(image credit: readwriteweb.com)

In the year of Internet IPOs, the big juggernaut of them all, Facebook, finally filed for its IPO this week. The best place for a wide variety of analysis was Techmeme. 

I had some time to go through their S-1 this morning though and here are the numbers that stood out to me:

• 2011 Net Income was $1B on $3.7B in revenues
• 57% of Facebook’s monthly users worldwide use the service daily
• 70% of Facebook’s growth last year came from outside the U.S., Canada, and Europe
• Facebook recorded $4.39 in revenue and $1.18 in profit per user last year
• Zynga accounts for 12% of Facebook's revenue (Related: Zynga's IPO Filing: Analyzing the S-1)
• Pandora is mentioned twice, Twitter twice, Microsoft five times, Google fourteen, and Zynga twenty four. MySpace isn't mentioned at all.
• 3,200 employees as Dec 2011
• Facebook is currently available in more than 70 different languages
• Over $3.9B in cash on hand. And they will raise $5B more.
• 845MM monthly active uniques
• 425MM monthly active uniques on mobile 
• The worldwide online advertising market is projected to increase from $68 billion to $120 billion from 2010 to 2015
• The global mobile advertising market was $1.5 billion in 2010 and is expected to grow at a 64% compound annual rate to $17.6 billion in 2015

I've reviewed the IPO filings from all of the big Internet companies over the past year (see: LinkedIn, Zynga, Groupon, Yelp, Millenial Media) and Facebook is unsurprisingly the most impressive of the bunch. 

As somone who lives in the advertising world, I have seen firsthand the growth in Facebook advertising over the past few years. What once accounted for a small part of a client's ad buy is now a must-have along with search. From a marketer's perspective, you just can't beat the reach, targeting and cost efficiency that Facebook provides. 

Facebook is a true networks effects business. The market opportunity is enormous. And they have executed fabulously. For these reasons, I agree with Bill Gurley that Facebook clearly belongs in the highly coveted 10x revenue club. 

Also: Why I'm Buying LinkedIn

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• The digital living room. The connected and smart TVs were all the buzz at CES. From Samsung to Microsoft to Google to Roku and others. Yet I think hanging over the head of every announcement was Apple's long rumored TV. The rumors of an Apple TV have been in overdrive ever since Steve Jobs said in an interview that he had "finally cracked it". Did he? Is Apple going to "pull an iPhone" on the cable industry?

• The mobile wallet. The idea that we might be able to use our mobile phones to pay for things offline makes sense. Imagine for a second using your phone to pay for things in stores, coffee shops, taxis, BART, etc. Merging the phone and wallet into one thing seems like a no-brainer. And it’s been happening in places like Japan for years. Will we in the U.S. finally be able to? It's going to take a leader to sort through a lot of mess. To make it happen involves a lot of moving pieces from the handset makers to wireless carriers to banks and credit card companies and finally the retail merchants themselves. Can Google do it with Google Wallet? Will Square try something to push the envelope? 

• The connected car.  Knowing the glacial pace of automotive development, I have been surprised by how quickly automakers have been embracing new technologies in recent years. The dream of a connected car is getting closer to a reality. The announcements out of this year's CES were many: Ford with updates to their Sync Applink, Toytota with Entune, and new releases from Kia, Hyundai and GM. Virtually every car maker is coming on board with new, connected systems after hearing the feedback and demand from consumers. But can the automakers bring the connected car to the masses and not just the high-end, luxury drivers? And can they do so in a simple, safe and easy-to-use way?

• Microsoft & Mobile. Microsoft has been astonishingly late to the mobile party with Windows Phone. Laughably late really. Still dominant in PCs, Microsoft is basically nonexistent in mobile smartphones and tablets ceding the crown to Apple and Google. However, Windows Phone has gotten some rave reviews recently. And through their partnership with Nokia, Microsoft would seem to have the distribution part. The flagship Windows Phone unveiled at CES, the Nokia Lumia 900, seems especially impressive. But does Windows Phone have what it takes to last? Can Microsoft woo app developers? Will it be a Zune (bust) or an XBOX 360 (hit) story for them?

Undoubtedly, these are are all wide open. There are certainly some big ones that I've missed. I mean who would have thought that Google would try to buy Motorola last year?

Some of these may take years to play out. As Bill Gates famously said, 

We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.

Still, there should be significant progress for each of these this year. And it should make for a very exciting year. 

Also: How Square was Almost Named Squirrel

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I’ve gone through much of Millenial's IPO filing. Here are some key points:

1. Revenue is growing rapidly and its loss is shrinking, but Millenial is not yet profitable.  The company is now doing about $100M of annual revenue, generating $70M in revenue in the first nine months of 2011, from just $6.2M in 2008. While not yet profitable, their net loss improved from $5.4M to $417,000 during the same period.  
2. Millenial is the #2 player in the huge mobile advertising market and its growth is taking away from Apple. The mobile advertising market is forecasted to double this year to $3.3 billion and be a $20.6 billion market by 2015, according to Gartner. And while Google/AdMob is the leader in the market, with nearly a quarter of the market share, Millenial ranks No. 2, with nearly 17% of share. Millenial's growth is also coming at the expense of Apple/iAds, who comes in at No. 3 with 15%. 
3. The mobile app market is just exploding. Gartner forecasts that the total number of downloads from mobile application stores worldwide will increase from 17.7 billion in 2011 to 108.8 billion in 2015. That's a compound annual growth rate of 57%.
4. Millenial is BIG and growing pretty fast. In December 2011, Millennial reached 200 million unique users. They also processed a whopping 40 billion ad impressionsin December too. In terms of apps, more than 28,000 have Millennial integrated across more than 7,000 different mobile device types and models. 
5. The executives at Millennial are all in their late 30's and 40's. I point this out only to highlight that much of Millennial's success so far is because of seasoned executives, not fresh-faced hackers out of college that we so love to glamorize here in Silicon Valley. Speaking of which, chalk up another big win for non Silicon Valley or New York startups -- Millenial is based in Baltimore. 

Bottom Line: Millennial is growing fast and going after an enormous market opportunity. If they can continue executing well, they will be an important, independent player for years to come.

Also: Zynga's IPO Filing: Analyzing the S-1

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And here is my full 2011 list with notes. Here's a recap: (6 FAILURES and 4 SUCCESSES): 

3.  Drink more water - SUCCESS!

4.  Read more - FAIL (reason: didn't track, take enough notes)

5.  Write more - FAIL (reason: work/life balance, didn't do much short form posts)

10.  Compete in a marathon and triathlon - FAIL (reason: ran 3 half-marathons but never committed to a full or tri)

Hopefully I can do better in 2012 than I did in 2011. How about you?

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That's the one thought I'm left with after reading through the S-1's of Groupon, Angie's List, and Yelp.

Let's dig into the numbers. Here's a look at the losses and revenues for each:

• Groupon 
  • FY 2010: a loss of $456M on revenues of $713M. 
  • Q1 2011: a loss of $146M on $644M in revenue.  
• Angie's List
  • FY 2010: a loss of $27.2M on revenues of $59.0M. 
  • First six months of 2011: a loss of $25.8M on $38.6M in revenue. 
• Yelp
  • FY 2010: a loss of $9.51M on revenues of $47.7M. 
  • First nine months of 2011: a loss of $7.6M on $58.4M in revenue. 

And what's the main driver of these losses? 

• Groupon
  • $208M spent on marketing in the first quarter of 2011 and another $178M on sales people and the rest.
• Angie's List
  • $48M spent on marketing (of which $35 million was on TV ads) and $22M on sales.
• Yelp
  • $38.5M, or nearly two-thirds of its revenue, spent on sales and marketing.

So a very large contributing factor to the losses for each of these companies comes down to marketing and sales. The marketing side of this is pure customer acquisition (read: advertising). And the sales side is simply feet on the street. Or warm bodies hitting the phones.

As Rocky Agrawal noted in his analysis of Yelp, there is very stiff competition in the small business advertising market so earning and keeping their business is difficult and expensive. 

Of course, there is a good reason why these companies are putting so many bodies behind the phones: the local advertising market is massive. So massive in fact that when I tried to find a number for the size of the local advertising market I came across a range from $14 Billion all the way up to $130 Billion. Companies realize that "to the winner go the spoils" so they're dedicating lots of resources to local in order to get out ahead of the competition. 

Indeed, local advertising is such a big market that my own company Pandora is aggresively going after it as well. Although it's a slightly different market in that we're going after local radio dollars specifically -- an area where I think we're well primed to gain market share in.

There are of course many strengths in all of the above businesses. The rate that each of them has grown revenues is no easy feat and should be applauded. I am personally a huge fan of Yelp the product. It's by far the most comprehensive source of reviews out there and the best place to go when I want to find a new restaurant. I am no longer a Groupon subscriber because the emails got to be too much but I've been impressed by their efforts with personalization. And I've bought deals through Groupon Now a couple of times too and been happy with the experience. Marc Andreessen nailed it when talking about Groupon recently in his predictions for 2012:

I've always felt that the criticism of Groupon has been unwarranted. People have really underappreciated what Groupon has done, which is they've created a way for small businesses that aren't online to spend money online and be able to dial up customers on demand. That's a really big deal. 

But investors have to look for the strengths AND the weaknesses of a company. One weakness (if big enough) is enough to cripple even the best company despite its many strengths.

The question, that we've asked before, is can these companies get their marketing and sales costs down even in the long term? I'm of the opinion that a more automated solution is the answer. I know it might be sacrilege for a salesperson to say so, but if a local advertiser wants to book $1,000 worth of ads, should they have to go through a sales rep in order to do so? At some point it is just not scalable.

More importantly, the question gets put back startups: is there a better way to do things in local?

Also: Two Opposing Views on Groupon

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Given all the news, I have been thinking a lot about Groupon's business model. When they initially released their their S-1 back in June it generated a lot of dicsussion on the long-term viability of their business model. I would say that most of the comments were negative, with one even going so far as calling Groupon a “Ponzi Scheme.”

However, I was most struck by two opposing views/analyses.

The first was from David Heinemeier Hansson who said to pass on this deal. Hansson argued that it is costing Groupon $1.43 to make $1.00 with no signs of getting any cheaper:

" ... They’re currently losing a staggering $117M per quarter, despite revenues of $644M, they’ll be burning through that cash almost as soon as it hits their account.

... The S-1 tells us the reality is far from that ideal. Groupon had to spend $208M on marketing in the first quarter and another $178M on sales people and the rest. Surprise, surprise — it’s costly to buy enough ads to reach the volume of consumers needed to produce such staggering revenue numbers. Likewise, hiring an army of 7,000-and-counting employees to cold-call every small business owner in the world costs a pretty penny, too.

... Groupon has a great tagline in “the fastest growing company in history,” but don’t underestimate how incredibly risky an investment it still is. There’s a very real chance Groupon will never figure out how to tune the revenue machine enough to produce even a penny of profit. They’re asking the public to value them at an alleged $25 billion (or 1/12th of AAPL, a company that generated $6 billion in real profits last quarter) on a hope, a prayer, a song, and a dance about fantasy metrics.

Buyer beware."

(via shortlogic.tumblr.com)

On the other side, there was Steve Cheney who argued that Groupon is worth $25 Billion. Cheney proposed that Groupon will be the centerpiece for the future of daily deals, a real-time bidding system for remnant inventory at places around you:

" ... And that’s the exact issue in question that people are puking over. Those reading the S1 believe this merchant to customer link is very weak, because Groupon left out key metrics for effective customer acquisition cost and merchant churn. 

That would be a sensible conclusion IF today’s email-based daily deal world were to remain static…  if that were the case all this would be extremely worrisome. But things are changing. We’re entering the next phase for daily deals, something Groupon has been public about: real time bidding on remnant inventory at places around you. 

... So the real end-goal for daily deal sites is in assembling a marketplace and exchange that has enough inventory and users to support these types of new online to offline behaviors at massive scale. And if Groupon doesn’t figure it out, someone else will. There is way more money to be made in offline commerce than there is in online commerce. Everyone knows that by now.

... The reality is we’re in inning 2 or 3 of deals and local commerce. We’re moving away from these static one-time deals toward a marketplace for your attention in the physical world. And someone is going to make a lot of money off of it." 

(via stevecheney.posterous.com)

Both have very good points. Time will tell who is more prescient here. One thing is clear, in going from founding to IPO in under three years, Groupon is the fastest growing company we have seen in a long time. But with all this growth comes lots of losses too:

(via businessinsider.com)

Summary. Is Groupon's business model sustainable? Time will tell. Certainly competitors are coming from all angles: LivingSocial is right on their heels and coming on strong, Google is pushing hard into other markets and national deals, and many are focused on certain niches (Lot18 for wine, CoupTessa for women, etc.). Combine all of these and you only get higher customer acquisition costs and tighter margins. The key will be if these customers become loyal repeat customers or not.

I am with Vinicius Vacanti on his great Yipit follow-up post that it is far too soon to tell.

We should however take a moment to reflect on what they have accomplished in such a short period of time. As Henry Blodget reflected, it is nothing short of remarkable and America does need more companies like Groupon.

I love reading S-1s by the way. You can talk all you want, but the GAAP numbers don't lie. Everything is laid out for all to see. 

Know of any other interesting analyses? Feel free to email any I might be missing. Just shoot me a note or comment below.

Also: In This Market, What's An Intelligent Investor To Do?

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Google has rolled out a new design to Google Reader. Previously announced, this release primarily includes a new design and Google+ integration. 

My friends and family know that I love Google Reader. Over the years I have curated my RSS feeds carefully into a heirarchy that I like. It's a bit messy but it works for me. I have broken my feeds into folders for the startups, entrepreneurs, VCs, etc. that I like to keep daily tabs on.

The general breakdown is like so:

• Startups
• Entrepreneurs
• Big Tech Companies
• Tech News (Hacker News, Techmeme, PE Hub, etc.)
• Venture Capitalists (Fred Wilson, Ben Horowitz, Mark Suster, etc.)
• Design
• Advertising
• Sales
• Sports 
• Financial news
• Investing/Traders

Essentially I can glance at any folder and get a good snapshot of all the blogs and news that I care about and follow on a regular basis. 

A lot of my reading typically takes place within Google Reader itself. Yes, I'll occasionally click through to look at and engage in the comments or explore other articles. But I like having all of them in one place for quick reading and scanning. Since so much of my reading is done within Google Reader, this redesign was pretty impactful to me. And after playing around with it for a few days, I have to say that I'm dissapointed.

I didn't use the sharing features within Reader all that much (only to push to Twitter really) so I am pretty apathetic to the Google+ integrations. Do I think I'll share more of what I'm reading on Google+ now because of it? Not really. But perhaps it will grow on me. 

My beef is mainly in the visual and UI changes. Now, don't get me wrong. I am all for visual consistency. And I have been really impressed with Google's new design across all of their products, including the new Gmail design. 

However, my sentiments on the Reader redesign echo the feelings of Brian Shih, formerly a project manager for Google Reader. Here's what he had to say on the redesign:

In the name of visual consistency, Google has updated the visual style to match Gmail, Calendar and Docs. I have nothing against visual consistency (and in fact, this something that Google should be doing), but it's as if whoever made the update did so without ever actually using the product to, you know, read something.

When you log into Reader, what the hell do you think your primary objective is? Did you answer "stare at a giant header bar with no real estate saved for actual reading"? Congrats, here's your prize:

Shih also does a comparison of old Reader vs. new Reader so we can see the difference side-by-side down to the first subscription (click to enlarge):

As you can see, there is a lot of more room for text and reading in the old design. On laptops and small screens every pixel is important so this space really matters. 

Another more obvious change is the full grey-ing out of Reader. There are now no blue links within titles or posts which leaves a pretty bland, boring reading experience. 

Most importanly, my favorite feature -- the reading pane -- is now gone. It allowed you to hide the subscriptions panel to let you have the full screen for reading. I loved it. 

I am all for the use white space and a clean design. But Reader is a product built to read and read quickly. The old UI wasn't perfect, but it was designed for the primary use case of reading. I hope Google takes more note of this in their next iteration.

Update: I just came across a post by Kevin Fox, a former UX design lead on Google Reader, who has offered his services to restore and enhance Reader while keeping in line with Google's new visual standards. I hope they take him up on it.

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By all accounts, it looks like we are in for a wild week. A lot of factors are coming into play at once giving rise to a lot of uncertainty in the markets:

• The U.S. debt ceiling debacle
• S&P's downgrade of U.S.'s credit rating
• Europe's soveign debt crisis 

With so much uncertainty, it's a good time to reflect on what makes an "intelligent investor." It's been a while since I've posted some reading notes (the last were for Born To Run) and the timing worked out well since I just finished reading The Intelligent Investor by Benjamin Graham. I recommend getting the version with updated commentary by Jason Zweig.

The Intelligent Investor is the one, must-read book that Warren Buffet recommends to any beginner investor. And for good reason. Anyone serious about investing in stocks should give it a read. It gives a great overview of "value investing" -- which shields investors from error during downturns as well as from their greatest enemy, themselves. 

It is also a timely book to keep in mind since this is the year of Internet IPOs. Graham makes the clear distinction between investing and speculating (see below) and regards IPOs in the clear camp of speculating as the companies don't yet have a history of strong performance. It's a challenge I routinely have to remind myself on (see related post: Why I'm Buying LinkedIn).

The markets are in for a bumpy ride this week (and months?) but as with all downturns there will be some very real buying opportunities presented to us. As Warren Buffet famously said, 

We should simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

I think if you stick to the basic tenets of Graham (high value, strong financial history, low P/E ratio, good dividend, etc.) then you will be fine in the long run. And if you invest intelligently in this downturn, then well, you could even make out like a bandit. 

Here are my notes:

Also: Why Apple Even Now Is Still Very Cheap

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On a trailing price to earnings ratio, usually the most used metric in judging what makes a stock expensive, Apple sits at a very reasonable 15.5. Here is a chart of Apple's share price and P/E ratio over the last year:

Let's look at a few other tech companies for comparison:

• Amazon - 92.6
• Netflix - 65.9
• Salesforce - 420.9
• Google - 21.7

And those are just tech stocks. It gets better when you look across other industries. 

The kicker is that Apple's revenue is actually still accelerating. Their revenue growth on a year over year basis is an astounding 82%. 

Where do other tech companies stand?

• Amazon - 51%
• Netflix - 48%
• Google - 32%
• Microsoft - 8%

It's actually kind of silly when you compare these growth rates to the P/E ratios above. With these growth rates, Apple is still very much a growth stock. So it's no suprise that some analysts think its stock will reach $1,000. And he's not the only one. 

Other than these purely financial metrics, here are a few other reasons why I am bullish on Apple:

• iPad's dominance of the tablet market - there still really isn't a “tablet” market — just an iPad market.
• The iPhone has no competition where it matters most — profits. Apple now controls over 66 percent of all the profits in the mobile space.
• iCloud - the first reviews in are positive. iCould should drive people to purchase even more on iTunes.
• The new Macbook Airs are just plain sick.
• China - Apple is rumored to be partnering with China Mobile, the world's largest mobile carrier, offering the iPhone 5 to their over 600mm customers 

With all these bullish signs going Apple's way and looking at the stock's fundamentals, it is clear that Apple is still dirt cheap. 

Needless to say, I am buying. If the institutions / big boys want it badly, then I want it badly too. I plan on buying and holding while also trading the swings. In fact, just yesterday I picked up some Jan '12 option calls. 

To the folks that say, "oh I don't have a lot of money to invest and you need a lot of money to buy Apple for it to be worth your while", I say that's simply not true. It doesn't matter about the share price, just the percentage gain. You could buy one share at $400 and if it goes up to $500 you have still made 25% on your dollars in. And honestly I don't see a surer thing in the market. 

Also: Why I'm Buying LinkedIn

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I was talking with a friend over the weekend about Zynga's filing for IPO. We were discussing Zynga's impressive business model but the conversation quickly shifted to Mark Pincus and the impact that he has had on the startup world. Pincus is an idol to many startup entrepreneurs and for good reason. He has likely been the single biggest source of inspiration behind the role of game mechanics in software.

Game mechanics in startups, also known as gamification, is the notion that game elements such as points or levels can be used in software to increase engagement and elicit a desired response from a user. These game elements make applications much more engaging and addicting. (The best recent example I can think of is Turntable.fm's successful social engagement loop.) Every entrepreneur should think long and hard about game mechanics and feedback loops if they want to make software that people keep coming back to over and over again.

Here are three must-reads for entrepreneurs wanting to learn more about the role of game mechanics in startups: 

• Bing Gordon, former EA exec and venture capitalist at KPCB, on how Every Startup CEO Should Understand Gamification. Here are the slides:

• Wired's article on Harnessing the Power of Feedback Loops. My favorite quote from the article:

So feedback loops work. Why? Why does putting our own data in front of us somehow compel us to act? ... Feedback loops are how we learn, whether we call it trial and error or course correction. In so many areas of life, we succeed when we have some sense of where we stand and some evaluation of our progress. Indeed, we tend to crave this sort of information; it’s something we viscerally want to know, good or bad. As Stanford’s Bandura put it, “People are proactive, aspiring organisms.” Feedback taps into those aspirations.

• And last but not least, Stanford Entrepreneurship Corner's video from 2009 with both Mark Pincus and Bing Gordon. It's an oldie but is still one of the most insightful lectures I have seen.

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In the year of Internet IPOs, social gaming juggernaut Zynga finally filed for its IPO today. So we finally get to get a good look at its financials. And they are strong ... to quite strong. 

Here's a quick snapshot:

• Total 2010 Revenues: $597mm
• First Quarter 2011 Revenues: $235mm 
• Cash and Cash Equivalents: $996mm
• Operating cash flow: $103mm

Revenues have grown at an incredible pace, up 392% last year alone. Nearly 95% of the company's revenue comes from selling virtual goods, which has increased 127% between Q1 2010 and Q1 2011. The profit margins on these virtual goods is good at 28% but not as high as some were forcasting (~40-50%). Turns out that there is still a lot of R&D, sales and overhead costs that go into making highly addicting, successful games. 

All this adds up to good things for the most important numbers for investors, profits: 

• Total 2010 Net Income: $90mm
• First Quarter 2011 Net Income: $12mm

They also have a TON of cash stockpiled up, to the tune of almost $1 billion. As Dustin Curtis noted, if Zynga's revenue dropped to zero right now and their costs remained constant, the company would not go bankrupt until June, 2012. In short, they have enough cash on hand that they don't really need to go public right now. I think they are absolutely right to take advantage of the hot IPO market though. 

Certainly there are risks. Zynga is quick to acknowledge the importance of Facebook to its business model, saying that it generates "substantially all of our revenue and players through the Facebook platform." Indeed, Facebook is mentioned over 204 times through Zynga's S-1. 

Here are some other numbers that stood out to me:

• 62 million - Daily Active Users
• 236 million - Monthly Active Users
• 38,000 - virtual item are created every second
• 2 billion - minutes a day spent on Zynga games

My favorite part of the S-1 though was when Zynga founder and CEO Mark Pincus leads the prospectus off with a personal letter, which I think is a great touch:

At Zynga, we feel a personal connection to our games through our friends and family. I love that my brother in-law, who has five kids and no free time, religiously plays our game Words with Friends.... My kids decided a few months ago that peek-a-boo was their favorite game. While it's unlikely we can improve upon this classic, I look forward to playing Zynga games with them very soon. When they enter high school there's no doubt that they'll search on Google, they'll share with their friends on Facebook and they'll probably do a lot of shopping on Amazon. And I'm planning for Zynga to be there when they want to play.

via sec.gov

By the way, have I mentioned that I really love S-1s? You can talk all you want, but the GAAP numbers don't lie. Everything is laid out for all to see. Know of any other interesting analyses of their S-1? Feel free to email any I might be missing. Just shoot me a note or comment below.

Also: The Groupon, Angie's List and Yelp IPOs Proved One Thing: Local Is Really, Really Hard

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A new site that's getting a lot of buzz these days is Turntable.fm. Turntable is the result of a pivot from Billy Chasen and Seth Goldstein out of Stickybits, the social bar code scanning service. And it has quickly become one of the hottest startups on the Web. But why?

Turntable has done an excellent job at a simple concept -- making music more social. My first impression was that it was silly and a bit cheesy (with the avatars and all). However, after a second I quickly saw the addicting nature of it. The Turntable.fm team has done a great job in creating a natural social loop to bring users in and wanting more. 

So how does the Turntable engagement loop work?

Ryan Hoover, product manager at Playhaven, explained on Quora and posted on his own blog that here are four main elements to Turntable's loop. I liked his explanation so much I thought I would share it here:

1) Visible Progress/Reward

• DJ Points and Fans - Points and fans represent social status and serve as a leaderboard. Even as a new user, these points of recognition are understandable and help existing users stay invested in their accomplishments.
• Avatars - Turntable offers different avatars from the mundane boy for newbies to a blinged-out gorilla for veterans. The users with the most recognition (ie, DJ points) are represented in more extravagant avatars.

Examples from other services: Follower count listed on user’s Twitter profile. Exclusive items for high-level players, visible by visiting friends in Farmville. Number of connections listed a user’s profile on LinkedIn.

2) Motivating Emotion

• Head Bobbing Avatar - Turntable’s most understated feature is the head bobbing avatar. When users click “awesome”, the performing DJ not only earns points but it also taps into positive reinforcement to encourage the behavior. This feels especially great when the whole room is enjoying the music.
• Unlock New Avatars - New users choose from a limited bunch of avatars and as users level up, they unlock gaudy avatars to represent their superior status. Who doesn’t want to look cool and different?

Example from other services: Desire to acquire more Twitter followers. Desire to unlock new items in Farmville. Desire to expand ones professional network on LinkedIn.

3) Social Call to Action

• Click “Awesome”/”Lame” - Naturally you want to express your love for songs you enjoy by bobbing your head and skip awful songs chosen by DJ’s with no taste.
• Chat - Conversation are usually fun and contextual to the music being played. It’s hard not to engage.
• DJ - The most fun part of Turntable is publicly displaying your superior music tastes to share with friends and strangers.

Examples from other services: Tweet or DM a friend on Twitter. Unlock a new gift to give to a friend in Farmville. Request an endorsement on LinkedIn.

4) User Re-engagement

• Email Notifications - Emails are sent to fans of a DJ as soon as they step up to the stage.
• Social Recruiting - Turntable is better with friends. Naturally people want to recruit their friends to share their favorite music with one another.

Examples from other services: @reply or DM notification on Twitter. Facebook notification for a gift given from a friend in Farmville. Email request for an endorsement from a former co-worker on LinkedIn.

via quora.com

Right now Turntable is mostly popular with the tech crowd (the "Coding Soundtrack" room is consistently the top room on the site) but I think it shows a lot of potential as it appeals to everyone and has an immediate draw-in from the above loop.

To make addictive software, one needs to harness the power of social engagement loops. Any entrepreneur out there would do well to examine the social loop behind Turntable and think about how they can apply something similar to their own startup.

[By the way, I'm DJ @gordonbowman on Turntable. You can follow me on Twitter here to get updates of when I'll be DJ'ing.]

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“One of my passions and one of the things I think I’m really good at is making something really approachable to the point of bringing it around in your pocket.”

  - Jack Dorsey, Co-founder, Twitter; Founder and CEO, Square

In my last post I discussed the importance of naming and branding for a startup, specifically related to Square and how Square was almost named Squirrel. 

Unfortunately there was no video of that interview between Jack Dorsey and Kara Swisher at the Commonwealth Club. Fortunately however, Jack and Kara sat down again for an interview yesterday at the D9 Conference.

My favorite part of the interview is about how Jack demoed Square for the first time to legendary investor Ron Conway and swiped his AmEx black card on the spot. And Conway was immediately able to check his mobile banking statement for a debit to Jack for $500.

Here's the abbreviated video from AllThingsD:

I'll also keep a lookout for the full video and post it here if they make it available.

To me the Commonwealth Club interview was a bit more intimate though so if you have time to spare you should listen to the full podcast here.  

Also: Some Thoughts on the Old Spice campaign

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The other night I went to the Commonwealth Club in San Francisco to see Jack Dorsey, co-founder of Twitter and CEO of Square, speak and accept Inforum's 21st Century Visionary Award. 

Jack sat down with Kara Swisher to talk all things Twitter and Square. The whole interview was informative and inspiring. However, the highlight was the discussion about the origins of Square. To me, one of the most fascinating parts of a founder's story is the first ideation and naming. There is so much that goes into this and it is vitally important. 

Jack relayed that Square was originally named Squirrel. The idea behind it being that the verb form of squirrel, or 'to squirrel', means to store or hide away money -- a fit for their mobile payments service. And their first card reader, instead of the white square, was originally designed to be a wooden acorn. (Another potential name considered was Seashell, since seashells were the first form of human currency.)

The news of the original name Squirrel was known already, however it was revealed for the first time in this interview that the impetus for change actually came about from a lunch at Apple. Apparently Jack was set to have lunch with Apple SVP Scott Forstall when, minutes before the meeting, he saw a point of sale system in the Apple cafe from a company called Squirrel Systems. So he had to change the name and approach. He looked up squirrel in the dictionary and went down the line until he found square and the verb form of square, or 'to square up', which was obviously a great fit. It is hard to imagine Square having the same success that it has without a reader that is so white, minimal and squared off.

Interestingly, apparently this was the same method used to name Twitter. The original name idea for Twitter was 'Twitch' (they were going for the audible sounds your phone makes when you receive texts) and founder Ev Williams pulled out a dictionary, started at twitch, and worked his way down to find Twitter.

It was neat to be in a place where news was breaking and to see it happening in real-time. I relayed the news on Twitter, as did some others under the hashtag #inforumsf. Check it out to see some other interesting tidbits and quotes from the evening.

It's always great to get a glimpse at a founder's first inspiration for an idea. It is clear to me that Jack is one of the greatest entreprenuers of our generation so I feel privileged to have gotten the glimpse straight from him.

Update: Part 2: How Square was Almost Named Squirrel - (with Video)

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I've written before about how this is the year the Internet IPO returns.

Well today LinkedIn is going public. And it will be a doozie. In fact, at $45 per share they have priced at the top of their price range.

This values the company at $4.25 billion. However, even with the lofty valuation and the real risks, I plan on buying LinkedIn (LNKD) stock today and over the next couple of weeks as the stock fluctuates. Here are the main reasons:

1. It is a True Network Effect Business - LinkedIn becomes more valuable the bigger it gets. Not only to the members themselves but more imporantly, to recruiters. The larger the talent pool is, the more valuable LinkedIn is for finding potential job candidates.

2. The Market Opportunity is Enormous - LinkedIn is in one of the largest and untapped markets. The worldwide talent acquisition market is estimated to be at $85B. And the hiring solutions market is estimated to be at $27B. Compare this to LinkedIn's ~$100mm revenues from "Hiring Solutions", and you see their market penetration is very small. So there is a lot of room for LinkedIn to grow. 

Moreover, as the chart from SAI below shows, hirings solutions is LinkedIn's fastest growing business (see point #1 as to why). 

3. It is Becoming a True Platform - LinkedIn is slowly becoming a true platform. Just as Facebook and Twitter have done, LinkedIn is creating a platform that allows their data to be accessed by 3rd parties via APIs. As the company has matured, so has their APIs. This should open up all sorts of possibilities to other developers and solidifies LinkedIn as the Internet's "professional graph."

Platform companies are very rare. As LinkedIn becomes more ubiquitous around the Web, the platform will start to manifest itself in the financials eventually.

4. Valuation is More Reasonable at a Second Glance - As this anonymous institutional money manager explains, LinkedIn's valuation is much more reasonable when viewed in light of these platform / network effect / hyper growth companies (hint: see OpenTable):

To account for the rapid growth, we need to look out a few years and see where earnings can be to derive a target for the stock in a few years. It seems that the industry expects the company to generate over $950m in revenues, EBITDA margins near 25%, and EPS of > $1 of EPS in 2014. However, I think these estimates may prove conservative, as a company typically gives guidance to its bankers that it feels is readily achievable (so it is more likely to beat Street estimates). 

Hence, I think that the company can probably do over $1b in revenues in 2014, likely still growing >20% for $1.2b in revenues for 2015.  At a 27% margin (the company said long term margins should be > 30%), that would equate to ~$325m of EBITDA, EPS > $1.60 and FCF >$210m. Quality Software as a Service (SaaS) companies like Salesforce or Concur can trade anywhere from 5-7x forward sales. So with $1.2b in revenues in 2015, a 6x multiple would imply an Enterprise value of $7.2b in 2014 - adding in the cash and cash flow over that time and that would be a over an $8b equity value for >$80 a share 3 years from now.  That would imply over 125% return from the IPO if done at $35. Similarly, applying a 50x forward PE multiple (reasonable as EPS should still be growing 50%+ at that point) to the EPS of $1.60 in 2015 would imply a target >$80 a share.  Applying a similar free cash flow multiple would also support this level.  Lastly, the top SaaS names can warrant a forward EBITDA multiple of 20-30x.  Applying a 25x forward multiple would also derive a stock greater than $80 in 2014.

via businessinsider.com

5. The 3 Largest VCs are not selling any shares - It should be a telling sign that the 3 largest venture capital investors are NOT selling their shares. Very little management is selling either. These folks are very experienced investors who are in it for the long haul - and so am I.

Summary. LinkedIn is a unique platform company with strong leadership that is executing well in a very large market. While LinkedIn's stock may look expensive in the short term, I think it is a great long term investment. The valuation is certainly lofty but I think it is one that LinkedIn will easily grow into.  

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When I was starting up BlastGroups, I used to keep Theodore Roosevelt's "The Man in the Arena" speech posted above my desk: 

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.

That speech always got me through the darkest hours. Even when the signs were on the wall that we would indeed fail, I knew that I had at least gotten into the arena.

Yesterday Chris Dixon penned another great "desk-noteworthy" post for founders on the two kinds of people in the world. As Mike Arrington describes, Dixon doesn’t quite match the eloquence of Roosevelt, but the raw power of his writing makes up for it:

You’ve either started a company or you haven’t. ”Started” doesn’t mean joining as an early employee, or investing or advising or helping out.  It means starting with no money, no help, no one who believes in you (except perhaps your closest friends and family), and building an organization from a borrowed cubicle with credit card debt and nowhere to sleep except the office. It almost invariably means being dismissed by arrogant investors who show up a half hour late, totally unprepared and then instead of saying “no” give you non-committal rejections like “we invest at later stage companies.” It means looking prospective employees in the eyes and convincing them to leave safe jobs, quit everything and throw their lot in with you.  It means having pundits in the press and blogs who’ve never built anything criticize you and armchair quarterback your every mistake. It means lying awake at night worrying about running out of cash and having a constant knot in your stomach during the day fearing you’ll disappoint the few people who believed in you and validate your smug doubters.

I don’t care if you succeed or fail, if you are Bill Gates or an unknown entrepreneur who gave everything to make it work but didn’t manage to pull through. The important distinction is whether you risked everything, put your life on the line, made commitments to investors, employees, customers and friends, and tried – against all the forces in the world that try to keep new ideas down – to make something new.

Entrepreneurs would do well to take note and save both of these posts for the dark hours ahead.

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Last week TargetSpot came out with some very interesting research studies on Internet Radio.

The TargetSpot research reveals that Internet Radio listeners are what they dubbed a "super demographic."

Here are some of the findings:

• 39% of the US population listens to Internet Radio regularly
• Internet Radio listeners are affluent and influential
• 80% of Internet Radio listeners spend between 1 & 3 hours per day listening
• 45% of Internet Radio listeners listen on a phone and 14% listen on a tablet
• 73% change stations throughout the day. Internet Radio listeners are not exclusive to any one service
• 56% listen to Internet Radio while shopping

Their research also lays out many reasons why marketers should be integrating Internet Radio into their marketing plans.

Here are some of the highlights:

• Response Rate increases by 200% when advertisers add internet radio
• Users who spend the minimal amount of time listening to Internet radio had higher ad response rates than heavy Internet-only users
• 350% higher ad response rates when advertisers add Internet radio to broadcast radio campaigns
• 52% of digital audio listeners recall hearing or seeing an Internet radio ad -- with 40% of that group responding to an ad

This research confirms two things most of us already knew:

• The Internet Radio audience is very, very valuable 
• As a marketing platform, Internet Radio works very, very well 

And this bodes very, very well for the clear leaders in the space. 

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There has been a lot of talk recently about why Silicon Valley immigrant entrepreneurs are returning home.

Currently, if you are a foreign entrepreneur who wants to start a company here in the U.S., the process of getting a visa is in incredibly difficult. As a result, many of the smartest and brightest immigrants are returning home to countries such as China and India to start their companies. And entrepreneurship is booming in those countries instead of here in the U.S.

However, there is some good news. 

Earlier this week Senators Kerry (D-MA), Lugar (R-IN) and Udall (D-CO) unveiled the Startup Visa Act of 2011. This is an updated version of the Startup Visa bill from last year.

As Fred Wilson summarizes:

"The premise of the startup visa is simple. If an entrepreneur can get funding to start a business in this country, he or she should be able to get a visa. Creating companies and jobs is a patriotic act and should be rewarded by legal status. The logic behind these ideas is irrefutable."

The new Startup Visa legislation provides visas to the following groups under certain conditions:

1. Entrepreneurs living outside the U.S. qualify if an American investor agrees to fund their entrepreneurial ventures with a minimum investment of $100,000. Two years later, the startup must have created five new American jobs and either have raised more than $500,000 in financing or be generating more than $500,000 in yearly revenue.

2. Workers on H-1B visas, or graduates from U.S. universities in science, technology, engineering, mathematics, or computer science, are eligible if they have an annual income of at least $30,000 or assets of at least $60,000 and have had a American investor commit investment of at least $20,000 in their ventures. After two years, the startup must have created three new American jobs and either have raised more than $100,000 in financing or be generating more than $100,000 in yearly revenue.

3. Foreign entrepreneurs whose business has generated at least $100,000 in sales from the U.S. After two years, the startup must have created three new American jobs and either have raised more than $100,000 in financing or be generating more than $100,000 in yearly revenue.

The consensus is that this version of the bill is leagues better than the last. One of the harshest critics of the initial startup visa bill, Vivek Wadhwa, has stated that this new version of the bill is even better than he had hoped for. ln his Businessweek article on how Startup Visas will boost U.S. entrepreneurship and create American jobs, Wadhwa concludes:

"This legislation offers all of them a chance to stay if they take the entrepreneurial path. It will likely open the floodgates to immigrant entrepreneurship. I expect to see thousands of new startups, a handful of which may become a Google or an Apple. The really good news: Unlike the billion-dollar bailouts and government subsidies we are used to, this program will cost taxpayers nothing."

This last part of this is key. This program will cost nothing. With all the talk of boosting economic growth in a low cost way, supporting the Startup Visa is a no-brainer.

If you are a supporter of this idea, you can go to the Startup Visa web site and help by sending a message to your elected officials now. 

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Facebook recently rolled out their long-awaited commenting system. Indeed, they had an impressive cast of publishers on board for the launch. Publishers and developers can now get their own comments plugin here. 

I'm a big fan of Ryan Spoon, of Polaris Venture Partners and Dogpatch Labs, who wrote his thoughts on the importance of Facebook's comment system. In it he notes two main reasons:

1. Identity. Plain and simple: Facebook’s authenticated login reduces spam and therefore increases quality. Say goodbye to SEO spam, trolling, etc. I am sure Cialis comments will come over time … but Facebook social graph highlights relevant comments and friends.

2. Traffic. Facebook’s comments publish both ways, integrates into the notification systems and will equate to increased publisher traffic. Whether comments occur on the publisher site or on Facebook – the content moves in both directions. That’s a big win.

I agree. These are the two main benefits. Here is my two cents on both.

By forcing a link to a Facebook account, you are ensuring identity. Simply adding a real name onto a person's comments makes their thoughts and critiques much more useful and interesting. There is also much less anonymity which will greatly reduce spam and trollish comments. The end result is a more constructive conversation all around. 

In regards to traffic, Facebook's comments will be a very powerful source of traffic for publishers. Having comments publish both ways creates a valuable virality loop between Facebook and the publishers. Here is a comment of mine occuring on Facebook.com for an example:

Any replies to this comment on Facebook and that content also appears on the blog which is a big win for publishers. 

While these two benefits clearly make Facebook's comment system important, I think there are still a couple of caveats for publishers. 

The big problem is that there are a lot of people that use Facebook primarily as a personal profile and have no interest in linking their private/personal life with their professional/business life. 

TechCrunch, one of Facebook's launch partners, recently wrote that since they made the change to Facebook Comments the overall number of comments have fallen dramatically. The main reason for the decrease is far fewer trollish comments. However, I imagine part of the reason is also people not wanting to have a link to their profile in a public forum. 

There is also a school of thought that Facebook is killing one’s authenticity. The idea behind it is that in order to join commnunities around the Web we now need to live inside Facebook walls. I think this might have some merit to it. I'm of the opinion that the Web as a whole will suffer with less wholly owned communities.

Finally, there is the privacy caveat. I think the two-way system could be made a little clearer for non tech-savvy users. As I noted in a comment on Ryan's post, people commenting over on Facebook might not realize their replies are showing up on another site. Yes, the button says "Comment on site_name.com" but I expect some users are so used to commenting quickly that they will not notice and be unpleasantly surprised.

I, for one, am still a fan of Disqus for a third party comment system. Daniel Ha and team continue to impress me with updates to the product. Plus their new Houdini theme just looks slick.

I think I mainly like the ability to have one central hub for all of my comments across the Web. 

Now, if we can just get Posterous (which this blog is on) to jump on the Disqus bandwagon too...

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Last Friday Pandora filed to go public. Or more technically, Pandora filed a Form S-1 with the SEC. There was a large amount of buzz around the news.

An S-1, according to Wikipedia:

"An S-1 contains the basic business and financial information on an issuer with respect to a specific securities offering. Investors may use the prospectus to consider the merits of an offering and make educated investment decisions. A prospectus is one of the main documents used by an investor to research a company prior to an initial public offering."

Essentially an S-1 gives investors all the information they need to evaluate an investment. This information includes:

• A detailed description of the business
• Risk factors
• Use of proceeds
• Capitalization
• Complete financial statements
• Executive team backgrounds and compensation
• Board of directors
• Current stockholders and investors
• etc.

Since I have written about recent Internet IPOs and Pandora multiple times in the past, I have gotten many questions from friends, family and collegues on Pandora's IPO. However, Pandora's publicly available S-1 answers these questions about the company better than I ever could. 

So there, our S-1 is available online here -- it tells you everything you might want to know. 

Note: Below is the full text version of the filing but use the SEC's official version for the most up to date information.

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