AT&T Tech Support 360The scary math behind Web 2.0
How many pages does a Web 2.0 company have to flip a month to get on track one day hold an initial public offering?
A billion or more, says Opus Capital partner Ken Elefant, which is why his firm doesn't invest in them.
"Most of them are features," he said in an interview. "Most of them can't be long-term sustainable businesses."
Here's how Elefant comes up with his math. A web 2.0 company needs to be pulling in around $5 million in revenue a month to become an independent, viable publishing house. The average CPM is around $10. About half of the inventory on a given site remains unsold so the real CPM is closer to $5. Thus, you need 1,000 CPMs a month. A thousand impressions go into CPM.
Ultimately, this means that, to thrive, a Web 2.0 company needs to get bought by an established player. A site that doesn't do this kind of readership volume or get acquired can still survive, of course, but it may end up operating like a small to medium sized business. It will pay the salaries and expenses of the employees, but the owners won't likely to be able to retire on a mattress made of chopped up $100 bills.
Although he's not wild about investing on the content side, Opus is making investments in web infrastructure. One of the more interesting ones is C-Nario, which serves up ads over distributed networks of public LCD screens and plasmas. So if you are playing slot machines in an gas station in Henderson, Nevada and see ads on a small screen, you can thank C-Nario.
Yeah - but isn't this assuming that they only sell one ad unit per page? I mean, by selling, say, 2 ad units instead aren't they tipping the tables in their favor since they would only need 500 CPM's, as you put it?
So, with an attitude like that, of course these numbers are scary. But what we forget is that the successful companies aren't the me-toos. They are founded by visionaries with a passion for what they want to give the world, not people looking for the right angle to retire on a "mattress made of chopped-up 100 dollar bills." That's so 90s, so post-Reaganomics, so Me First, Me Only. And, what's wrong with a web startup being run like a small business, profitable and stable, but without the meteoric rise? I've been at enough startups to know that the bruising pace and the constant abuse by the venture capitalists to "go exponential" is no fun. Maybe a few tech weenies have fun for a while, but in short order, the pressure to produce ruins the party. The executives turn grey in their 30s under the pressure, divorces are rampant, and the company becomes a treadmill of constantly replacing senior team members in an effort to find the secret sauce that will please the investors and the market. Where's the joy in that?
Ultimately, we're going to have to redefine the web business segment to recapture the joy of creation, discovery, and giving. Web 2.0 has derailed on the altar of profit, and from what I saw at the web2.0 conference, it's a train wreck. We're going to need to come at it from a wholly different direction if it's to become sustainable.
John Mackey, CEO of Whole Foods, is on the right track. Check out his blog about conscious capitalism at http://www.wholefoods.com/blogs/jm/archives/2006/11/conscious_capit.html
His philosophies apply equally well to the Web. Heck, there are even a few companies on the web doing business this way (like cambrian house, for example.)
It's time to find the joy again - and not wait for a self-centered retirement for it to appear, but rather to fuse it with our daily lives. It's time for web 3.0
Eric Novikoff
http://www.enkiconsulting.net
Ken Elefant
General Partner, Opus Capital
1. The VC approach relies on the Buffet Complexity Barrier to Competition. Thus, the VC looks for IP or other secret sauce. The VC wants a quick return because the heart of this and hedge fund investing is quick turnaround investing in the 4 for 1 range. Say vig.
2. There is no complexity barrier in ANY content market. The music industry can explain this one to you, but essentially it is an 'any idiot can do it' market. So the content industry relies on the promotion or amplification of talent and the keiretsu of managed acts and events. Think of this as the control of resources for resources.
3. When a technology emerges, one can ride the wave until it become common and by that point must be large enough or well-connected enough to sustain operations to repay investors. Otherwise the churn is exactly as has been described regardless of the size or age of the operation. Ask any mid to lower level employee of a stable company purchased by equity investors. The cruelty and the cost-cutting are legendary. This is the result of squeezing for vig.
On the other hand, it is not impossible or even incredibly risky to run a content-based business if one takes the network or keiretsu approach. It is very hard work for those who do not have a good network of contacts for the production of the content with access to the customers for content of a given type. That is the key: content has a type based on the associations of the customers. There is no dominance possible because by its nature such networks are quite flat. What you look for is reach. This isn't a hard idea because it is a matter of identifying the connectors, the information sinks, the producers, consumers and modifiers, then providing useful utilities that speed up or reduce the work load for every component that can effectively use a computer form or page.
The hard part is building it to the point of getting the exponential or power law effect. A LOT of little pieces have to be assembled first and those without subject matter expertise are advised to get people who have it and to be sure that their expertise is reasonably global but immediately local. That is where the real risk is. Some content markets are entirely local by the very business rules for processing the content.
All said, it's the network, stupid, meaning, until you have identified an organic content network, meaning a network of information trading relationships, all of the cpm figuring you do, the ad relationships and so on, are so much dreaming. It isn't about getting rich quick. That is the way the Mafia does business and they are mostly sloppy, ineffective and culturally insane. Earn it by product for value. It's old fashioned but stable and grows proportionally to sane returns.
We don't all want to be pirates.