Nov 302004

The Rumors of Email's Demise Have Been Greatly Exaggerated, Part II

The Rumors of Email’s Demise Have Been Greatly Exaggerated, Part II

Fred beat me to it.  There was an interesting article floating around yesterday about how Korea, which is one of the cutting edge nations in terms of technology usage, is finding that younger people prefer electronic communications like SMS text messaging and IM to email.  Fred says he sees that trend here in his teenage kids as well.

It will be interesting to see how this develops.  It may be over the long haul that more personal communication happens over SMS and IM, but I’m still a believer in email for more formal business communications, any longer form note, and distribution of content or marketing that is best served on a larger screen and in a less intrusive way.

Filed under: Email

Nov 302004

Why Entrepreneurship is Like Windows

Why Entrepreneurship is Like Windows

My family and I had a great and very relaxing Thanksgiving holiday, and I hope you did as well.  I always enjoy the four-day weekend — it’s one of the few times during the year where no one (outside of retail) is working, so I always get to relax and take some mental time away from work. 

It’s often said that no matter how many hours a day an entrepreneur is in the office, he or she is always working mentally.  It occurred to me this past weekend that being an entrepreneur is a lot like Windows in this way:

Usually, at night, you’re in Screen Saver mode.  One little jiggle of the mouse, and you’re right back in the game.

If you’re lucky over a weekend, you’ll get to Log Off or even Standby, so going back to work actually requires a few conscious keystrokes.  But the Operating System is still ready and waiting in the background.

A good vacation allows you to Hibernate.  The hard drive stops spinning, the fan quiets down, and you can close the screen.

While a great vacation (a 2+ weeker) can allow you to actually Shut Down, that’s rare and difficult.  I achieved it in Antarctica a couple of years ago, but only because there was no electricity and no reminders of civilization, let alone email marketing.  More often, a full Shut Down happens on an exit.

Usually, it’s not until after the exit that you get to Restart and try it all over again, although you might get lucky and do that midstream with a good management team offsite or working with a great executive coach.

And I won’t even get into the Ctrl-Alt-Del shutdown.  That’s not pretty.

Filed under: Entrepreneurship

Nov 182004

Everyone’s a Marketer, Part II

Everyone’s a Marketer, Part II

In Part I of this posting, I talked about how everyone’s job function is increasingly touching customers and therefore, in our networked world, everyone needs to think like a marketer.  This posting has the same theme but a different spin.  From the perspective of the individual person (in a company, and in life), marketing is central to success, although the definition of your target market needs to change with the circumstances.

Interviewing for a job?  How good a job have you done building the brand of you (your list of accomplishments)?  How good is your collateral (resume)?

Want to get an increase in your department’s budget or buy a new piece of hardware?  Have you adequately defined the return on the incremental investment you’re proposing?

Need to get that project done?  What’s your universal selling proposition to get others to help you out (“here’s why it’s good for you to cooperate”)?  Are there any incentives involved (“I’ll buy dinner if you stay late and help with this”)?

Working hard to get a promotion?  Identify a new customer segment, or a new problem to solve for your customers, or a solution to that problem, and your marketing skills will get you there.

Want to go somewhere off the beaten path on vacation?  Better come up with some great selling points that resonate with specific members of your family (it’s beautiful, it’s inexpensive, the food is great, no one else has ever been there) to convince them all to go along with you!

I suppose this posting (and maybe the other one as well) could be entitled “Everyone’s in Sales,” and that would also be fitting.  Anyone who’s not in marketing or sales but who’s interested in learning a few of the basics should consider some outside reading.  I’d recommend Positioning: The Battle for Your Mind, SPIN Selling, and Getting To Yes, but there are many, many other great books that would also do the job.

Nov 142004

Complex Collaborations

Complex Collaborations

I just read a new book entitled Business Without Boundaries:  An Action Framework for Collaborating Across Time, Distance, Organization, and Culture.  I happen to know one of the authors, Don Mankin, who was on our trip to Antarctica last year.  The book is a good, quick read for anyone running an organization that requires any degree of complex collaboration, whether in the form of multiple offices with a single company, close relationships with suppliers or customers or channel partners, or even a joint venture.

Mankin and his co-author Susan Cohen present three case studies:  John Deere, Radica, and Solectron.  They then tie their learnings together into a solid framework that’s almost a how-to checklist for organization leaders to follow.  While the writers take an academic approach, the learnings and framework steps presented are anything but academic — they place a huge premium, for example, on relationship building and communication patterns.  These are all things we’ve worked through over the years at Return Path, whether managing employees across multiple offices  or in working with some of our reseller partners or clients.

All in, it’s a good read — and not just because I hung out with this guy in an igloo for two weeks!

Nov 142004

Reverse Engineering Venture Economics

Reverse Engineering Venture Economics

Most entrepreneurs don’t really understand how their VC investors actually make money, so I thought I’d take a shot at explaining it in general terms.

Let’s say a venture firm raises $100 million from a series of what they call Limited Partners, or LPs.  LPs can be anything from diversified institutional investors like pension funds or banks to high net worth individuals.  The partners in the venture firm, or General Partners (GPs) typically derive money from two sources.

First, they receive a small percentage of their fund as an annual management fee to pay basic operating expenses.  These fees range in size, but a typical one is 2% per year.  So on the $100 million fund, the GPs will take $2 million per year to pay their salaries, staff, and office expenses.

Second, they receive a percentage of what’s called the carry, or the profits from their investments.  Carry percentages have a range as well, but again a typical one is 20%.  Here’s where the math starts to get interesting.

Let’s say the GPs invest $4 million in your company at a $12 million pre-money valuation, so they buy 1/4 of the company.  You end up selling the company for $40 million a couple years later without taking in additional capital (good for you!), so their 1/4 stake in the company is now worth $10 million.  They’ve made a 2.5x return on their invested capital, bringing back a profit of $6 million to their LPs, and they’re entitled to keep 20% of it, or $1.2 million, for themselves. 

Fred Wilson talks about the rule of 1/3 in Valuation, where, from a VC’s perspective, 1/3 of deals go really well, 1/3 go sideways (he defines sideways as a 1x-2x return), and 1/3 go badly and they lose most or all of their money. 

So based on this rule, let’s say a "good" VC will generate an average return of 2.5x on their LPs’ money over a 5-year period (an IRR of 20%). 
Now let’s say on average, the GPs make 22 investments of $4 million each to fill out their $100 million fund (less the $10-12 million spent on management fees over the life of the fund), and, again on average, each returns 2.5x (recognizing that many will return zero and a few will return 10x).  The VCs will have returned $220 million to their LPs on $100 million invested, for a gain of $120 million (good for them!).  The GPs get to keep 20% of that, or $24 million, to split among themselves.  Not a bad bonus, on top of their salaries, for 5 years of work across a small number of partners and associates.

Let’s attempt now to compare those earnings to the earnings of an entrepreneur, assuming equal annual cash compensation.  An average entrepreneur of a venture-funded company probably owns somewhere between 5-10% of the company by the time the company is sold.  In this same average case above, the company is sold for $40 million, so the entrepreneur’s equity will be worth between $2 and $4 million for the same 5 years of work.  In this simple case, the GPs in the venture firm have earned a collective $1.2 million, much less on a per-person basis than the entrepreneur.  However, in the 5 year period of time where the entrepreneur is working solely on one business, the GPs are working on 25 businesses, earning a collective $30 million.  A senior partner in a small firm will end up with $10-12 million.  A junior partner maybe more like $2-4 million, comparable to the entrepreneur.  However, and this is an important point, most entrepreneurs probably operate at the "seinor partner" level.

So on average, I think the economics probably work out in favor of VCs over entrepreneurs in the long run, mostly because VCs operate a diversified portfolio of companies and entrepreneurs are putting all their eggs in one basket.  But on any given deal, I’d rather be the entrepreneur any day of the week – you have more control over value creation, and more of a personal win if things go well.  And in the 1/3 of deals that are home runs for the VC, it’s better to be the entrepreneur, since you’re much further along the risk/reward curve and have that chance of seeing your equity turn into $20 million or more in that one shot.

Filed under: Entrepreneurship

Nov 102004

For Whom the Bell Tolls, Part II

For Whom the Bell Tolls, Part II

Great news for fans of Vonage and other Voice over Internet Protocol (VOIP) services.  Today, the  The Wall Street Journal (that link may only work for a week or so) reported that FCC Chairman Michael Powell just drove a successful vote to declare VOIP an interstate service, exempt from state regulation and really paving the way for much smoother and broader adoption.

I’ve received a number of comments on my earlier posting which sang the praises of Vonage and VOIP, and apparently not everyone has had the same positive experience as we’ve had with the service.  But it’s still going strong for us!

Nov 092004

Gmail – I Don’t Get It, Part II

Gmail – I Don’t Get It, Part II

Back in June, I blogged about Google’s new Gmail service, how I didn’t understand the fuss, and how its features would ultimately be replicated and true usership stalled at a couple million.  I stand by those assertions (just look at what Yahoo, Hotmail, and Lookout have done to the landscape since then), but my company Return Path published some data today that’s interesting on this topic.

We run the largest Email Forwarding and Email Change of Address service around, so our data on email switching is pretty solid — we’ve had about 16 million consumers register a change of email with us in total, and about 25,000 new ones come in every single day to report a new ISP.  So our numbers are probably pretty good relative to each other (ISP to ISP or month to month at the same ISP), but they’re certainly not meant to be correct on an absolute basis.

– In July, we saw 375 people join Gmail, in August, 802, and in September, 2,396.  To put these numbers in context, we see 50,000-100,000 new users every month at Hotmail  and Yahoo, and even 5,000-15,000 new users every month at smaller ISPs like AOL, Earthlink, Comcast, and Roadrunner.  These numbers are obviously on the rise, but they’re still pretty small.  In all fairness, though, G-mail is still invitation-only, at least in theory.

– Gmail is mainly stealing share from Hotmail and Yahoo, twice as rapidly from Hotmail as from Yahoo — and twice as rapidly from Yahoo as from AOL.

Read the full article in eMarketer here.

After I saw the article this morning, I asked my colleagues Jack Sinclair and Jennifer Wilson to tell me how many people we saw leaving Gmail every month, an interesting metric to offset the one most people are interested in covering.  The answer at this point is also revealing.  While we recorded 2,396 new Gmail users in September, we also recorded 741 people leaving Gmail in the same month.   That’s a sign to me that a lot of people are trying it out to see what the buzz is all about, but many are quickly switching back after a little experimentation.

And yes, we also took a look at how many people are leaving Yahoo, Hotmail, and AOL every month relative to the number of people joining those services.  Hotmail and Yahoo do a lot of treading water (lots of people leaving, lots of people joining), but let’s just say I wouldn’t want to be the guy in charge of AOL subscriptions these days.

Nov 042004

Caught In Their Own Underwear

Caught In Their Own Underwear

This is, as Brad says, priceless. According to PC World, verification emails sent by the challenge/response anti-spam technology from Mailblocks, Inc., which is now owned by AOL, are being blocked by…you guessed it, AOL (and Earthlink, too). Read the full article here.

This is a little embarrassing for AOL, but it really underscores the continuing problem in the world of email, spam, and anti-spam systems: false positives. It’s almost impossible, with the moving targets of technology, consumer complaints, and aggressive spammers, to get filtering right 100% of the time. We all know the multi-faceted solution is out there somewhere (authentication, reputation, monitoring, improving permission and mailing practices, legislation and enforcement, etc.), but the industry hasn’t nailed it yet. Stay tuned!

Filed under: Email

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Nov 032004

We Did What?

We Did What?

Newsgator founder Greg Reinacker has a pricelss posting about the first time an entrepreneur discovers that something happened in his company that he didn’t know about. An absolute gem.

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