WTF Yahoo?

Statement of the obvious: landing page optimization is important. Online marketing 101, right? You’d think so, but apparently not if you’re Yahoo.

I was blatantly reminded of this yesterday when I clicked through on a Yahoo email trying to get me to sign up for their daily deals email. The email itself wasn’t that horrible (see figure 1 below). It’s got a clear value prop and a clear call-to-action. But take a look at the landing page (figure 2 below). I felt like I just hopped into my DeLorean time machine and traveled back in time to 1996. Seriously WTF? As a former Yahoo employee I’m rooting for the company to succeed, but seeing stuff like this is unbearable. It makes me sad. Who in their right mind thought this was acceptable? It’s tough to stay relevant in the rapidly changing tech sector when you’ve got employees that don’t care.

Side note: if you’re an online marketer that cares, I recommend checking out ABtests.com. It’s a treasure chest of real world landing page insights. Curious about how YouTube increased their account creation conversion 15.7% from their home page by adjusting their messaging and call-to-action placement? They’ve got it.

figure 1: 

figure 2: 

WTF Yahoo?

IPO pricing

A few weeks ago there was a decent amount of talk in the blogosphere about how the LinkedIn IPO was underpriced by its investment bankers. Henry Blodget was one of the loudest sounding the alarm bells. LinkedIn was screwed out of $175 million dollars! His assertion? The investment bankers intentionally priced the IPO well below where they knew the company was really worth so that they could put more money and profit in the pockets of its institutional clients (investors like Fidelity, Putnam, and countless others).  They knew that it would pop to $94 on the first day and yet they still priced it at $45! What were they thinking? Must be greedy, right?

Continuing on this theme Hank was at it again this week following the Pandora IPO. Finally, a hot tech IPO priced correctly! They priced it at $16 and it closed the first day at $17.42, a fair and reasonable increase of 9%. Perfect!

I find Henry as interesting to read as the next guy, but in this case I think these assertions are a bit misguided. He’s obviously a very smart guy and knows finance very well, but I think the analysis ignores two key facts.

1) It’s not about the first day of trading
Yes, LinkedIn closed on day 1 at $94.25, representing a premium of 109% compared to the $45 issue price, well north of the typical 15% IPO discount. But yesterday – less than a month from its IPO – it closed at $68.27, representing just a 52% premium. Is LinkedIn really worth 28% less than just 4 weeks ago? Did something go horribly wrong with the company? Of course not.

How about the perfectly priced Pandora IPO? Yesterday in it’s second day of trading the stock closed at $13.26, 17% lower than it’s $16 issue price. How do you think Pandora feels about that? Yes, they maximized the proceeds to the company and the selling shareholders, but its long-term shareholders – the ones that didn’t flip the stock on the first day of trading – have now lost money (on paper anyways). It’s not going to make or break the company over the next 10 years, but it’s probably not how you want to start your life as a public company.

2) Retail investor demand is difficult to predict
Hank is also assuming that the investment bank responsible for pricing the IPO knows exactly where a stock will trade once it is available to trade on public markets. After all, as the lead bookrunner of the IPO they get to see the demand. They know what every investor is really willing to pay. They should be able to predict where it will go.

Intuitively that makes sense and it is often the case, but unfortunately when a company that primarily serves consumers completes an IPO you’ll often get lots of aftermarket buying by retail investors. They are users of LinkedIn or users of Pandora. They love the service. They believe in the company. So what if they don’t get to buy at the IPO price. They are in it for the long-haul. Throw caution aside and buy, buy, buy. The problem with this dynamic is that this retail demand can cause short-term price movements that have no basis in reality. Institutional investors have a better sense for what a company is really worth and ultimately a company will trade to that value. But in the short term a stock can trade wildly based on irrational and uniformed buying (or selling) by retail investors.

But why can’t the investment banks predict retail investor demand? Herein lies the biggest problem. Investment bankers will distribute IPOs through their own retail investment channels and through co-managers of the IPO, but they don’t open it up to the broad public. If you don’t have an account with one of these brokerage firms the only way you are going to buy into the company is by making purchases in the aftermarket. Further compounding the problem is the manner in which investment banks solicit indications of interest from their retail investor channel. They aren’t really going to each and every customer asking them how many shares they are willing to buy and at what price. The indications of interest are typically submitted at the branch level based on what the manager of that branch estimates they can sell. Bottom line, while the investment banks do have a pretty good sense of how their institutional investor clients will behave in the aftermarket, they have much less visibility into how their retail investors will behave, particularly for companies like LinkedIn and Pandora that are well known and loved by consumers.

The solution: a Dutch Auction IPO
So what can we do? If you can’t predict how retail investors will behave, do we just have to roll the dice knowing that sometimes a stock will likely shoot up (LinkedIn) and other times it will trade below issue (Pandora)? Are we doomed for all future IPOs attracting significant retail investor demand (i.e., Facebook)? Thankfully, I think there is a better way. I think the answer is the rarely used dutch auction IPO process.

You can read about what a dutch auction is here, but the important thing to note is that if done right it opens up the bidding process to any retail investor that is interested. Google made this structure famous back in 2004 when they used it for their IPO. Don’t have an account with one of the investment bankers managing or co-managing the IPO? No worries, because of the IPO you can set up an account, place your own bid, and actually get an allocation assuming your bid is above the ultimate issue price.

That all sounds good in theory, but how did it work in reality? Google priced their IPO at $85. On day 1 it closed at $100.34, representing an 18% increase. How about 2 weeks later? On September 2, 2004 – exactly two weeks later from it’s August 19 debut – it closed at $101.54.

There is no such thing as a perfectly priced IPO, but that ain’t bad. Everyone won in that scenario. Google maximized their proceeds. Long-term institutional investors still got the 15% IPO discount. And retail investors had access prior to a first day pop. This last point it very important. In both the LinkedIn and Pandora IPO’s the retail investors – the ones that love those services – are really the ones that get screwed. They buy at the height of the mania, and then within in weeks (LinkedIn) or days (Pandora) when the mania stops and the market value moves to intrinsic value they find themselves way underwater.

Facebook will supposedly go public in 2012. I’m hoping they – like Google – can be just as innovative with their IPO as they are with their technology innovations.

IPO pricing

Fundraising milestones

At Shasta our sweet spot is investing in series A companies, but we’ll also invest in seed stage companies and also in series B companies. Because we invest across various stages I’m often asked by entrepreneurs about the differences between these various financing rounds. Many investors define these differences in terms of round sizes or valuations, but I prefer to think about it more in terms relating to the key milestones associated with each financing round. A company’s capital requirements may vary from one sector to another, but all companies eventually need to achieve a similar set of milestones to build a valuable company. The framework below is admittedly oversimplified and there will always be exceptions, but I still find this to be useful rule of thumb for me when evaluating a company’s progress.

Pre-financing: define a hypothesis
Before a company raises any money they start with an idea. Identify a problem. Identify a target customer. Start building the product that you believe will effectively solve your target customer’s pain.

Seed round: build a product that someone wants
Often your original hypothesis will be wrong. Maybe the pain point isn’t as great as you thought. Maybe your product is too complex. Keep experimenting until you find something that your customers really want. I’ve often seen what was initially an afterthought feature prove to be the most valuable piece of software for customers. At this stage of development I’m less concerned about broad reach or absolute revenue. Focus on engagement. Prove that your early customers love and depend on your software.

Series A: find a repeatable, scalable, and economic customer acquisition model
Now that you’ve got a product that people want, figure out how to get more of them using it. How do you make them aware of your service? What is the right messaging to attract and convert them into customers? How much does it cost to acquire a new customer relative to the the lifetime value of that customer? Just like finding a product that people want, this is an iterative process. Test various channels and distribution partners. Measure efficacy and cost of each and every channel. Optimize your revenue model to increase lifetime value. Continue doing this until you’ve proven you’ve got a repeatable model ready to scale.

Series B: aggressively scale your business
If you’re on track at this stage you’ve now got a product that people want and you’ve got a repeatable, scalable, and economic customer acquisition model. The next step is to raise money to execute against your acquisition plan and scale the business. Invest in marketing. Invest in customer acquisition. Be aggressive. Focus on reach and market share.

Final note:
It’s worth noting that while I’ve described this as a linear process with discrete steps that’s not quite how I really think it works. In reality, you’ve got to continue achieving each milestone well into the future. Even after a seed round I’d like to see a company that never stops listening to its customers or stops investing in product innovation. And even after an A round I’d like to see a company that continues to iterate and optimize their customer acquisition funnel and their monetization model.

Fundraising milestones

Broken Laser Pointers, Midnight Jumper Cables, Valentine’s Day Flowers and Surrogate Families

Nearly 16 years ago eBay was born. It was a crazy, yet simple idea – to create a marketplace for regular people to connect with other regular people and sell their unwanted stuff. No longer would you be limited to the small handful of people that showed up to your Sunday driveway sale. Instead you could sell your goods to anyone in the world with an internet connection. As you know, this marketplace worked like magic. Turns out that my unwanted stuff is actually gold to someone else out there in the world. I just needed a fast and efficient way to find them. So you have a broken laser pointer? No problem, we’ll connect you with the one person in the world that collects broken laser pointers. Magic!

Today I believe we’re on the precipice of seeing a similar transformation for the local service economy. Many regular people in our communities have very special talents, but have no one to share them with. There’s the young professional that loves gardening, but doesn’t have a backyard. There’s the retiree that that loves fixing car engines, but doesn’t have a car of his own. And there’s the stay-at-home mom that loves to keep her graphic design skills up to snuff, but can’t do it full time while also raising a family. Likewise, there are regular people out there that need these same services, but in all likelihood they’d walk right past each other in the aisle of a grocery store and never know that they were the perfect match for each other.

Nearly three years ago Leah Busque started TaskRabbit. Like eBay, it was a crazy, yet simple idea – to create a marketplace for regular people to get the services they need by connecting with other regular people best equipped to help them. Three years later the marketplace is changing the world. Stranded drivers can find others with jumper cables in just minutes even during the middle of the night. Flower businesses can get the extra delivery help they need on Valentine’s Day to keep their customers happy. And families of hospital patients across the country can find caring surrogate families to provide a favorite meal and friendly conversation. But this is just the start. eBay started with Pez dispensers and later found themselves selling cars. Likewise, TaskRabbit has only scratched the surface of what it can become as a platform. I personally can’t wait to see what we’ll see five years from now. Given the creativity and ingenuity of our communities I know it’s going to be some pretty cool stuff!

Of course none of this happens without an amazing team to pull it off. I’ve had the pleasure of spending lots of time with Leah, Brian, Victor, Jamie and M.T. over the last few months and I can’t imagine a team better suited to creating this magical marketplace. Their passion is palpable, their execution is world class, their enthusiasm is infectious, and their commitment is truly admirable. Venture investors often argue about what is more important: a great team or a big market? I hate it when this argument comes up. I want my cake and to eat it too! And now that our recent investment has been announced, it’s awesome to know we didn’t have to compromise on either. Leah and team – we’re thrilled to join you on what will undoubtedly be an amazing ride.

Broken Laser Pointers, Midnight Jumper Cables, Valentine’s Day Flowers and Surrogate Families

The iPad’s role in education

The New York Times has an article this week about the increasing popularity of the iPad in US schools. It’s still a just a fledgling market, but the initial data is reasonably promising. For example, New York City has already spent $1.3 million on iPads. Other school districts in Chicago, Virginia, California, Arizona, North Carolina and New Jersey are also purchasing iPads to put in their schools. I won’t be surprised to see this become a major trend in 2011.

However, not everyone agrees this is a good thing. From the New York Times article:

“There is very little evidence that kids learn more, faster or better by using these machines,” said Larry Cuban, a professor emeritus of education at Stanford University, who believes that the money would be better spent to recruit, train and retain teachers. “IPads are marvelous tools to engage kids, but then the novelty wears off and you get into hard-core issues of teaching and learning.”

Having witnessed my 5 year old niece and nephew use my iPad over the last year I could not disagree more. I’ve played with a number of educational games (both offline and online) with my niece over the years, and the pattern has always been the same. She’s interested in the task at hand for a 5-10 minutes and then her attention turns elsewhere. That completely changed with the iPad.

A great example is My First Tangrams HD. The touch interaction paradigm is much more intuitive for moving puzzle pieces than the relatively clumsy computer mouse. The application adapts and evolves at the perfect pace for her learning abilities. The iPad’s unlimited shelf space replaces the closet full of physical tangram puzzles, while also avoiding repetition and boredom. And it’s not just fun and games. She’s learning, and learning faster. She learns new shapes, new colors, and new objects. She can even freestyle, create her own artistic masterpieces, and then share those with the rest of the world.


Old School vs. New School

Likewise, my experience with my nephew has been no different. Ultimately we had to ration his use of the device with him so that he would not forget to interact with us. Without having done that, he would have been using the iPad’s educational software all day long.

This is incredibly exciting to me. I believe education is one of the most important gifts that we give to our children, and yet for a long time now it feels like we as a society have been short-changing our children. To be clear, I don’t expect the iPad to replace good parenting. But I expect it can replace books, puzzles, educational games, and packaged software, while supplementing good parenting and good teaching.

I hope to see many smart entrepreneurs pursuing opportunities in this space in the coming years. I believe that building world class educational software for the iPad (as well as for the coming onslaught of Android tablets) will not only be a gift for our children, but that it will also prove to be a good business. It’s a trend that I hope and expect to invest behind in the coming years. If you’ve seen any great apps out there tackling this opportunity I’d love to hear about it.

The iPad’s role in education

Can a web search start-up win?

I’ve found myself starting to get a bit frustrated with Google web search recently. Don’t get me wrong. It’s still awesome when searching for many things. Anything that leads you to Wikipedia, Yelp, etc, will likely be a fast and efficient search. But commercial oriented searches often lead to a long list of spammy sites. For example, the cnet reviews aren’t bad, but is this really the third best site for “DSLR camera reviews”? Travel searches also typically lead to some really awful sites (check out this crap-tastic result on page #1 for “Costa Rica travel”). And long tail searches often require many keyword iterations and testing until you find what you’re looking for. I’m not the only person that feels this way (see this recent Techcrunch post).

This has led me to rethink whether a start-up could actually make a dent in this industry and capture meaningful market share. Paid search is still one of the best business models on the planet, so any start-up that can pull this off would be a huge success.

Historically, I have been pretty skeptical about a start-up trying to take on Google in web search. They’ve got too much brand recognition. There is too much inertia among consumers that don’t want to try something new. They’ve got too much distribution anywhere and everywhere across the web. It’s also not an opportunity for the faint of heart. Even in today’s world of low cost start-ups, it’s not cheap to maintain a proprietary index of the web. Plus you can count on Google outspending you on distribution thanks to their powerful paid search platform. Baidu may be killing it in China, but there was a unique set of circumstances that enabled them to pull ahead of Google. In the US we’ve seen lots of start-ups try, but few – if any – have really succeeded.

But maybe the time is right now. Maybe Google is becoming big and slow enough that consumers will be open to better, more innovative alternatives. The leading contender out there today appears to be Blekko and their slashtag feature. Will this innovation be enough? Can they gain share without Google’s distribution power crushing them? Will the slashtag search experience cross the chasm from early adopters to the mainstream? While it seems like it could be quite powerful, it also feels a bit like a geek feature that may be too complicated for the average user (i.e., the valuable user that actually clicks on paid search results). To try and figure this out I’m going to do an experiment over the next week. I’m going to abandon Google and exclusively use Blekko for all of my web searching. I’m interested to find out whether I’ll be able to genuinely recommend it to others at the end of the experiment. Challenge #1 will be fighting the urge to search directly from Google Chrome’s combined search/address box!

Can a web search start-up win?

2010 through the lens of Google

It’s nearly 2011, which means that it is once again time for the the biggest consumer web companies to review the past year through the lens of their products.

Yahoo has done this for years, and you can see it once again right here. In an upset for the ages, the BP oil spill supposedly beat out Miley Cyrus and Kim Kardashian for the top web search, but those of us in-the-know know better. Attractive women always beat out depressing disasters. Does Yahoo think that we forget about Britney Spears’ dynasty in 2005, 2006, 2007, and 2008?

Facebook and Twitter are newer entrants to this annual tradition, and that inexperience shows in each of their low-budget efforts, Facebook’s 2010 Memology and Twitter’s top trends. In a clear sign that I’m no longer cool (or probably never was), a 3-letter acronym that I’ve never heard of in my life – HMU (“hit me up”) – was the top trend on Facebook. Am I really the last one to catch on to this trend? And why do people keep claiming that teens don’t use Twitter? Who else over the age of 18 would tweet about Justin Beiber?

But the best review of the year goes to Google. Lists are boring. They are so 2009. This year Googled upped the ante. They wrapped all of the year’s trends up into a cool video, layered in some inspiring music, and captured screencasts of the world surfing the web. The thing I really like about it is that they didn’t limit themselves to just web search. Sure, we still use web search all of the time, but what about all of the other web applications we use to make our lives easier – products like news, images, maps, profiles, gmail, gtalk, and YouTube? In 2010, web technologies influence us more than ever before. They inform us. They make us more productive. They entertain us. Very simply, they make our lives better. Google embraces this and puts it on display here. Take a look for yourself below.

On a related side note, where is Apple in all of this? I want to see a 2010 year in review video through the lens of my iPhone, dammit! Can someone please make this?

2010 through the lens of Google