More on the Pitch: Ad Revenue Model

An interesting conversation during Friday’s pitch was around the business model.

Now, I think if you’re a potential investor in Linkspank and you’re going to choose to focus on any one part of the business to discuss and you choose the revenue model, it’s probably a sign that you are not comfortable with really discussing the business. Because Linkspank is the kind of beast that requires growth in users to make any money at all; and conversely, if you can achieve this growth than you ARE going to be able to make money.

But revenue is still important :-), and like I said I thought it was an interesting conversation. It’s a chance for me to try to clarify my thinking, improve it with your feedback, and also if you don’t know any of this stuff and you’re vaguely in the business than heads up.

I told them that Linkspank had some exotic opportunities for business models, but that we would start simple and turn on contextual advertising once we hit one million users.

“Contextual advertising” (currently limited essentially to text advertising) is advertising that is placed on the page and chosen according to what the page is about, as determined by a scan of the text on the page. You get a Linkspank about the Nicks, and next to it are advertisements for Nicks jerseys, Nicks videos, Nicks tickets.

This kind of advertising makes such a small amount of money that you need to be serving massive traffic for it to get you anywhere, but it has an advantages. First, you can turn it on about as simply as flicking a switch. Google and other services are the ones actually providing the advertisements. There is no need to sell advertisements, find advertisers, any of that crap. This kind of advertising is (basically) what has made MySpace and facebook businesses that rake in lots of cash.

Here’s the model I showed for how linkspank would make its money:

So, when we have 1 million users, we make $33 million in revenue per year. Here’s how the calculation goes: you have so many users, and the view so many pages, and they click on one or more of the ads a certain (very small) percentage of the time, and you make so much money per click, and you add it all up.

They found the number too high and we took it from there. The ads per page is not really disputable – if you’re going to put 6 ads per page than ok then! The CTR (click through rate) per ad is a little more disputable. If your ads look cool like facebook’s, and not ugly like generic AdSense ads, maybe your CTR will increase a little. Or it might for other reasons. But certainly I have seen real world examples where the CTR is at least this low. I think it’s worth considering a case in which the CTR is 0.1%. (That would cut the $30M to $10M).

The page views per day per user is the key number. Well, sort of. The REALLY key number is the top figure, the number of users. As I contend, the key question for this business is the growth. But this second line is key. It currently asserts that on AVERAGE every spanker will view 150 pages per month, which is a lot.

The second line really involves forming an opinion about how growing size will affect the stickiness of the site and user activity. Users are not currently viewing 150 pages per month; they are viewing more like 10 to 17, depending on how you count.

So why would the figure multiply by 10 when the site grows? It wouldn’t necessarily. It depends basically on whether your site actually does something, or people sign up for it and it’s crap. Let’s contrast LinkedIn and facebook (speculatively, not like I have inside numbers). Both are supposed to become richer and more valuable for you the bigger they get, the more potential connections you have and people you can learn about or whatever. Most users will confirm for you the following reality: facebook strongly benefits from having all your friends on there and it makes it much easier to stick around longer. In contast, LinkedIn for most people is a site that they visit occasionally to approve someone’s connection request and then they pop out. Every now and then someone will spruce up their profile. But they don’t seem to be doing much more than they were when the network was younger. I don’t quite think LinkedIn is crap, but hey these are the (anecdotal) facts on this particular issue.

So far all our data indicates that Linkspank will go the way of faceook on this issue and not the way of LinkedIn. The fundamental logic of what spanking is also supports the claim. Will this really bring us up to 5 page views per user per day? I’m not sure that anyone can answer that question definitively. I’m willing to consider a lower forecast. It still shapes up to a very profitable business – IF you get the growth… which once again is the real question.

That really just scrapes the surface of the conversation, but it's enough for Saturday morning. :-)

Results of Pitch at Deloitte Tech Venture Center

Bananas are the hottest thing, you should invest

I took my hacking, raspy self to Waltham today and pitched at an "investor roundtable" hosted by Deloitte. Launchpad and Atlas were there, and some other folks. DFJ and Spark were supposed to be there but I don't believe they were.

Summary: they conceded that they weren't part of the target market. I also noticed that they weren't too well acquainted with the market space. I am routinely baffled by how little people understand online advertising. Meanwhile, the guy who thought he knew the space suggested (inadvertantly) that I instead build another delicious - which is a deeply troubling suggestion on a variety of levels.

Anyway, to resume the summary: I think they weren't 100% understanding what Linkspank is. And how can you invest in something you don't understand, right? Agreed. They suggested that I go look for a younger angel investor, which I think is a good call. (The investment I'm looking for is $200-500k, depending on timing and other factors, so it's borderline between angel and group of angels or institutional.)

Internet Site = Must Do Demo

The thing I puzzled over most was whether to include a demo in the pitch. It's the Google way of doing things and I was always sold on that. But I was dissuaded from the idea over the last week, by the fact that my practice pitch listeners didn't want to hear the pitch.

In retrospect, I think it's absolutely true - none of these guys want to see a demo. But it's laziness on their part not to want to see one, and it should be my job to force them to see it. Considering investing in a consumer Internet business without seeing the site in action is like considering investing in an ice cream shop without tasting the ice cream. If you wanna do it, go ahead, but seriously.

So, I think in the future I will insist on a demo, even if this means requiring a presentation time of 30 min (without questions). I know that's longer than the norm, but it's fine because I don't want to do business with anyone who won't take a look at the product.

The need for a demo was underscored by the fact that Linkspank's on-paper stats are astonishing, and they still had trouble winning the group over. With no PR, we've grown to 1300+ users. 67% are active in a 2 month period, with 8+ invitations to join the spank sent out per user. The average session on the site in December was 3.7 hours. The business makes sense on paper. There's not more much I could have told them statistically to convince them without having already had a thriving business :-).

Next Steps

The only part of the outcome I disliked was the idea that no one on the East Coast would have the vision to invest in this idea. I was hoping to get outside the box a little by putting Linkspank here instead of there. But (so the story goes), while there are plenty of techie and visionary people here in Cambridge, they aren't angel investors but rather poor kids.

At any rate, next steps are to look a little more globally, and reach out to angel types and get their advice. It will be fun, because I love talking about the business and I'll get some more meaningful interaction with cool people. And I'll insist on the demo :-).

this blog just got way more micro (I'm talking about Twitter)

I just checked out the Social Media Breakfast. Was cool, thanks Bryan.

The thing was basically a huge Twitter lovefest. It helped me to think a little deeper about the service.

1. Often I want to blog here, but my thought is "too small" for a blog post, or maybe a bit off topic. Reason to try Twitter.

2. Facebook status updates are fun, and I have previously been of the opinion that they killed the need for twitter. But now I'm understanding that the whole game of twitter is VOLUME.

You COULD do a high volume of status updates in facebook, but that's not really quite what it's for and your friends are likely to get bummed. Twitter is designed more to be high volume.

Actually this scenario is similar to Linkspank - you can post a link on facebook, but you can't do it in high VOLUME efficiently (i.e. without spamming your friends). Enter Linkspank, and your world is awesome - more content, bigger brain, bigger laughs.

Anyway, I'm going to try the twitter things for people who for some reason think it's interesting to follow the individual firings of my synapses. That place will be

twitter.com/bitchell

I'll still blog here, of course - when it's more than just a snippet.

You can see that I used my (sort of) real name rather than "linkspank" as my twitter handle. The reason: twitter is not about companies, but rather people. A huge portion of what I do is "Inside Linkspank" type stuff. But there will be & has to be other junk in there too, because when you go high volume the line gets blurry between this & that. Some people raised an eyebrow at the user name "bitchell." I raise an eyebrow back at them. I'm like hey, What do you expect from a person who names a site Linkspank? ;-)

Pitch: Improving the 10/20/30 Rule

I'm working on Linkspank's pitch a bit as I mentioned. So far this is basically consisting of having conversations with some of my brilliant friends and colleagues about it.

One advisor checked with me that I would be following Guy Kawasaki's 10/20/30 rule. And I was like, "Of course!" And I do think about that rule. But I'm a contrarian guy and when I hear the words "of course" (even from my own mouth) I start to examine them. So after I got off IM, I was sitting at my computer with a raised Vulcan eyebrow. "Of course?"

Could the 10/20/30 rule be improved? Of course. :-) The improved version is the 0/10/20/30/1000 rule. How catchy is that? It's Guy's rule, plus a 0 rule at the beginning and a 1,000 rule at the end.

0: The ideal number of slides that you actually get through in your presentation. This is not a trick - you bring your presentation to use it. But the best presentations are stories, and the best stories hook the listeners immediately and have them so mesmerized by what they're hearing - sitting on the edges of their seats, eyes boggling, mouth agape, drooling - that the use of slides would actually be jarring and disrupt the magic spell that is occurring. What will you possibly ever remember from this little blog post? Maybe the Vulcan "of course" eyebrow, maybe the number zero, but at any rate the elements of a story.

The other rule to append:

1,000: the whole picture is worth thing. So far, one of the most effective parts of my attempts to explain Linkspank to an uninitiated person has been this picture:

Spankmaster

Depending on what you watch on TV, this picture is just a guy, or it's a picture rich with associations and meaning (and usually immediately triggers a smile or laugh). This picture reduces the time that it takes me to explain my target market by about 30 seconds, which is a lot of time.

Summing Up

If you happen to be on my wavelength, you may have thought that the 1,000 rule boils down to the 0 rule, since good pictures boil down to telling a story. I think actually that's true for the 10/20/30 in general: it's about telling a story. The 10/20/30 parts of it are pointers for keeping the attention and understanding of your listeners.

Of course.

The Pitch

Linkspank will be pitching to investors this month and it seems like a perfect thing to blog about here (protecting the identities of the investors, of course).

This won't be the first time I've pitched Linkspank to investor types but it's pretty close. On the other hand, Linkspank's business planning goes back almost two years.

Here micro-observations so far:

1. Even though your pitch will be a PowerPoint, it's better to introduce your business to people (before you have a meeting) with a 1-2 page Word document. PowerPoint isn't meant to stand on its own, but prose is.

2. Getting a meeting with investors is much easier than winning them over. So I think it's worth it to focus on your message, not the meeting. I think connections are useful only when no one is giving you the time of day, and if your connections will vouch for you so strongly that it will help investors believe in your management ability.

3. I view investment as a partnership and courtship, and I think most investors do too. You don't just want a match, you want a good match with all kinds of signs of mutual fit. If you're feeling too hungry, you're probably missing something. And it takes time, and it's impossible and undesirable to seal this kind of deal instantly.... so there's no need to try. At first, focus on the basics of your business and the caliber of person that you are.

Do you agree? Maybe it's obvious stuff. Anyway, more to come.

Viral Videos

Last spring, I had the opportunity to study Linkspank Marketing with my Marketing Communications classmates. We did a thorough study of marketing tactics for Linkspank. We came to many interesting conclusions. One conclusion was obvious and yet still striking: it was that viral videos are far and away the most effective way of reaching people online. People know this, yet we were still amazed, in the financial model, just how superior is successful viral video is compared to any other form of advertising, marketing or other expense to get peoples attention

Our experience in creating Linkspank TV made it relatively simple to create a viral video. We already had a team in place to create videos and to create video content. Bur TV show is different strategically from the viral videos. Our TV show is intended primarily for current users of our site. For this reason it makes sense that our television show would be more mainstream, less risky than our viral video, which in turn would be more offensive and more risk taking. Why? Because on one hand, for our television show we have dedicated viewers that we want to keep and make happy. On the other hand, our viral videos have to cut through a lot of noise out there and reach people who are not yet spankers but who should be spankers.

Viral videos appear to have indicated that the main way to cut through the clutter is to be so offensive that you stand out. Or probably “outrageous” is a better word, because viral videos don’t seem to have to be NSFW. To act on this opinion, a viral video is going to play a key role in our public launch this month. We have created a video that we will be sending to our users and and asking them to forward to their friends.

Viral videos are hard to make "stick" or make successful. But I don't think the failure rate is the real deterrent to companies - it's the cost of failure. A weird or outrageous video will alienate some viewers, maybe even many viewers.

Here I think it is key to have a strategy, if you have a strategy that is your guide to determine what you do and even what detail of what you do. I think a lack of strategy is why more companies don't create videos – they don’t know where to start. Do we make a funny video? What should do your video be about? Who should it reach or impress? The world is much more open probably, in that of conservative traditional advertisement. Linkspank, on the other hand is a young startup with a crazy name. We don't mind being weird and we might not mind even being defensive at least sometimes and it wrong as we are too offensive. For our company, this represents a big opportunity. One reason companies have trouble creating viral videos is because they are constrained in a way that we are not or at least should not have to be. That constraint is that big companies are reluctant to do weird or offensive things – while viral videos are actually usually maybe almost as a rule weird and offensive at least to some people.

In my opinion (and this has been my opinion for a long time) it is much more important to win over a small number of users—rather than simply not to alienate the larger audience. It is true that our site has special appeal to a great audience and I would like to be able to serve that large audience. But in this early stage it is important to target and win over early adopters, who will appreciate unusual messages more.

This might lead you to ask, as Linkspank grows, will its communications and brand become more mainstream? I think the answer is yes, to a degree. It is important to evolve to accommodate growth, but is also important to maintain our own identity. Part of my personal agenda is that I would like to create a vibrant large community but that I do not want to grow the community beyond its natural size. I think many successful websites have been pressured to do this to keep growing, and while they have proven that it is possible, I still would contend that it is not necessarily good business. But I shouldn’t be getting ahead of myself – it’s still time to make crazy YouTube videos.