VC Trends: Funding Blog Networks

Posted on October 18, 2006
Filed Under VC, Business, Web, Web 2.0, Media | 4 Comments

Pile of MoneyAs you all have no doubt noticed lately a lot of blog networks are receiving funding from big name VCs. The most well known blog networks to receive funding recently are GigaOm, b5 Media and Sugar Publishing (PopSugar, etc.), The blog network has truly become the hot new investment for early stage VCs. Why? Well, VCs have seen that blog networks are garnering traffic at a rapid pace and have the potential to make huge sums of money from advertising. The most well known example of this right now is TechCrunch. Mike started the blog as a hobby and now takes in over $60,000 per month in advertising from it (note: Mike has not taken funding).

So, investing in blog networks does make sense if you look at how the businesses can grow and how the coveted network effects can be harnessed to drive even more traffic (using Digg, etc.). However, my interest lies in why the blog networks need the money and, if they need it, how much do they need?

There are some easy answers to whether or not blog networks need some money or to why they would want it; writers, ad sales (this can be outsourced to a certain extent), admin, office space, servers, bandwidth, office supplies, etc. Om, for example, took $1mm or so for GigaOm which will cover all of those costs and leave some room for growth. But what about a network like Sugar Publishing who took ~$5mm from tier one firm Sequoia? Do they need $5mm? To answer that question I decided to do a little research on what kind of capital it takes to start a print magazine. Perhaps there are some similarities.

Turns out that you need between $50k and $100k to start a low end magazine/newsletter but if you want to launch a glossy newsstand publication like PC Magazine you’ll need to spend at least $5mm (sources: MagazinePublisher.com, MagazineLaunch.com and Cheryl Woodward’s book “Starting and Running a Successful Newsletter or Magazine”). Interesting. Seems like we hit the exact number that Sugar Publishing took and I would consider them, and the other blog networks I mentioned, the high quality newsstand variety.

A lot of the cost to start up a big time magazine lies in the printing and infrastructure which you don’t have in the online world and with bandwidth and storage being cheap where does that money go? Staff, office space and the like are a big expense for online publishers but are still not enough to justify a large investment. While talking with some friends about this it seems the answer may be that Sugar and others are planning on using some of their money to acquire other properties, networks and talent. With a few acquisitions Sugar starts to look cheap at the $5mm investment price.

With the costs being laid out I am now drawn back to the VC side of the table. I am guessing that the pre-money on Sugar was around $10mm or so (perhaps a little more as TechCrunch speculates) which means that Sequoia ended up with about one third of Sugar. VCs are usually looking for a 10x return meaning that, in this case, they want to sell the business in the end of the day for around $100mm. This then means Sugar will need to get to about $10mm in cash flow per year ($833k per month).

If you take a look at Sugar’s current pageviews (which are growing incredibly fast - I have heard they are at 13mm per month now) they will have to grow them by 8 - 10x or so and achieve a good CPM to be able to get to that revenue level (not including feed ad inventory which will become more of a factor - disclosure: I work for FeedBurner). Not at all impossible judging by how fast they are growing and by the demand for quality women focused content online. Also, if the acquisitions do come into play this type of growth could be achieved fairly easily.

I hope that you have found this little bit of analysis interesting and I would love to hear your comments. It is going to be very interesting to see how or if the different funding amounts and approaches will affect blog networks and whether or not the VCs will get the 10x returns they are looking for. It still seems to me like a lot of money is being put to work but I also don’t want to discount guys like Sequoia who have had a lot of big wins over the years.

Photo Credit: Noah Wesley from Flickr


Deal Flow: For the Week Ending October 16, 2006

Posted on October 16, 2006
Filed Under Deal Flow: Weekly Wrap-Ups | 1 Comment

Google News:
- Google “Docs and Spreadsheets” launches

New Companies:
- Smalltown launches and has $3mm from Formative Ventures
- Coghead launches: allows for easy online application building

Fundings:
- AirPlay secures $14mm series B: merging mobile gaming and live TV
- Ripe Digital receives a $32mm series B: on demand TV
- Cellfish Media raises $50mm: pioneer in original mobile content creation
- LeadPoint Secures $2mm series C: online leads exchange
- Procore Technologies raises over $2mm series B: software-as-a-service for construction projects
- SolFocus completes a $32mm series A: solar cells
- Amyris gets $20mm: developing alternative fuel
- Indian local search engine Guruji.com gets $7mm from Sequoia
- Practical Instruments raises $8mm: solar energy
- PopSugar takes ~$5mm series A from Sequoia

VC News:
- Sevin Rosen halts latest fund
- VentureBeat launches VentureBoard

Cool Toy O’ the Week:
- H-Racer: Hydrogen Fueled Toy Car


TECH cocktail 2: A Smashing Success

Posted on October 14, 2006
Filed Under VC, General Thoughts, Technology, Chicago, Business, TECH cocktail, Web, Web 2.0 | 2 Comments

Rick and IFrank Gruber and I hosted our second TECH cocktail in Chicago at the Gramercy this past Thursday (October 12, 2006). The event was promising to be bigger than the first with over 400 RSVPs and ultimately 350+ attendees. We knew it was going to be a challenge to keep the fun factor high but I think we were able to pull it off judging by all of the great feedback we have received. Not too bad for a couple guys with a vision formed about eight months ago over some Potbelly sandwiches.

TECH cocktail 2 brought together technology enthusiasts, entrepreneurs, VCs, angels, podcasters, videocasters, bloggers and even a few top CEOs together in one room and the energy was incredible. This is exactly what Frank and I wanted to see when we started to pursue TECH cocktail and why we chose the name. We wanted an event where a cocktail of people from the tech industry could all get together and talk about what we are passionate about - technology. Ron May got the best quote of the evening from Matt McCall which I think sums up the attendees and the event nicely:

“This is the crowd that will remake Chicago.”

That’s a powerful statement but I think Matt is right. Being a transplant from Boston, a town that didn’t have a silicon valley atmosphere but had a tighter knit tech community than Chicago, I can say that I am proud to be a part of bringing the tech community together here in chi-town and watching Chicago gain its rightful place as one of the top tech cities in the country.

As Frank Said: Thank you, Thank you, Thank you…

Frank and II am indebted to a number of people and companies that made the event happen. First off, a huge thank you to Frank Gruber, my partner in crime, for being a great co-founder and more importantly a great friend. Second, I would like to thank our sponsors for TC2; midPhase, MK Capital, Coastr, Liquid Talk, Chicago.com, Digital Bootcamp and the Chicagoland Entrepreneurial Center. Third, thank you so much to all of the companies who were willing to show off the fruits of their labors. Thank you eSigma, GrubHub, Pawky.com, Planypus and Time 59. Thank you to all of our film crews including Stone Cliff Productions, LiquidTalk and Technology Evangelist. Thanks to Jonathan Wolter and my girl, Laura Bermudez, for working the registration booth with a smile all night. Thanks to the guys from Freshwater Venture who brought some really sweet Chicago tech company baseball cards with them. Nicely done guys! Thank you my family and friends who always support me even from afar. Wish you could have been here to see this. Thanks to my good friend and college roomate Rick Gottlieb for coming in from NYC for this. Whew! Last, but certainly not least, I want to thank Jeff Pulver for coming in from NYC for the event and for his generosity in picking up the tab after our money ran out. Let me tell you - you guys can drink so the bill wasn’t cheap!

The Reaction and Media (taken from Frank’s post):

Here are all of the photos tagged techcocktail2.

Here is some of the buzz from the blogosphere:

TECH cocktail Specials launches:

TECH cocktail SpecialsFrank and I also took the opportunity to launch our new job board called TECH cocktail Specials. After TC1 Frank and I were inundated with requests from folks looking to find good people in the Chicagoland area so we thought putting a job board together would make sense. We’ve set the price low and the proceeds will go towards funding future TECH cocktail events. If you are interested in giving it a trial run please feel free to e-mail me and I will get you the freebie posting code. Special thanks to Jeff Johns over at Phraction for developing the site for us.

The Crowd

Looking forward to seeing you all at TECH cocktail 3!


Is the VC Model Broken?

Posted on October 11, 2006
Filed Under VC, Fixing the VC Model, Business | 1 Comment

Broken DollarThe subject of whether or not the VC model is broken has come up again so I thought I would weigh in. This time the New York Times started the discussion with an article discussing Sevin Rosen’s decision to abort the process of raising their 10th fund. The reason for the cancellation of Sevin’s 10th fund is summed up in a quote from General Partner Steve Dow:

“The traditional venture model seems to us to be broken…”

This is very interesting and intriguing for a couple of reasons.

  1. Sevin Rosen is a very respected firm that has been around for a long time (25 years or so) so hearing them say that the VC is broken means a lot more to people than Fraser and I talking about it.
  2. The firm had already taken somewhere between $250mm and $300mm in commitments for their fund meaning they had a lot of management fees coming to them.

Of course there are a lot of VCs who don’t think the model is broken. One of the first VCs to respond was Fred Wilson. Fred’s conclusion was that the VC model is not broken but just a model that needs to be tweaked. His suggested tweaks, which he says a lot of VCs, including himself, are already employing are as follows:

I totally agree with Fred on those points. In fact, I have talked about the benefit of smaller funds before (check out my post on <$100mm funds for more). However, I think that the New York Times article is referring to the “traditional VC model” which is… well, I don’t really know. My guess is that most people would disagree on what the traditional model actually is.

I think that the traditional model the New York Times was referring to is large funds looking to put a lot of money to work into companies that will generate high 9 to 10 figure returns through IPOs. This is exactly the opposite of what Fred calls for which leads me to this statement:

Perhaps Fred doesn’t think the VC model is broken because he is, in fact, one of the “new school” innovative VCs.

I happen to believe Fred is very innovative and what seems so natural to him doesn’t come natural to others.

VC funds themselves are not the only piece of early stage investing that is going through some changes. There are also other innovative trends happening now that are changing the game. One of those trends comes in the form of “advisory capitalists” or ACs. ACs put time to work instead of (or along with in some cases) money for a share of the company. They are basically a hybrid between a VC and a consultant.

There are some problems with ACs though like the fact that they probably won’t be able to put up money when the company needs it leaving the ACs piece of the pie vulnerable to serious dilution. However, the idea is interesting and new and that’s a good thing (check out my previous article on ACs). If you would like to read more about the innovative things that are happening in early stage investing please see Fraser Kelton’s post from earlier in the week that includes a nice summary of the new ideas including ACs.

In the end of the day there is definitely one thing that everyone can agree on though: It is a very exciting time for early stage investing. I, for one, am excited to continue watching the progression while hopefully contributing to it as well.

Update: It seems as if the reason Sevin Rosen gave for halting their latest fund (VC model is broken, etc.) has come into question.  VentureBeat is reporting that Sevin Rosen may have orchestrated a snow job on the New York Times and that the real reason for the halting of fund X was due to internal personnel issues.  Either way - discussing the venture model and how it may be tweaked to perform better is still important.


The Founder Discount

Posted on October 10, 2006
Filed Under VC, Fixing the VC Model, Business | 1 Comment

Empty PocketsThe latest podcast in Pascal Levensohn’s VC-IO entrepreneur series came out today and the subject matter was CEO compensation and the founder discount. Compensation in start-ups is something I am very interested in and, as long time readers know, I have talked about ways compensation could be structured differently to better align entrepreneurs with VCs (the previous link is to the first in a string of “fixing the VC model” posts). Little did I know that there was a man by the name of Noam Wasserman, Harvard Business School professor and blogger (I am now subscribed to his feed), who has done a lot of research in this area.

The fifteen minute discussion that ensues between Noam and Pascal on the podcast covers a lot of material so I will highlight some key points here although I suggest listening to the whole thing if you can.

As Pascal asks in the podcast - Why should we care about this? Isn’t this what being an entrepreneur is about? Taking pay cuts to work on your “baby” and to gain on the upside of your equity stake? At first blush caring about this may seem silly but when you look deeper you can see that there are significant issues brought on by compensation.

Founders will eventually be faced with hiring non-founders that get paid more than they do at which point they will begin to wonder why they are worried about saving that extra $30k for the company. The founders can also become distracted by their lack of pay and begin to lose focus on the business. In these cases, if the founders were just paid adequately they would be able to focus more on the business and less on how they are going to pay their bills and whether or not they may ever see any upside on their equity stake (this could be another case for partial founder buyout although PFB has its’ drawbacks as well).

Founder compensation definitely plays a role in how a company will move forward and I know I will continue reading Noam’s blog for the latest in compensation and other studies on how non-founders and founders differ.

Noam’s latest paper on founder/CEO compensation can be found in the October 2006 issue of the Academy of Management Journal and is one of a series of papers dealing with the differences between founders and non-founders.


New Stuff from my Readers: Volume 1

Posted on October 10, 2006
Filed Under VC, Business | 1 Comment

I have received a number of notes from all of you guys who read this blog over the past couple weeks. This lead me to an idea of showcasing what all of you are up to once in a while in a post and here we are. In this volume I want to highlight a couple communities for entrepreneurs that were founded by readers of The Wannabe VC (listed in order of when I received e-mails).

Start-up Camp: Start-up Camp is described as a posting board and community for entrepreneurs. You will find a traditional posting board on the site as well as blog posts and other content from around the entrepreneurial community. Start-up Camp has also created ways for people to spread the word which is very smart. There is nothing like viral word of mouth marketing to get a community off the ground!

IdeaWhip: IdeaWhip is a community for entrepreneurs as well but it focuses on a specific group of people. In specific IdeaWhip focuses on young alumni, undergrads and graduate students. The founder of IdeaWhip is also looking for help and suggestions on how to better the site so please check it out and lend a hand.

That does it for “New Stuff from my Readers: Volume 1.” Please send me a note with all of the interesting things you are working on as I would love to keep this segment of the blog going.


Deal Flow: For the Week Ending October 9, 2006

Posted on October 9, 2006
Filed Under Deal Flow: Weekly Wrap-Ups | 3 Comments

Deal Flow is a new section for The Wannabe VC but those who are reading that came from my podcast will know this as the show notes from VentureWeek. I hope this will be a useful weekly wrap-up of new companies, new deals, new venture funds, etc. and I hope to see regular feedback from all of you to help me make this section better. Without further adieu, here we go!

Huge News of the Week:
- Google acquires YouTube for $1.65 billion (all stock)

New Companies:
- Revision3 founded by Digg co-founders and gets $1mm
- stashSpace, full length video editing online, launches
- slideshare launches: powerpoint + youtube

Fundings:
- Voxant: Video Syndication Network - gets $10.5mm
- Ecast: Digital Jukebox Firm, gets $20mm
- Wallop: Social Networking site, gets $10mm second round
- ContextWeb closes $15.5mm series C
- Nexaweb closes $10mm series B
- VideoEgg gets $12mm third round
- BuzzLogic raises $1.5mm
- Demand Media raises $100mm
- Visto secures $51mm
- Mintera secures $10mm
- PayperPost, controversial blog advertising company, raises $3mm
- Fotolog received $4.1mm third round
- Songbird gets $1mm
- Ugobe raises $8mm
- Yelp raises $10mm
- b5 media: blog network, raises $2mm
- CityVoter gets $1.1mm
- Voddler raises $2.2mm
- Ripe raises $32mm second round

New Funds:
- NGEN II Closes at $180mm
- OpenView Venture Partners launches

Interesting Notes:
- Unique International Angel/VC Community Launches in Europe and the US


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