I wrote about Club Penguin a few times in the past (here and here) and it looks like Mike Montgomery at Montgomery and Co was able to find an even better buyer than Sony, DIsney for $350mm in cash and potentially $350mm more in an earnout (see Paidcontent for more). That is pretty impressive for a company that raised money from friends, family, and angels and would not take any venture money despite my best efforts and many other VCs. It is amazing that Lane and team were able to ramp the business up in 24 months to over $60mm in projected revenue and $30mm in projected 2007 profits. That is one capital efficient business and goes to show that many times spending your way to success is not the answer. Anyway, my children seem to be on to some pretty big ideas as they pointed this out to me awhile back. Given that they have been spending more and more time on Webkinz, I wonder what Ganz will do with that property – potential spinout and IPO or rollup strategy or just outright sale?
Congratulations to the Answers.com team on the announcement of this deal! Since I am a board member and it is a public company (NASDAQ: ANSW), there is not much commentary I can add except that I wholeheartedly agree with Bob Rosenschein’s assessment of the transaction (see press release):
"The acquisition of Lexico is a transformative event for us," explained Robert S. Rosenschein, Chairman and CEO of Answers Corporation. "We are excited about applying our experience in monetization to significantly increase Lexico’s 2008 revenues and EBITDA. Lexico’s suite of popular brands, steady direct traffic and loyal users are valuable assets that we believe will reduce our products’ reliance on search engine-driven traffic. Post-transaction, we estimate that over 70% of our total traffic will now be direct from end users or people searching specifically for the term ‘dictionary’ in search engines. Our combined size and available ad inventory should provide greater exposure among online media buyers, which we expect will lead to increased advertising sales."
As I have mentioned in earlier posts, scale matters in the Internet space and becoming a Top 28 web property in the US (according to our combined 22.5m monthly unique visitors in June based on Comscore) will provide the company with an even better opportunity to monetize our reach.
If you are interested in learning more, here are a couple of other highlights from the press release:
Lexico is a leading online provider of reference products and services, which attracted approximately 11.5 million unique monthly users in the U.S. during the month of June 2007, according to comScore Media Metrix.
Lexico is a highly profitable company that strongly complements Answers’ user base. In 2006, it generated revenues of $7 million, EBITDA of $2.9 million and net income of $2.8 million. This strategic acquisition drives Answers to a leadership position in online information publishing.
Key benefits of the acquisition include:
– Page Views: Lexico’s Web properties currently generate approximately three times the total page views of Answers.com.
– Monetization: Lexico’s Web properties currently monetize at approximately one-third the rate of Answers.com, presenting material revenue upside.
– Direct Traffic: Over 85% of Lexico’s traffic is direct from end users or people searching specifically for the term "dictionary" in search engines. The resulting shift in traffic mix should significantly reduce Answers.com’s current reliance on search engine algorithms.
– Market Leadership: Based on the June 2007 comScore data, the addition of Lexico’s Web properties will increase Answers reach to over 22.5 million monthly unique users, which would rank #28 in the top U.S. properties.
I signed up for LinkedIn in mid-2003, and since then I have not been very active on the service other than accepting invites as they came to my inbox. Over the last couple of weeks, I have noticed a significant increase in the number of requests from friends and colleagues and interestingly most of them are not from the technology industry. It is clear to me with over 10mm users worldwide that LinkedIn has crossed the proverbial chasm. The company has clearly done a great job creating a strong revenue model around social networking and leveraging the technology industry to get started, but as I see more and more mainstream users join the service I wonder how big it can get and how it will play against the other players in the space. LinkedIn has repeatedly stated that it believes people will have two profiles, one professional that is maintained on LinkedIn and one personal which is maintained on MySpace or Facebook. I don’t doubt that at this time, but I must admit that while Facebook has mostly been about friends and personal relationships, I have been surprised at the number of professional and business contacts wanting to add me as a friend on Facebook ever since it opened up its platform. It will be interesting to see how these two services grow, how the boundary between friend and professional contact continues to blur for the professional, and whether Facebook makes a concerted effort to enter into LinkedIn’s turf. For example, why couldn’t I maintain one profile on Facebook and only share the professional information with those in that network and the personal with those in another? Expanding that thought, wouldn’t it be great if there was a metaservice where you only maintained one user profile and you could check off which details were fed into which different social networks. I would love to hear your thoughts on the subject.
The kids space is hot. Techcrunch just reported on rumors that Montgomery and Co or Monty was working with Club Penguin on a sale to Sony for $500 million. Montgomery is the same investment bank responsible for selling Intermix (MySpace) to NewsCorp and Grouper to Sony so they have been building a nice practice in the Internet and digital media sectors. As for the price tag, $500mm is pretty big money (I have heard ranges of $250-500) but according to Techcrunch the company projects around $65mm in revenue with $35mm in profit. No wonder why the company didn’t need my angel or VC money :-). If most of this revenue comes from subscriptions at $6 per month or $60 per year for upfront commitments, using a blended rate of $65 annually, you get around 1mm paying subscribers (this is simple math and does not take into account growth and ramp). Not bad for a company that was started by 3 dads. As I mention in an earlier post, virtual worlds are hear to stay and there will be a number of acquisitions in the space over the next couple of years. In my household, Webkinz has taken the top spot. It will be interesting to see what Ganz, a privately held company in Toronto, does with this fast growing property. I can think of lots of ways it can further build out Webkinz and also monetize the community without losing its appeal and innocence.
Congratulations to my friend Gary Vaynerchuk of the Wine Library for his acquisition of Cork’d (see Mashable and the Alarm Clock for coverage). When I had dinner with Gary a few months ago we talked about how the next big opportunity for e-commerce was to weave social networking and blogging tools into the existing infrastructure to directly drive transactions (see excerpt below from an earlier post on social shopping).
The next step in this evolution of commerce will be social shopping or companies leveraging Citizen’s Media (blogs, podcasts, videocasts, tagging) to drive commerce. According to Answers.com, "Social Shopping is based on the principles outlined in the wisdom of crowds where a large group of users can recommend products to each other and between them work out what to buy and which ones have the most buzz." I believe this is an interesting area that has not been fully tapped yet. At the root of it, people want to connect. Most people I know tend to check the Internet first to research a purchase and also ask friends for recommendations or reviews about products. The more inefficient a market is, the more opportunity there is to educate consumers and peers leveraging the web.
While the Alarm Clock calls this a roll up in the wine space, I view this as the beginnings of the return of the 3 Cs (content, community, and commerce) with a year 2007 flair. Speaking of the 3 Cs, I also noticed that Amazon bought dpreview yesterday, a leading provider of digital camera reviews and information. Amazon acquiring a content site may sound odd but we must remember that one of Amazon’s competitive advantages is its huge database of consumer reviews. As commerce sites begin to recognize the value of content and community again, I wonder who is next on the hit list?
The rumors of a pending Microsoft-Yahoo deal are out in the market again today (see NYPost and Techmeme). Who knows if it will happen but rest assured if it did, Microsoft would be in a pretty good position to take on Google with Yahoo’s user and advertising base combined with Microsoft’s strength in development tools and aggressive strategy to go grassroots and emerge as the platform of choice to build next generation web sites and applications. All that being said, let’s take a moment to think about what this would mean for entrepreneurs.
It is pretty clear what is happening in the market today – Google is dominating and the Internet advertising game is a game of scale. The bigger you are the more opportunities you have to increase your lead – more users equals more data equals better targeting equals more money per click. In addition with lots of inventory and excellent targeting, it is easier to attract more advertisers. And as we all know, much of this whole Web 2.0 (yeah-I hate that term) world is based on advertising, advertising from Google AdSense and other partners. Why not outsource your whole ad sales team as you can get a pretty good deal from Google without any operating expenses? If you do the math, startups really do need a fair amount of traffic to merit hiring its own internal ad sales team. Consequently, we have seen tons of web startups launch over the years as it is really cheap to build a web-based product and costs no upfront capital to start generating revenue.
I am not sure about your own analysis but based on a number of portfolio companies, I can tell you that Google Adsense delivers the best results bar none in terms of generating revenue. In a world without a combined Microsoft-Yahoo, it is pretty clear that Google will only get stronger leaving it with a virtual monopoly in the online ad game. And as you know, monopolies over time take advantage of their position by changing pricing in their favor. I am sure every company that is generating money from Google Adsense worries about the day when the revenue splits could change. So on the positive side, a combined Microsoft-Yahoo would hopefully give startups another real alternative to Google Adsense as the combined entity would have real scale like Google and therefore the ability to deliver Google like results. On the negative side, a combination would mean that there is one less aggressive acquirer on the market. So if the Internet ad game is one of scale, you can bet that in the future there will be a high likelihood of further consolidation. What this means is that entrepreneurs who are starting companies to be acquired better think twice as their chances of winning the lottery will diminish with time. What this also means is that entrepreneurs need to start companies for the right reason and focus on building a real business versus the quick flip.
The alarm bells are ringing in the web world (see the Techmeme discussion) – one of the gorillas in the space is flexing its muscle and protecting its turf as MySpace is preventing Photobucket photos and videos from appearing on its site. As Om Malik mentions, this happened once before and I am sure the MySpace folks have done some hard thinking about whether or not their users will vote with their feet and leave, and if they do, what kind of impact it will have on its business. I guess they figure it won’t be too large of an impact for them. Anyway, all of this is not a surprise as this is the way business works. Forget about Web 2.0, this is Business 2.0 (ok, someone else already has the trademark). The world of openness is only open so much because if you get to0 big and threaten someone’s turf and livelihood, guess what…they will fight back. I put a timely post up two days ago titled "Why Startups Must Control Their Own Destiny." The point is that the only person you can really rely on is yourself and in this world of mashups, widgets, and open APIs, distribution is easy…getting money is hard. Well guess what-distribution via widgets on MySpace was relatively frictionless, but now that Photobucket is a serious player, the Gorilla is fighting back and that is just the way the world works. I am not saying that you should not leverage free distribution, but that you should prepare yourself for the day that it may disappear. In one of my portfolio companies we have a saying, "Google giveth and Google taketh away." The point is you should take a hard look at your business, and if you are too dependent on any one partner or distribution method, you should stay awake every night thinking about how to diversify your business. And for those who built their business off of one partner and think they are worth hundreds of millions or billions of dollars, I can assure you that if that one partner is not buying you, there will be appropriate discounts paid to your business based on the fact that the acquiring company’s competitor could shut your lifeline off tomorrow. Yeah, this is nasty stuff, but this is business and companies need to make money.
As a VC that invests in early stage companies, part of my job is to discover new opportunities and business models. While much of today’s online and social networking growth is being driven by teens and college students, very rarely do I get the opportunity to learn about interesting companies through the eyes of my young children. It started about 6 months ago, when my son came home from school talking about a build-your-own penguin site. He did not know the web address, but said it was a cool place to create your own penguin, play games online, and earn points to further dress up your penguin. He also said that we had to sign up and pay to become a member and kept asking me to visit. After doing some diligence, I found ClubPenguin, created my own penguin, and discovered that it is basically like second life for kids – a virtual world of penguins designed for kids to interact in a safe manner. While the stated target demographic is for 8-14 year olds, I suspect that the user base is much younger. To its credit, it has built in some nice safeguards for privacy with the ability to limit chat to precanned menu items and parental involvement in the signup process. If you log into the site right after school, you can see a number of overloaded servers where penguins are living in a virtual world, earning points to decorate their igloo, playing games with others, and socially interacting. Luckily most of my children’s time is spent doing their own things and less on the social networking aspect of the community.
Within weeks of that discovery, the next big thing in our house became Webkinz. Webkinz is another virtual world for kids but with a twist. You have to buy a stuffed animal and on that pet there is a special code you enter to bring your animal to life on the web. I must say that Webkinz is also brilliant and well done. My kids wake up in the morning asking to log on to feed their pet before they go to school and to also earn some kinzcash to decorate their rooms. Kids can earn kinzcash by answering math and educational questions, playing games, and answering surveys. In addition, you can add friends to your buddy list and invite them to your room to interact. So far Webkinz strikes the happy balance between being a fun and entertaining place for kids without too much marketing. I could envision down the line branded items for sale through the W Shop but for now the site is just selling generic stuff.
Together both of these sites have become the hottest destinations on the web for young kids. As a VC, the big question I have is what is the staying power of sites targeted towards young children as we all know that children are fickle and trend-oriented. In addition, I am paying close attention to the revenue model as it has been notoriously hard to extract dollars from kids. For now, ClubPenguin earns cash through the premium model having free users pay a monthly or annual fee for the special privilege to customize and buy items for their penguins. Webkinz seems to make its money from selling the real stuffed animal which has a virtual equivalent. It also manages its product line and inventory closely by constantly developing new pets so kids can have multiple pets/adoptions. In fact, to further encourage purchasing of new pets with every 10 adoptions kids earn a "priceless" prize for their room. All I know is that based on an informal poll I have taken amongst my children’s friends that the penetration of these services is quite high and most users are paying users. And so far through the eyes of my children I can see that the more time they invest in these services the harder it is to extract them. So from this standpoint there may be some staying power for both services. As a parent, the big question I have is are my kids too young to be on these virtual worlds and what am I socializing them for in the future. Where do they graduate to after they tire of ClubPenguin and Webkinz? Being a technology VC, I would be a complete hypocrite if I did not let my children try these services. While I do question how early is too early, ultimately I have come to recognize that this is the world that my children live in and the best thing I can do is monitor closely, teach them what is real and not, and make sure to constantly educate them in terms of safe web practice. In addition, there are some educational benefits as well pushing my kids to read and do math. I know their world today is much different from mine when they tell me to go to Answers.com (full disclosure-I am a board member) or Google to get more information.
Given these factors, it is pretty clear that there will be more virtual worlds for kids created. From an exit standpoint, I wouldn’t be surprised if one or both of these web properties eventually gets bought by Fox Interactive Media or Disney as a way to reach this young, impressionable demographic, develop brand relationships early in life, and upsell them on various social networking options as they get older. It is also important for us to realize that we are still just in the second inning when it comes to new advertising models. All of the groundwork we are laying to reach today’s teens and young adults is just the beginning and my question is how will the world look 10 years from now when today’s 5 year olds are 15 and todays 10 year olds are 20. What will be the best channel to reach them and with what kind of message and in what medium? I can bet that wireless will definitely be one big component of that. Striking a balance, the parent in me will ask how will we be able to protect our children (to the extent that we need to) from overcommercialization and other security issues (this is a huge topic that can be addressed at a later time)? I don’t have any answers now, but trust me I have a vested interest in monitoring this space carefully for multiple reasons. I would love to hear your thoughts and opinions on this as well.
Matt Marshall (amazing how he does it!) recently broke the news on my fund’s (Dawntreader Ventures) latest investment which is still in stealth mode. Now that the news is out, all I can say is that there is tons of data on the web, most of which is unstructured, and that the company, Peer39, has some serious algorithmic technology which can help mine that information and boost "conversion rates" dramatically for advertising as Matt succinctly describes. Matt correctly updated that Dan Ciporin, the former CEO of Shopping.com, is not a founder but a seed investor and board member of the company. Amiad Solomon is the founder and my two colleagues, Ned Carlson (who will be on the board) and Sang Ahn (not Dan Ahn) were leading the deal from our end. I know – having stealth companies is a pain, but we were truly trying to keep the company under wraps until we rolled out our beta system later this year. What we love about the model is that with some proprietary algorithms we believe we can turn just plain data into real usable information to dramatically improve the effectiveness of advertising, and that as a fund we believe there are many more opportunities on the web to take unstructured data, apply some algorithms, and turn it into real valuable information. The other beauty is that if we execute correctly, it is an extremely scalable and capital efficient business. More to follow and thanks to Matt for breaking the news…
We all know that there is something different this time about the web startup market. As I have written before, it costs next to nothing to get a service on the web (look at MyBlogLog as an example), the market is much bigger as broadband penetration has grown from 10% to 50% over the last 5 years, and I hope that we have all gotten more prudent with the amount of funding that startups initially need to get their service up and running. This cuts both ways as a lower barrier to starting a company means a lot more competition in each market. Given that, it is not surprising to me that a number of startups that have raised money over the last 12 months seem to be making the news in the blogosphere for laying off staff or even (GASP) going out of business. The timing seems about right – startups raise about 12-18 months of cash to hit some key milestones and then either go out for more funding, get acquired or go out of business. Until now, most of the news was centered around the first two paths. So it is inevitable that we will hear about failures especially as management teams and investors make the hard decision to pull the plug early rather than plod along. This also may mean that rationality is still with us as people understand that funding the 30th tagging site or 50th video site may not be the best use of capital.
If there are always going to be 1-3 winners in a space, then more competitors equals more failures. Combine this with the fact that this new resurgence of web startups is much more publicized and transparent than the first generation. So more startups and more news outlets and blogs means that we are only going to hear more and more bad news in 2007. That’s ok. We have to remember that in the echo chamber of the blogosphere, this news of death and layoffs seems to reverberate quite loudly. Just because we hear about it and hear about it from more sources does not mean that the sky is falling. From my perspective, this is no different than the past. Startups are risky and a number won’t make it but some will hit it big. In addition, startups have to be flexible and more often than not their business models will adapt once they are out in the market which means a layoff or two may happen.
This reminds of the scene from the movie Monty Python and The Holy Grail where the dead collector comes through town to clean up the streets. As he pushes his cart through the town, people start piling up dead bodies. However, one seemingly dead body claims he isn’t dead. The same goes for web startups – we will see more bad news but that does not mean the market is over. It also doesn’t mean that we shouldn’t write about the failures as we can all learn from them.
Here is an excerpt from the movie:
The Dead Collector: Bring out yer dead.
[a man puts a body on the cart]
Large Man with Dead Body: Here’s one.
The Dead Collector: That’ll be ninepence.
The Dead Body That Claims It Isn’t: I’m not dead.
The Dead Collector: What?
Large Man with Dead Body: Nothing. There’s your ninepence.
The Dead Body That Claims It Isn’t: I’m not dead.
The Dead Collector: ‘Ere, he says he’s not dead.
Large Man with Dead Body: Yes he is.
The Dead Body That Claims It Isn’t: I’m not.
The Dead Collector: He isn’t.
Large Man with Dead Body: Well, he will be soon, he’s very ill.
The Dead Body That Claims It Isn’t: I’m getting better.
Large Man with Dead Body: No you’re not, you’ll be stone dead in a moment.
Just to be clear, the fact that it seems like more and more startups are running into hard times does not mean that the market is in serious trouble. And while I believe the failure rate may be even higher in this go round, I also expect that the dollars lost per failure will be orders of magnitude lower than in the first Internet wave. When the 30th tagging site or 50th video site have hard times, that is not cause for alarm. What will scare me is if we start seeing more unproven startups raise significant amounts of first round capital at frothy valuations and spend it on Super Bowl commercials or if Google starts to hit the skids.