@gordonbowman

Millenial Media's IPO Filing: 5 big takeaways

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

Two Opposing Views on Groupon

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?

Mark Pincus and the role of Game Mechanics in Startups

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.

The Loop Behind Turntable.fm's Rapid Growth

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.]

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

“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

How Square was Almost Named Squirrel

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)

Why I'm Buying LinkedIn

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.  

Chris Dixon on The Two Kinds Of People In This World

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.

Thoughts on The Startup Visa

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. 

On Internet IPOs

This seems to be the year the Internet IPO returns.  

It is a very exciting time to be in the startup world. San Francisco is abuzz these days with talks of major 2011 IPOs from companies such as Groupon, LinkedIn, Demand Media, Skype, and others. The other big two, Facebook and Zynga, are almost surely to IPO in 2012. Everywhere I turn people are talking about who is going public and when.

On the news of recent high valuations via private financings, the broader press is signaling alarm bells, citing another "bubble." John Battelle wrote a great post pointing out that no, in fact, we haven't seen this movie before and that the companies now earning billion dollar valuations do, in fact, deserve them.

Among his better points:

"Each of the companies earning these valuations have revenues in the hundreds of millions or more, and operating profits in the tens of millions, if not more. Most also have operating histories of many years, and/or executives and boards who have extensive histories operating in the Internet economy."

Fred Wilson agrees:

"But it is very possible that some or all of these deals will be good buys even in the face of an overheated valuation environment. The public Internet names, most of which went public eight to ten years ago (or more), are mostly carrying full but not crazy valuations. If this new crop is priced off of those comps, then they could be worth buying and owning. And, as John points out in his post, if these companies contiue to grow rapidly and throw off ever larger amounts of cash, then they could easily be worth well north of what they are worth today."

It has been over ten years since the dot-com bubble and crash. The markets have largely been closed off since (first due to quality supply, then the recession) so now there is a very strong pent up demand. The companies seeking IPO this year are strong, quality companies to fulfill that demand. These companies are earning revenues in the hundred of millions and are generally the market leaders in their respective markets.

So, despite the many very serious problems with the IPO process, 2011 will mark the second coming of the Internet IPO. However, this time around, the companies are all very, very real.