Facebook IPO Lessons

Like most people, I had the opportunity to review Facebook’s IPO filing yesterday and admit that, like Apple’s recent earnings announcement, this is pretty damn impressive.

Here are a couple of lessons worth reinforcing:

1) People’s view of what is normal and acceptable in emergent online activities is constantly evolving. What Facebook deserves a lot of credit for is not allowing itself to be held back by what a small and vocal group of critics said they should not do. As a result, by constantly pushing forward, and making mistakes, Facebook created a new normal that in retrospect would never have been accepted even 5 years ago.

2) Zuckerberg, like Larry Ellison and Bill Gates most notably, retained tremendous control of their respective companies through outsized stock ownership and voting structures that assured them total control of their destiny. Shareholder rights advocates will say that this is precisely what needs to change about corporate America but stock ownership is not a democracy where every vote is equal… but it is also a structure that shareholders opt into when they buy stock in a company.

3) Don’t discard old business models because they are old… Silicon Valley is home to the shiny new object syndrome and we often forget that old business models are referred to as old because they WORK. Facebook was criticized for not having a business model, well they did and it was a tried-and-true one… advertising. Turns out that a company can still make a boatload of money doing this and it doesn’t require a 60 slide powerpoint deck to explain it.

4) Raise boatloads of money when it is available to you, and do it on your own terms. Facebook benefited from a wide range of factors that drove interest in the company, not the least of which was that for private equity investors who had large funds to put to work, there were few options that scaled to the degree that Facebook did. These investors are not looking for the returns that early stage VCs are, so they were happy to put large amounts of capital to work at high valuations, and it appears that these bets will pay off. Mutual funds and other traditional investors that bought stock in the private secondary market that emerged were also reacting to a scarcity of investment options. The real lesson here is not to be constrained by the traditional venture capital cycle when macro conditions create an environment that allows you to be non-linear.

Lastly, I’ll refrain from repeating the oft-repeated mantra about hiring the best people… would you hire anyone but the best? I hate it when people say things which fall into the stating of the obvious category.

The End of the Beginning

Today Get Satisfaction announced that we have successfully closed a new round of financing, led by Bruce Cleveland at InterWest Partners. It’s a validating moment for all the hard work that the team has undertaken, particularly in the last year and a half.

Despite the fundraising process being a major MBO for me over the last 3 months, I find myself surprisingly “not in the moment” in terms of celebration. I think this is a result of realizing that closing the financing is not an end point but a starting point, and when you are at the stage we are in the expectations on us are focused exclusively on execution and competitive position. There simply isn’t a lot of time to celebrate what we did yesterday.

In other words, we’re past the point where figuring things out is a primary focus… and to the credit of our entire team this is why we had such a smooth fundraising process that closed in a reasonably short period of time. We have developed the business to a point where we know what we are selling, how our customers derive ROI, and we have a strong perspective on the market today and tomorrow along with where we fit.

We are no longer a startup… this most recent round of financing affirmed that we have crossed over to growth stage. This is a great accomplishment and represents an enormous collective effort by every single person in this company, and the company is a lot bigger, approximately 40 people up from 12 at this time last year.

From here on out we need to continue executing as well as we have been, establish an externally accepted competitive profile in a defined market, land-and-expand in our major customer accounts while we also continue driving customer growth on our zero-touch web channel, develop more distribution channels, deliver on a significant product roadmap for this year and next, and lastly, continue building a world class team.

“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
Sir Winston ChurchillSpeech in November 1942

 

The Ascent of Q&A as Community

Q&A communities have become grown in popularity in recent years with consumer and business offerings being developed at a blistering pace and established players emerging with their own offerings.

The Q&A interaction model has existed for years, as long as search engines have been around and this is not a coincidence. Q&A takes advantage of a common behavior that web users exhibit through search engines, they query in the form of a question.

Early generation Q&A sites existed as consumer grade services and an outgrowth of these services are expert based where the person responding to a question is a vetted expert on the subject matter and is compensated for answering. More recently Q&A sites have morphed into a variant of social network where users build profiles and interact with other members and topics by following them and cross posting to Facebook and Twitter.

I am most interested in the generalized Q&A communities, not the expert networks.

Search and Q&A are Different

While no data is publicly available, it is generally accepted that a significant percentage of search queries are in the form of a question, and it is this behavior that has created the opportunity for a raft of Q&A sites to emerge. Search is often Q&A but Q&A is not well suited for search and in an attempt to differentiate from Google several search engines, Bing most significantly, have invested heavily in advertising campaigns that highlights the shortcomings of search for answering questions.

The problem with search for Q&A is the methodology for serving search results. When answering questions, the volume of inbound links to a given web page, the accepted search technique for ranking web sites, does not tell you the site with the best answer; it just tells you the most popular page with relevant information.

Text matching, another useful technique for serving search results, is also inadequate for Q&A because the text in a question is rarely found in the best answer. Similarly, click through analysis on search result links to determine site relevance is ill suited to Q&A because presenting the answer to a question requires no click through to measure.

Source: Ask.com

Finally, the nature of questions presents quite possibly the biggest hurdle for search engines attempting to accommodate questions as well as keyword searches. Any given question can represent degrees of complexity and subjectivity, as well as be time based.

Why Marketers are Taking Notice

Brand companies today are already monitoring Q&A communities as a normal part of their social media monitoring and response systems, it is not unreasonable to speculate that companies will seek greater participation in Q&A communities for the same reason that they are participating in social networks and in customer communities:

1)     Exert brand influence by demonstrating expertise in topic areas. Q&A communities, such as Quora, prominently display company information associated with a user profile and this is a powerful signal in the community as it relates to specific topics.

2)     Gather honest and detailed feedback. Q&A communities that allow for multiple members to interact with a question provide the equivalent of a micro focus group for a company interested in gathering feedback. The nature of Q&A communities has thus far not proven appealing for trolls and bad actors, ensuring that the quality of feedback is high.

3)     Social media integration is a bonus for brands interacting in Q&A communities, cross posting in many cases to Twitter and Facebook.

In addition to brand to customer interactions on Q&A communities and in some cases the ability to populate web assets with widgetized content, brands also have the ability to do something in Q&A communities that they cannot do in any other forum, which is the ability to support an entire product category through a Q&A community.

I already do a form of category support now on Quora, replying to questions concerning social media, customer communities, and community support. This is a powerful market facing activity that projects industry expertise and builds confidence in the company brand.

It is foreseeable that Q&A sites will sell sponsorship of topics to brand companies much in the same way that Google sells search keywords today. With the strong SEO that sites like Quora exhibit the value of keywords on the site would be considerable and they could in fact implement the same auction methodology that pervades search making it a natural extension for online advertising initiatives.

Will Q&A Encroach on Customer Community Platforms

The short answer to this question is that there are too many variables to project what the point of intersection between Q&A and customer communities will be, however it does seem plausible to forecast that there will be a convergence in these two closely aligned sectors over time.

Business.com released a research study in December 2009 (which I apologize for not being able to locate online now) that revealed surprising closeness in the perception of broad based communities vs. Q&A sites. With 1,200 people surveyed across a spectrum of functional roles, the participation rate in online communities and Q&A sites was virtually identical at 51% and 49% respectively. This study is one data point and to be clear it reflects how business users view each type of community for professional use, however the fact that little sunlight separates the perception of each reveals that the definition of community is very pliable.

Q&A and customer community platforms are complimentary for the time being and for a small cross section of customer community platforms there exists an opportunity to build out a Q&A community that weaves in and out of customer communities.

3 Classes of Q&A Companies

The first generation of Q&A services were consumer based and highly generalized in nature, allowing for virtually any question to be asked and, hopefully, answered. These sites are often advertising monetized therefore the primary objective is traffic with quality of answer a distant second.

Interestingly, the generalized consumer grade service remains a primary offering for many “answer sites” and is even being re-imagined by newer entrants with large user communities, Facebook Questions being the most recent example.

The other end of the spectrum is the curated expert community, such as Mahalo Answers, where the objective is both traffic and quality. In the case of Mahalo a virtual currency is used as a form of compensation which incentivizes quality contributions. This approach takes advantage of a primary weakness in search engines, an inability to provide quality answers for open ended questions.

More recently Quora has emerged with a compelling model that takes advantage of a primary social network characteristic related to social graphs. Quora, and LinkedIn Answers, both rely on the likelylihood that a member’s social graph will have collective insight on topics that the member finds interesting. By following topics and people, as well as posting Q&A content in a newsfeed the Q&A community drives the participation and quality dimension.

Facebook Questions

This recent service from Facebook has not disrupted the market because it is poorly surfaced and to my knowledge not even available to all users. It’s unclear what Facebook’s commitment is to Questions but the ability to drive their own organic search at the expense of 3rd party search engines is interesting to consider.

Questions is also not integrated with Official Pages and that hinders brand companies ability to get behind this initiative in parallel with their Fan management and online advertising initiatives.

LinkedIn Answers

LinkedIn has been building Answers since 2006 and the service was conceived to focus on business intelligence rather than general purpose Q&A. The quality of content on Answers is impressive and the categorization options they present as part of the posting process clearly indicate a bias to specific categories of business topics.

LinkedIn does offer category (topic) sponsorships to advertisers.

Quora

This is perhaps the most watched Q&A community and for good reason, the quality of content is very high and the network behaviors for following of people and topics as well as sharing of content to Facebook and Twitter are pronounced.

The user experience of Quora reflects a strong understanding of how people use networks and the social signaling that drives participation. I’m not aware of their revenue focused initiatives but it’s not hard to imagine what they are.

It’s interesting to note that Quora may be entering the phase where they are legitimately mainstream… as indicated by the degree which Silicon Valley pundits turn on them. I have a few complaints about Quora, like the hyper aggressive manner by which they connect via follow topics and people to me, but in general I’m a fan of this service because I discover great content on it.

Sponge

This is a white label Q&A community that represents a specialized form of customer community. From a product standpoint Sponge is most like Get Satisfaction but that also means their challenges in building community are well defined. Sponge will attempt to position themselves as “Quora for the enterprise” is my bet.

Opzi

Like Sponge, Opzi is a white label Q&A community for business customers… another “Quora for the enterprise”. Their challenges and threat status are identical to that of Sponge.

Market Opportunity

This is a real market opportunity, that much is clear, because of the way it forks search behaviors, enables co-creation of content, and has well understood revenue models that can be played. The explosion of companies in this space also foretells a future collapse as consolidation shrinks down the viable options and forces other companies to become highly niched in their delivery. This isn’t a bad thing, it’s a focusing phase that all successful categories go through but in this case I would speculate that we are at least 18 months out before that begins to happen.

The VC Shakeout

This piece in HBR is must read, it details why there will be a lot fewer VC funds in the future.

The sky is falling on the venture capital rainmakers. Over the past 10 years their quarterly internal rate of return (IRR)—the primary measure of VC success—was dismal, hovering in the single percentage points and sometimes dipping into negative territory. Many firms have struggled to market new funds. Their main sources of profitability—IPOs of their portfolio firms—are fewer and farther between. Their backup strategy—selling their portfolio companies to other firms—is getting tougher and the prices are falling. Investments that once generated cash after just two years now take six to 10 years to reach liquidity.

[From The VC Shakeout - Harvard Business Review]

Maybe the solution is downsizing the industry (which is happening anyway) or going back to basics or rethinking how we capitalize and manage venture investments… I really don’t know the answer. The easy part is identifying the problems, the hard part is figuring out what to do about them when the problems are structural in nature.

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9 VCs You’re Gonna Want to Avoid

Too funny. I’m listing #1 through 3 as a teaser, click the link to get the rest. This list is made all the more funny by the fact that we all know someone who fits one of the types, or several, or maybe even one for each.

I was reminded of the meeting I had with one VC (when I was on the other side of the table raising money) where he spent the first 25 minutes of our 1 hour telling me how smart he was, how much money he had made, and that he only does 1 deal a year because when he invests in something it is definitely going to be big… I think he would be a #6.

1) Mr. Armchair. He’s a Friday afternoon Chairman. He knows exactly what he’d do as board member of facebook, Google, MySpace.,YouTube. Too bad his portfolio company’s don’t get the same enthusiastic coverage.

2) Mr. One-Hit-Wonder. Yes he sold Postage.com for $200 million (and kept $15 million) so if you wanna hear war stories from the ’90s, take this GSB alum’s money.

3) Mr. Spray-n-Pray. He cites being founding CEO as his Operations experience. (Translation: He was a interim CEO for his last venture firm before company/portfolio implosion and subsequent fund implosion. His fund is a catch-all and he tries to participate in every Sequoia backed deal.

[From 9 VCs You’re Gonna Want to Avoid « FoundRead]

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