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Olson’s Observations

Technology. Innovation. Science. VC. Media. :: by Eric Olson

Archive for September, 2007

Weighing in on the Facebook Debate: What’s with the Valuation?

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I knew there were some folks out there that had more of a contrarian view on Facebook and they are now emerging in force thanks to Kara Swisher’s latest post over at AllThingsD. The post, and reason for outcry, all centers around the valuation numbers being floated around Facebook these days.

Supposedly Microsoft is seriously considering an investment in Facebook that would value the company at around $10 billion. Yes, you read right, that’s billion with a B. And as if that wasn’t somewhat crazy in and of itself the Wall Street Journal article mentions that Facebook might actually be holding out for a $15 billion valuation (this valuation craziness caused Om Malik to create a Silicon Valley Funding Advisory graphic akin to the Homeland Security warning - if he can get this into a widget it’ll be on Olson’s Observations in a second - hilarious!).

Those are some big numbers for sure and there is no doubt that Facebook has a lot of potential but let’s take a quick look at their revenue numbers to date. Swisher has them pegged at around $30 million in profits on $150 million in revenue (not sure on the time frame for the numbers). If we look at those numbers and then apply a 10x revenue valuation, which is what a lot of folks initially look at when thinking about acquiring a company, that puts Facebook’s valuation right around $1.5 billion.

The $1.5 billion valuation is an order of magnitude away from the $15 billion valuation that Facebook is supposedly looking for (side note: every deal doesn’t follow the 10x “rule” - it is just a good benchmark to use in this post - in fact, a lot of IPOs go for more than 10x including Google’s). Again, Facebook does have a ton of potential but, as Swisher points out, we have seen this story before. That is to say a company with a huge valuation and a lot of potential that fades away.

That said, some of the examples she gives (like Geocities, Netscape, AOL and Yahoo!), don’t seem to help her make her point. Both investors, founders and employees cashed in big at all of those companies and stock market investors were also able to cash in on them for a while before the companies became cash cows as opposed to rising stars (any BCGers out there - did I get that right?).

One of Swisher’s other main points is that Facebook is not Google. This is dead on. She likens Facebook to Yahoo! which is a good analogy. The basic thing to remember is that Facebook is far more dependent on eyeballs than Google. Ah, but Google is all about ads and eyeballs seeing those ads so isn’t it one in the same with Facebook? Not at all.

Google places ads on many publishers websites (and many other places for that matter). If a publisher starts to wane and receive less eyeballs then another one comes along to fill the gap and Google will probably have ads on that site too. Facebook on the other hand only has their property. If eyeballs begin to go away Facebooks begins to lose revenue immediately.

Basically Google is far more broad than Facebook will probably ever be.

Now, let’s go back to valuation numbers for a second and see if Facebook is really that far off in their self assessment.

I took a look at where Google was right around its IPO. Those numbers were as follows: $105.6 million in earnings on $961.8 million in revenues (2003 fiscal year numbers - source). If you take the 10x approach here that would have put Google at a $9.6 billion dollar valuation.

Google actually IPOed between a market cap of $29 and $36 billion which is significantly more than the 10x valuation. Of course it isn’t an order of magnitude larger though (that would have put the valuation at roughly $96 billion). It was about a 70% premium to the 10x valuation or so. Also, when you look at valuation to earnings you’ll see that Google was about 307x while Facebook, at a $15 billion valuation, is about 500x (disclaimer: these are just quick semi-useful/interesting comparisons and not by any means a rigorous financial analysis).

However, the real question is how did Google grow post IPO and can Facebook grow as fast or faster? We’ve already shown that Facebook seems to be valuing itself higher than Google did back in the day. Of course that seems off due to the fact that Facebook is far less broad than Google was and is. So, how has Google grown? Here are the EPS (earnings per share) numbers:

2005 - $5.33

2006 - $10.19

Partial 2007 - $6.22

2007 Full Year Estimate - $13.20

The first thing I noticed was that if you bought the stock right after the IPO, and you look at current EPS numbers, you are in for around 10x earnings which isn’t too bad at all. That said, the growth is pretty obvious. Even though it is slowing down now EPS grew about 92% from 2005 to 2006 and it is on track to grow 30% from 2006 to 2007 year.

Can Facebook experience that kind of growth? It will for a little while perhaps but I don’t think it will for as long as Google did simply because, again, Facebook is far less broad. In other words it seems to have less potential than Google did. Again, Swisher makes that argument but I didn’t buy it fully until I did the numbers.

So perhaps Facebook is being pretty aggressive on their valuation compared to their revenue numbers and to where Google was at when they IPOed and how they grew post IPO. In fact, it appears they are being even more aggressive when you look at where a lot of their revenue actually comes from - a deal with Microsoft for ad serving that, according Swisher and her sources, is currently not profitable for Microsoft.

With all that said we should all remember that something is worth what someone is willing to pay for it so if Facebook can get $15 billion than they should. It seems they are making a lot of moves that may justify such a large valuation down the road as well which makes the valuation a little less harsh.

One of those moves was the Facebook lending application. Apparently that application is doing very well and, as we all know, you can make a lot of money in lending so perhaps this is the thing that will propel Facebook up to Google’s level or perhaps even beyond it. Or maybe the propellant will come int the form of their own, in-house, apps in general which can take many forms like P2P lending and selling virtual gifts. Of course there are two issues with that approach:

  1. The apps are diversified which means that Facebook could end up in the trap of doing a lot of things but doing none of them well.
  2. The eyeballs still matter. If there are no eyeballs the apps won’t be used and no money will be made.

We’ll have to wait and see what the future holds for Facebook. While I do think they are being aggressive with their valuation this early in the game I do think that people shouldn’t bet against them quite yet. They have shown they are strategically smart and have the incredible team needed to create a world class company with the nice big valuation that goes with it. As big a Google? Maybe not, but it could still be pretty big.

Written by Eric Olson

September 26th, 2007 at 12:49 pm

Posted in Media, Technology, VC, Web 2.0

Life & Work: Is blurring the line good or bad?

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In the internet world the line between work and life has been getting more blurry over time. There has been a lot of talk about it in various blogs and other publications some of which talk about the good and some of which talk about the bad. I began to think about this lack of a line and whether it was bad or good (or both) shortly after writing my latest piece on networking.

That particular post focused on what I view as the core of good networking and that is simply being truthful, honest and striving to create lasting friendships that may also lead to business (i.e. being a good human being). Of course following that approach makes keeping a line between business and life pretty difficult.

Speaking from personal experience I would say that a lot of the folks I work with on a regular basis are also good friends or at least heading toward that status. That means we share a beer at a pub as friends one night and the next morning we’re providing connections for each other or working on a business deal.

I love that way of working since it makes work so much more fun. I mean who doesn’t want to work on something they are passionate about and get to do it with friends that are just as passionate? (Quick disclaimer - I know some folks prefer to keep life and business separate. This is just my $0.02 and it is all *imho*.)

After coming to that conclusion I began to take a look back at history to figure out if the line between work and life had always ben there or if it evolved over time. It seems to me that the line has evolved into being because, in the past, the line was pretty much non-existent.

If you think you about it people’s lives were very tied to their work back when business was mainly agricultural and trading rather than paying for things with cash. In those days everyone seemed to know everyone else in town and people weren’t simply customers. They were also friends, neighbors and family. I would guess that it was not uncommon for customers to know the whole family that owned the general store or the family that ran the pumpkin farm.

Today it seems like the line has been drawn because people look at business as separate from life but I wonder if that isn’t the way we should think about things. If business was more personal and ones customers and partners were also friends it seems more humanity could be brought back into the business world and better deals could be done.

Sure, there would be arguments and issues because of the personal nature of things but that exists already. I mean, when someone says that something isn’t personal and that it is just business does that really matter? I feel like people will generally take it personally anyhow and, a lot of the time, it probably is.

What’s interesting is that Facebook seems to be breaking down some of those barriers as more and more work friends, customers and partners begin to connect on the network. Suddenly people begin to see others as people with families, hobbies, etc. just like them. Adding the human element to the mix changes things since now the person on the other end of the phone or computer is more real. They aren’t just a customer, partner or co-worker they are a fellow human. I feel like that “realness” makes a big difference in how people feel about their work.

Scaling that type of situation so it works in the world of big business, though, will be the key and I am not sure how or if that can be done (or even if most people would want it to be done). What are your thoughts? Can it be done and, if so, should it be?

Written by Eric Olson

September 24th, 2007 at 3:51 pm

Posted in Business, Networking

Movie Review: The Prestige

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The pledge. The turn. The prestige.

They are the three acts in which illusions take place and all three were expertly worked into the 2006 film The Prestige.

The Nolan brothers, who are also the duo behind Memento, are known for making films with many twists and turns that keep the viewer guessing until the very end and this one is no exception. What makes the twists and turns in The Prestige so interesting though is the amount of foreshadowing included in every bit of film.

The foreshadowing is done in such a way that the viewer is unconsciously aware of it. This is crucial because if one is fully aware of the foreshadowing the ending may not have been as thrilling.

The Nolan brothers also worked the three acts of illusion into the film many times. On the surface you have the three acts of the movie which correspond to the three acts of an illusion but once you get under the surface and start looking at the film a little closer you begin to see these three acts throughout.

Just like the foreshadowing in the film you are only somewhat conscious of the three acts continuously repeating. That said, the three acts do play a very important role. If they were not constantly embedded in the film the end product would not have been nearly as good.

While the writing, directing and concept of the film were top notch good acting is still needed to make the film complete. Lucky for us the actors were up to the challenge.

The lead actors, Chrisitian Bale and Hugh Jackman, turned in fantastic performances and were perfectly suited for their roles. Jackman, who plays Robert Angier, is the slicker magician who isn’t as dedicated to the craft but has the panache needed to entertain an audience. His character is a stark contrast to Alfred Borden, played by Christian Bale. Borden is far more dedicated to his craft but he lacks the showmanship needed to pull in large crowds.

The two start the film as colleagues but things slowly turn into a deadly battle for magic supremacy after a death on stage tears the two men apart.

I don’t want to say too much more about The Prestige because I do not want to ruin it for anyone but I will say that it is an intricate and well thought out puzzle. Without question it has to be one of the top 10 films of 2006. For those that end up watching the film, remember that each and every line is important to the plot (another reason why The Prestige is incredible). So, in the words of Alfred Borden, I ask you: Are you watching closely?

Written by Eric Olson

September 23rd, 2007 at 4:26 pm

Posted in Movie Reviews

Make Your Mistakes As Early As Possible

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Note: This is a true account from my life but the names of people and places have been changed to protect the innocent.

It was a bright, sunny, crisp fall day in Chicagoland (well, maybe just the names of people were changed) and I was lucky enough to be having lunch with a wise man who we’ll call Chris (see, name changed and innocent protected). Chris and I were talking tech, start-ups and VC, the usual stuff he and I like to ponder. It seemed like a pretty typical day for me until we walked into the parking lot (queue dramatic music).

Once in the parking lot Chris and I began to talk more about my career and a piece of advice emerged that really got me thinking. The crazy thing is that this particular piece of advice was so basic and, yet, it hadn’t occurred to me before Chris said it. The advice was this:

Figure out who you are and what you enjoy career wise and get to that place as soon as you can. That way, as you make mistakes, which you undoubtedly will, the lessons learned from those mistakes will be directly applicable to where you want to be down the road.

Of course, I thought. That’s dead simple reasoning and yet I hadn’t thought of it. Here’s an example of this reasoning in action:

Let’s say Jonathan wants to be an entrepreneur down the road but he is currently a VC. Well, he should get to the entrepreneurial side of the fence as soon as possible because mistakes he makes as a VC won’t directly apply to the entrepreneurial side (for the most part). The implications are that Jonathan is losing time.

Adding in some numbers… If Jonathan started his entrepreneurial life now, at 25, he could make mistakes and start to get good, by, oh let’s pick an arbitrary number, 30 (of course I understand that one always makes mistakes, learns from them and grows but I want to keep the example simple). That gives him another 25 - 30 years to hit the ball out of the park. However, if Jonathan did VC until I was 30 and then jumped to the entrepreneurial side he would start to get good around 35 and then he would only have 20 - 25 years to hit the ball out of the park.

This is a very interesting concept and one that is directly applicable to entrepreneurship because of the fact that the most successful entrepreneurs have simply tried more times than others.

So, some food for thought on this fine day in Chicagoland. As always, I would love to hear your feedback in the comments section or directly at eric [at] ericjohnolson.com.

Written by Eric Olson

September 20th, 2007 at 3:25 pm

Facebook Apps: Where are the picks and shovels?

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You guys probably thought I was abstaining from writing about Facebook apps but you would be wrong. I had a post brewing the whole time. What can I say? It is a big trend and I was practically compelled to start thinking about it and you know what happens when I start thinking. No, my head doesn’t explode… A blog post comes out of that thinking of course.

Anyhow, it seems that everyone I know has started thinking about Facebook apps and they are all wondering how you turn them into a business (some have ever turned them into a business already). Of course the two simple models that emerge immediately are:

  • A consulting/development firm for Facebook apps
  • Creating a Facebok app or apps that can generate money by selling virtual goods (or even advertising in the app although that may be frowned upon by Facebook)

Those models are definitely good ones although I have issues with both.

The consulting/development firm angle is more of a short term play. Those types of companies could be likened to the web development firms back in the Web 1.0 era. The first players will generate a lot of cash because they were first to market and beause there are a lot of companies who want Facebook aps but have no idea how to go about creating them.

After a while others will see how much cash these firms are generating and enter the market themselves causing slimmer margins up to the point where a lot of folks start taking their Facebook app development internal. This is the point where the consulting/development firms will need to start thinking about other offerings (one successful example of this in the web development space is 37 signals - they turned their business into a picks and shovels business actually - oooooo… foreshadowing).

Creating Facebook apps that will generate cash is a whole other ballgame. There is a lot of risk in this approach since the volume of Facebook apps is simply massive (i.e. barriers to entry are low) and you’re essentially trying to develop something that will go viral. If you are able to get something to go viral then you are looking for attention to your app and, as that attention eventually fades, you will need to develop new “sticky” apps that will keep your company in business.

In many ways creating Facebook apps to generate cash is a lot like a content business. Pure content plays make me nervous because you constantly need to bring eyeballs in. That said, there are a lot of people that have built amazing and very successful content businesses so there is certainly a lot of money to be made and many sustainable businesses that will be created (in fact, I have friends that are successful in this area - they are great at creating content). Basically, I am just not sure I would be good at creating a pure content play.

Again, the issues above are just personal issues as many people have been and will be successful with both approaches. The approaches just don’t suit my personal style.

My style business is typically a scalable platform of some sort. I am more of a picks and shovels type guy. I like creating tools that will underpin revolutionary ideas and allow those ideas to spread (and also to allow people to make money from their work).

Creating a platform is exciting to me because you can leverage it across many clients quickly and efficiently which also means you can keep your company very lean and nimble (one of my reasons for joining FeedBurner a couple years back should be pretty obvious now).

That said, I began thinking about a picks and shovels related business for Facebook apps and the first idea that came to mind was a platform that anyone could use to quickly and easily create a Facebook app (think Yahoo! pipes).

This platform would eliminate the use of code so that anyone could create a Facebook app quickly and easily but it would also allow advanced users to create more advanced apps by diving into the code a bit.

It would essentially be the geocities of Facebook apps.

Of course to make the platform really useful you would need to allow someone to create a Facebook app and a host of other widgets (because after all a Facebook app is really just a widget specific to Facebook) for things like iGoogle and Netvibes all at once.

I know what you’re going to say now. But, Eric, isn’t there already is a company that does that for widgets called Clearspring? Well, yes, but I don’t think that Clearsping currently creates Facebook apps although I am sure they are probably working on it.

So, why did I write this post if the idea was essentially already out there? I figured it was a good exercise in terms of thinking from a picks and shovels perspective. The next time you see a big trend bubbling up I challenge you to think past the obvious and try to figure out what type of picks and shovels type solutions might make sense to serve the growing need.

Always remember what the gold rush taught us. It is a very valuable lesson and one that, if taken to heart, can help you create a company that has a good shot at being profitable (of course success/profitability is all in the execution but that’s a whole other post).

Written by Eric Olson

September 17th, 2007 at 8:44 pm

Posted in Business, Web 2.0

Olson on Networking: Helping Others, Friendship and Honesty

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Due to the success of TECH cocktail I get asked about networking a lot. Now, I don’t know about you but every time I hear the word networking I cringe ever so slightly. The cringing is a result of a specific image popping into my head - the image being Keith Ferrazzi’s “networking jerk.”

C’mon, you know who I’m talking about. They are lurking at every convention, party and conference and they are the people you try to avoid. I’d try to write my own description of the “networking jerk” but I think Ferrazzi says it best. Here’s an excerpt on the “networking jerk” from his book Never Eat Alone:

He is the man or she is the woman with a martini in one hand, business cards in the other, and a prerehearsed elevator pitch always at the ready. He or she is a schmooze artist, eyes darting at every event in a constant search for a bigger fish to fry. He or she is the insincere, ruthlessly ambitious glad-hander you don’t want to become.

Truer words have never been spoken. You do not what to be that guy or gal ever and if you find yourself acting like that you should take a long hard look at what you’ve become, slap yourself in the face and make a concerted effort to become human again.

That gets to the core of what I think good networking is - being a good human being.

Your first concern should be helping others. (aka: Karma is very, very real.)

We are all members of the human race and we all want to succeed but the key is to remember that to succeed you need to help others succeed as well. (We’re all in this together, right?)

Every time you enter a conversation with someone you should do the following:

- Ask them about and try to understand their passions and goals.
- Figure out a way that you can possibly help them pursue their passions and attain their goals.

I think this comes as a natural impulse to most if not all people but some folks let other things skew their natural impulse causing them to only think of themselves and what others can do for them. That is how you start to fall into the trap of the networking jerk and how you don’t make friends.

Make friends. (aka: Everything needs a foundation.)

Pretty simple idea right? I think so and yet I see a lot of people who simply don’t seem to grasp this idea. These are the people who are always looking for the next person to hand their business card or give their elevator pitch to and, frankly, they aren’t making quality connections.

Frank and I based TECH cocktail on the idea that if you get people together in one room who share the same passion for technology than friendships will form. We figured that friendships are much more valuable since they are long term in nature as opposed to a simple one off business card hand off which may result in a short term deal but will most likely fizzle out quickly and not result in long term business.

The reason why the simple business card hand off doesn’t work is because the person (or people) you were “networking” with didn’t really get to know you and you really didn’t get to know them. After the event when you then tried to work together you got to know the person (or people) and one or both of you realized you didn’t like working together. If you can’t work with someone it doesn’t matter how fruitful the deal could be it simply won’t be worth it and future business is, of course, also out of the question after that realization is made.

So, what has really been accomplished in that situation? I am sure the person doing the networking thought they were doing the right thing since they got a deal but, in the end of the day, a lot of work was done for a short term gain whereas, if they had made a friend the same amount of work would have been done but the result would have been a longer lasting partnership and new business opportunities for both parties that weren’t even evident at the time of the first connection.

Making friends helps people in the long run because friends will continually help each other in ways they may have never foreseen whereas the one time deal via a “networking moment” is just that - a one-time deal. Plus, who doesn’t want more friends who get excited about the same things they do?

No hidden agendas. (aka Honesty is the best policy.)

Yes, you read right and yes, this is common sense. However, I have occasionally seen folks that have lost that common sense throughout my travels. What is even more fascinating to me is that they think the people they are trying to network with won’t see right through them. Unfortunately for them I think that is a very big underestimation of their fellow humans.

Simply being honest with people will get you far in life. However, to follow my own advice, I will be honest with you and tell you that honesty will cause you to lose some deals too. Even with those losses taken into account though I think you’ll be much better off being honest. Being honest will create much more rooted relationships with people that will yield more business than you can imagine because people trust you.

Thats right, trust starts with honesty.

Another part of being honest is being genuine. I feel that the term networking also conjures up thoughts of people who are not genuine and who are trying to manipulate the people they are talking to and that is a shame. Networking should not be a synonym for manipulation it should be a synonym for creating real friendships among people who share your passions.

So, the bottom line is to be a good human being and make friends - not just connections. Friendships will be around for the long haul where as connections can be and are generally fleeting.

Making friendships can’t be taught though. There is no easy way to simply make things start happening. All you can do is get out there, be yourself and try to help your fellow human beings and things will work themselves out.

Relating this all back to TECH cocktail I would have to say that what has made TECH cocktail such a success is the fact that the TCers all get the idea that solid friendships are what matter. Without such great attendees TC simply wouldn’t be what it is today.

Well, I could go on and on about networking but I think this is good for a first post about these issues. Perhaps this could become a series of posts. If you guys would like to see more on this topic please comment to that effect and I will work out some more posts around these ideas.

Written by Eric Olson

September 14th, 2007 at 10:08 pm

Posted in Business, Networking

TECH cocktail Boston: A Wicked Good Time

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TECH cocktail BostonNow that was a party. I would estimate that the vast majority of the 500+ people who RSVPed came out which is great for any event but seeing that this was the first Boston TECH cocktail it was even more of an accomplishment.

Of course we all know quality not quantity is key and the folks that came to TECH cocktail Boston were all top quality. I think just about every Boston area start-up had at least one of their team present and most of the top VCs came out to show their support as well.

Of course none of this success would have been possible without the top notch TECH cocktail Boston crew. In no particular order here are the guys you need to thank for last night:

Peter Glyman - Geezeo

Shawn Ward - Geezeo

Jay Meattle - Compete.com

Brian Balfour - ZoomInfo

Those guys also helped to raise the money that paid for all the drinks and food and believe me when I say that the tab wasn’t cheap! A huge thanks is due for our sponsors:

Compete.com

Geezeo

ZoomInfo

North Bridge Venture Partners

As always we had some really sweet demos going on around the room. We really appreciated Geezeo, Compete.com, ZoomInfo, Party Resume, Viveo and Fafarazzi for coming out and showing off that they have been working on. If you’re interested in demoing at TECH cocktail Boston 2 please shoot me a note (eric [at] ericjohnolson.com).

I’d also like to thank Vroop, makers of the Liveboard, for coming out and auctioning off two Liveboards. All the proceeds from the auction went to the Jimmy Fund to help with the flight against cancer.

We’re almost there - only a few more thanks to go!

Thanks to Greg from Blue Sky Factory for the killer hollywood-style backdrop near the sign-in table.

Last but certainly not least I just want to thank everyone that came out to the event as you all make it what it is. We purposely go light on structure in order to keep the room flowing but that means things only work well when the crowd moves around on their own and engages new folks which you all did very well.

Please check out the photos and subscribe to the TECH cocktail Boston feed to be updated on future events, job openenings in the community and other events happening around Boston as we work to get another event together for you.

Thanks again guys! I couldn’t have dreamed of a better homecoming.

Additional TECH cocktail Boston coverage:

TECH cocktail Boston a Wicked Success
TECH cocktail Boston: Thanks & Wrap-Up

Tech Cocktail Boston Rocked
Tech Networking Nirvana on Lansdowne Street
Do You KNOW TECH Cocktail?
Tech Cocktail Offered…Cocktails
Techcocktail Boston at Tequila Rain
Boston’s First Tech Cocktail

Written by Eric Olson

September 7th, 2007 at 11:23 pm

Posted in TECH cocktail