March 14, 2010

Why Not Just Run It As A Lifestyle Business?

In 2007 I founded Gamers Media, a vertical ad network for casual game websites.  As an advertising network we’ve been able to accelerate our growth through revenue without the requirement of institutional investors, which has undoubtedly allowed us to iterate our business model several times and explore new opportunities that institutional investors may have otherwise felt were not aligned with our original vision.  

Its my belief that if possible, founders should refrain from raising institutional capital as long as possible to figure out their business model.  Raising capital too early from institutional investors may hurt your chances for success since their job as investors is to is to try to keep the founders focused on a clear vision, and sometimes your vision may require change.

So after nearly three years, hundreds of ideas and several iterations to our business plan, we finally have a clear understanding of the market and how we differentiate ourselves in a scalable and defensible way.  Its very important to refine your business model until you feel you’ve found a scalable, differentiated and ultimately defensible plan before you raise institutional capital.   

So in December 2009, we recruited Lou Kerner as our CFO and began meeting with institutional investors to raise the necessary capital to execute on our new business model, Banner.ly. 

However, a common question we’ve been asked has been, “Why not just run this as a lifestyle business?”

Sure, there’s no question that operating an advertising network is a great lifestyle business for any founder.  But Russ Fradin may have answered this question best when he said that in order to build an interesting long term sustainable business, it requires a lot of capital.  And venture capitalists are paid to help entrepreneurs succeed.  So as an entrepreneur that is looking to build a long term sustainable business, you should raise more money sooner from venture capitalists to increase your chances of success.

He also says not to put too much emphasis on sexy ideas or retaining as much control of your business as possible. Adify certainly wasn’t the sexiest business, but it was a very practical scalable business, which provides the technology and back office services necessary for companies to run their own online ad networks.  And as Russ says, who cares if you retain control of a sinking ship.  However, control is a matter of leverage and BATNA, and Naval writes extensively about this on his blog (subscribe to his RSS if you’re an entrepreneur).

Anyway, the overall point Russ makes, which I agree with, is that if you want to build a long term sustainable business, you need institutional capital from professional investors that are paid to help you succeed on your business plan.  So that’s why we’ve been exploring the possibility of raising capital and not just running it as a lifestyle business. 

Luckily for venture capitalists, there are entrepreneurs like us that understand and appreciate the concept of venture capital, or they wouldn’t have a job!  :)


March 4, 2010

The Fourth Generation Ad Network Is Product Oriented

Jeremy Liew (Managing Director at Lightspeed Venture Partners) wrote a post on February 25, 2009 asking what the fourth generation ad networks will look like.  In his post he described the evolution of ad networks into three generations, which are:

  • Controlling Inventory
  • More Data
  • Better Targeting Algorithms

Together, he went on to say that these three elements represent three of the four core competencies of ad networks, which he describes as:

  • Aggregating Inventory
  • Aggregating Data
  • Targeting
  • Sales

Without the ability to aggregate inventory and sell, you clearly don’t have ad network.  Jeremy also correctly pointed out the commoditization of inventory and data from companies such as Right Media, DoubleClick exchange, Bluekai and others. 

I would also argue that targeting and sales will also eventually become commoditized through the ad servers and exchanges respectively.  If you’re a rockstar in ad sales, you can easily find inventory on the exchanges to buy, and eventually, as OpenX, AdJuggler, Zedo and others develop better targeting capabilities, there won’t be much differentiation within the targeting competency either. 

In fact, when I founded Gamers Media in 2007, I believed that ad data and ad targeting would eventually become commoditized by ad serving companies.  So we focused our efforts on sales and aggregating inventory (First Generation) to accelerate revenue and profits to bootstrap a product effort that would create a defensible business. 

There are 400+ ad networks attempting to offer a unique value proposition to the advertiser, yet there is very little technological differentiation among them, and even less defensibility.  Ad networks like Betawave attempt to become thought leaders with catchy taglines like “attention based media”, but ultimately these networks are dependent on recruiting and retaining publishers and selling their story to agencies. 

The fourth generation ad networks will be product oriented.  They’ll need to compete for users, not advertisers.  The fourth generation ad network will need to provide products to publishers that add value to their users.  These products should include game mechanics that create addictive repetitive behaviors and high barriers to exit for the publishers once their users are addicted, while serving ads along with the product.  The ads will also likely be non traditional (non-IAB).  That’s not to say these fourth generation ad networks won’t sell IAB ads as well. 

Jeremy finished his post stating that sales must always be the core competency of the fourth generation of an ad network.  Although I agree that sales is a core competency that any ad network clearly needs, if you succeed at building a product oriented ad network, you could always open your inventory up to the ad exchanges to help fill any sales voids you may have. 

I’m interested to see what others think.