads into the stream of conversation.  It sure sounded like an interesting idea but people just did not care.  They were on the system to IM  not to view ads.   The sames goes with social networking sites.  I do agree with Sergey that there is tons of inventory and much more learning to be done to monetize more effectively.  With that much inventory every penny increase in effectiveness per page means big dollars.  Better and different ways of targeting will surely be one of the keys to understanding if there is a there there in making big dollars from social networking.  That means we should all closely follow MySpace’s hypertargeting ad system to see how it performs for the company over the next year as another data point for advertising effectiveness on social networks.