The 3 Most Interesting Start-ups in #DCTech in 2013

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With it being that time of year again when ‘best of’ lists and predictions for the New Year get published I thought I’d take a hybrid approach in looking at the current state of the Washington, DC start-up community of which I’ve been a part of for the past dozen years. It was a web generation ago that the DC area, namely Northern Virginia, was considered an important technology hub thanks to the likes of AOL, which drove consumer adoption of the web, and UUNET, which built the underlying delivery infrastructure. Unfortunately there’s not much left to show from these early internet successes (just look at AOL’s former campus headquarters in Dulles, VA which mostly consists of Raytheon, a defense contractor, signage these days). If the DC region hopes to reestablish itself as an important tech ecosystem it needs a company, or two, to become anchors in the community that will not only draw technical talent to the region but also enable employees to leverage these companies to start new ventures of their own. So I put together a list of a few start-ups that could become one of these pillars.

Two caveats in putting this list together though (1) I excluded any company I’m directly or indirectly involved with (as an employee, investor, mentor, etc.) so as to remove any personal biases and avoid disclosing any non-public information. This meant that portfolio companies of NextGen Angels (where I am a member), for instance, were not considered (and anyway, how could I choose the best amongst all of my companies!) and (2) Advertising-supported businesses, like Vox Media, were also eliminated from consideration. The rationale for focusing this list on start-ups that build and sell technology rather than are just tech-enabled is the diversity of engineering talent needed to run these types of organizations, which are critical in sustaining a tech ecosystem, as well as their ability to build defensible businesses longer-term that are not as susceptible to changing consumer momentum and tastes.

So with these disclaimers out of the way, here are the 3 companies that laid the groundwork in 2013 to potentially become outsized success stories and reestablish the DC region as a major technology hub longer term:

FoundationDB In 2010 then Google CEO (and now Chairman) Eric Schmidt was famously quoted as saying that the amount of information created in 2 days at the time equaled all the information created between the dawn of civilization and 2003- and the pace of creation was only increasing. Even if Schmidt was wrong by a factor of 10 that’s still a lot of information that needs to be captured, stored and made available for retrieval. Add to this the complexity of handling disparate data types with varying rules around what information actually constitutes data and you have the reason for FoundationDB’s existence.

The company is developing a new type of core database that supports the modern day needs of web applications by storing and scaling data regardless of the data model being used (geospatial, graph, JSON, traditional, etc.). By combining the scale and distributed architecture of NoSQL databases (which the likes of MongoDB, which has raised over $220 million to date, have popularized) with the power of ACID transactions, FoundationDB is creating an industrial strength database technology similar to the one used by Google to run AdWords. Having started out building its core features to support NoSQL, the company acquired Akiban, another database start-up that used the same abstraction FoundationDB’s substrate uses but for SQL, earlier this year giving the combined entity a unique hybrid solution. The company’s 4-year effort in building a fault-tolerant system was rewarded last month with a $17 million Series A investment, bringing FoundationDB’s total funding to $23 million.

MapBox Apple’s launch of the App Store in 2008 ushered in the era of computing and with it the importance of location in adding context to mobile application experiences. One of the simplest ways to provide location-based information is via maps- and that’s where MapBox’s technology comes into play.

The company provides cloud-based tools for developers to add interactive maps to their web and mobile applications by leveraging OpenStreetMap data (an open-source project which MapBox also contributes to). Even though the company competes with the likes of Google Maps and ESRI it counts Evernote, Foursquare GitHub, Hipmunk and Uber among its 2,500 paying customers. Due to this early success, MapBox was able to raise a $10 million Series A in October to expand its offering.  That’s because location data is just the starting point of potential for the company as it looks to partner with other data providers to incorporate other types of content to its map offering which would allow it to apply other, relevant, contextual signals that developers could use to enhance the capabilities and user experience of their apps.

SmartThings The “internet of things” promises to move the internet beyond just computing devices to include everyday devices such as door locks and thermostats. By 2018 it’s estimated that there will be 9 billion such devices connected to the internet- roughly equal to the number of smartphones, smart TVs, tablets, wearable computers and PCs combined. So it’s no surprise that DC-based SmartThings is tackling this huge market opportunity. The company, which raised a $12.5 million Series A last month bringing its total funding to $15.5 million since its founding, started out as a Kickstarter project in 2012. Since then SmartThings has launched its own online store to promote its ‘Smart Hub’ which allows consumers to connect various packages of sensors and devices to the internet to solve specific problems.

While the company faces competition from the likes of Nest (founded by ex-Apple employees that are building a vertically integrated solution) and Revolv (which launched its own hub that connects to existing connected devices but lets people create their own notifications) its biggest threat might come from their market timing of consumer understanding and adoption of these types of solutions.

So is this list perfect? No. Could I be dead wrong? Absolutely. But the fact that these companies touch on early-stage and fast-growing technology market opportunities gives me hope for their success. All they have to do now is execute.

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Hitting Reset on the Internet and Mobile

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Every day there seems to be a new figure released that enforces the notion that mobile is also eating the world. The problem with most of the coverage of this type of data is that (1) the pace of mobile adoption shouldn’t come as a surprise and (2) the definition of what constitutes ‘mobile’ needs to be revised.

With smartphone penetration about to cross 60% and tablet ownership almost doubling from last year to a third of the U.S. population in 2013, it’s no coincidence that the amount of incremental traffic that mobile brings to the 50 most-visited internet properties now averages 28% (reaching a high of 223% in one instance) according to comScore. In response to this, media companies are reinventing their content consumption experiences to meet the growing demands of mobile users. Atlantic Media launched Quartz, a digital-first, mobile-oriented publication late last year while The New York Times is in the process of redesigning its online presence (slated for release this fall) to resemble the single-page stream layout popularized by social networks. Even native web media outlet ReadWrite is leveraging responsive design to adapt to their multidimensional mobile audience. This design trend will only accelerate the transition of internet activity from the desktop to mobile devices.

Remember, the personal computer, which reached the mass market more than 15 years before the web browser, was never intended to be a web-centric device. The evolution of wireless technologies and networks combined with the invention of smartphones and tablets are allowing digital companies to finally hit the reset button and create internet experiences that are designed to be more useful, from both a content and advertising perspective, than the current incarnation of the commercial web which borrowed heavily (to everyone’s eventual detriment) from print.

What this means for evaluating the mobile phenomenon is that instead of accepting all these stats at face value, we need to look at mobile’s ability to drive incremental adoption and create new monetization opportunities above and beyond the natural growth that comes from cannibalizing PC-based audiences and revenue streams.

This brings us to the issue of what exactly constitutes ‘mobile’. Typically we think of smartphones and tablets as providing mobility. But if you take into account that over 90% of tablets being purchased only use WiFi and, as a result, are primarily used inside the home, what differentiates these devices from laptops, which we consider PCs, aside from the form-factor? If you also include the divergent behavior of smartphone and tablet users the whole concept of what mobile is and represents needs to be redefined.

Instead of thinking of mobile as a device, we need to think of it as an activity. The two data points that matter most in defining mobile activity then are a user’s location and their data network. So if someone is at home or at work they shouldn’t be considered mobile. In this context the use of smartphones and tablets (instead of desktops and laptops) for accessing the web and certain apps (that also exist as websites) is done out of convenience rather than the need for a specific capability- and usually enabled over a WiFi network. The only experiences that should be classified as mobile are in locations where people usually don’t spend an extended amount of time at with their devices and are typically connecting to the internet by way of cellular or MiFi networks- so pretty much everywhere else. Building products and services that maximize utility in these scenarios is where mobile becomes useful. If we can agree on a better definition of mobile, then we can better quantify this opportunity, understand network constraints and figure out solutions that create new value.

This isn’t to say that devices that use WiFi networks or are used at home aren’t valuable- especially when you consider IP-based ad targeting and the second screen opportunity (something I’ll touch on in a future post). It’s just that the mobile activity on devices in these locations don’t generate incremental value unless they are using mobile-only applications (such as HotelTonight or Uber) and could, in fact, be destroying value for certain companies when taking into account that mobile users monetize at a lower rate than their desktop equivalent.

‘No Appointment Necessary’ Television

Same_Bat-Time_Same_Bat-ChannelThe recent release of House of Cards by Netflix was as much-anticipated for its production value (starring Kevin Spacey and produced by David Fincher) as for its release strategy (all 13 episodes were made available to Netflix subscribers on the same day). While traditional media outlets have questioned Netflix’s decision to release the entire first season at once, which eliminates the water-cooler effect and anticipation build-up from episode-to-episode that traditional television show experiences have been built around, fans of the all-you-can-eat approach to serialized content can’t get enough of it. So it’s not surprising to hear that House of Cards has become Netflix’s most-watched program in terms of number of subscribers and total hours according to Chief Content Officer Ted Sarandos.

But is binge-viewing the future of television then? Not exactly, though it is part of a broader trend in how content consumption habits are evolving thanks to technology. Just look at some recent stats from two new series on FOX’s network- The Following and The Americans. The Following debuted to an audience of 10.4 million viewers on FOX who watched the premiere either live or the same-day. That audience figure doubled in size though when DVR (which contributed 23% of the audience), encore showing (14%), streaming (7%) and video-on-demand (5%) viewing was also included. Much like The Following, FX’s The Americans also showed audience growth of 44% and 58% across its first and second episodes respectively when DVR viewing data for the 3 days following the original airing (the period that encompasses the original broadcast plus DVR viewing up to 3 days afterwards is relevant because it is used determine the cumulative ratings used by advertisers to determine the size of the audience that saw their ads) was counted.

The story being told by these stats is that the appointment-based model of watching TV popularized in the 1960s by the likes of the original Batman series (remember ‘Same Bat-Time, Same Bat-Channel’?) is becoming a relic of the 20th century. But to what extent? That question will finally start to get answered this fall when Nielsen, the de facto standard in determining how the $60 billion television advertising market is allocated across television networks, will begin counting TV shows consumed via video game consoles and broadband connections in its show ratings (with an eye towards including iPad and tablet viewership in 2014).

By expanding the definition of what constitutes an addressable audience, Nielsen will be legitimizing viewers of shows that are already being quantified (as The Following data shows) but not valued from an advertiser perspective. This will give broadcasters the incentive to both expand the availability of their television content through additional channels (which both ABC and CBS seem to be set to do with the launch of new streaming mobile apps) as well as aggregate these cross-platform audiences to provide more reach and value to advertisers (as Disney’s networks are doing now).

Another potential benefit in this approach to TV content distribution and monetization will be the unification of pricing across digital screens (PC, tablet and smartphone) which have traditionally seen a wide discrepancy between PCs and their mobile counterparts (especially smartphones). While digital might not reach parity with television ad rates, the increase in revenues from parity within digital should convince broadcasters to make more content available online and with less delay from the original television airing day and time (depending on how all-encompassing Nielsen’s new ratings get).

The days when broadcasters knew what was best for audiences (which really meant what was best for their advertising clients) is coming to an end as consumers are exerting more control over the pace at which they consume content and the devices they use to watch it. This will have an interesting effect on event-based content and advertising as sports (especially football and playoffs or championship in any sports) audiences along with those watching voting-oriented reality TV (like American Idol and The Voice) and award shows (Golden Globe, Grammy’s and Oscars) will become even more valuable to time-sensitive advertisers (such as movie studios promoting a new weekend release) looking to reach large audiences in one fell swoop. Conversely, it will create opportunities for ad technology platforms, along the lines of BlackArrow and Freewheel, that can both deliver ads in different formats and dynamically synch the delivery across multiple platforms for advertisers looking to reach this newly identified ‘appointment-less’ audience.

Tune-in whenever you feel like it to see how it plays out.

Photo image source: Batman

The Valuation Disconnect in Mobile

Well before the media anointed mobile the Next Big Thing, venture capitalists saw its potential. Consumers have rewarded VCs for their foresight by how quickly they’ve adopted non-voice mobile services over these past couple of years. The result has been a number of high-profile liquidity events this year starting with mobile ad network Millennial Media’s IPO followed by Facebook’s acquisition of Instagram for an eventual price of $736 million and record levels of gaming sector acquisitions led by mobile. With all this positive momentum it’s not surprising that VCs continue to allocate an increasing share of deals and dollars to mobile startups as the overall number of investments has reached its highest levels since the dot-com days.

In contrast to this optimism in the venture community, Wall Street is down right negative towards mobile. Google’s third quarter earnings announcement was met with a 8% drop in share price in part due to the increasing number of search queries being performed on mobile devices which is causing a deceleration in the company’s revenue growth. And while Facebook’s most recent quarterly earnings report resulted in the stock rising 20%, the company’s market capitalization is still only at 60% of its peak value from its first day of trading. This is in largely due to concerns over Facebook’s ability to monetize their growing mobile audience, which now consists of 600 million users, including 126 million of which use Facebook mobile exclusively.

The Typical Relationship

So why the disconnect in how these investors value mobile? It can be partially explained by how each type of investor evaluates investment opportunities to begin with. Venture capitalists, especially early stage ones, typically look to buy private, and thus illiquid, stock in pre-revenue companies with nascent, but potentially market-disruptive, ideas. As such, these investments may take up to 10 years to realize a return for their VCs, if at all. Contrast this with public market investors, such as hedge and mutual funds, which focus on the predictability of earnings and revenue growth relative to a company’s market value and reevaluate their investments in real-time based on news and quarterly earnings reports since liquidity is readily available in these stocks.

So when VCs invest in start-ups, especially consumer-oriented ones that are ad-supported, they are betting not only on a company’s potential to execute on their business plan but also on the formation of a rapidly growing market. Due to this, the focus is usually on customer acquisition and market share growth- not revenues. As a market begins to mature in size and opportunity, monetization solutions are developed, usually by other start-ups, allowing the entire market to benefit from the creation of new revenue streams. Companies that don’t get acquired and can show they have a path to profitability have the opportunity to go public and in the process become industry bellwethers, using their new capital infusion and stock shares as currency to further enhance their market position.

Why Mobile Had Been Different

In the case of mobile, a couple of things happened that has affected the usual relationship between the private and public markets. First, the consumer adoption of mobile has outpaced any other technology in the history of the U.S.- including radio, TV and the internet. As such the native monetization solutions that were developed alongside these other technologies have been slow to scale in mobile because (1) the ad formats currently being used are largely re-purposed ad technologies from the desktop internet, such as banner and rich media ads, which were easy to launch with in an effort to capture mobile revenue early on and (2) advertisers have been slower to allocate advertising budgets to mobile than previous technologies due to this speed of growth- funds that would be used to help spur innovation in ad experiences on mobile devices.

The economic realities of increasing supply of mobile ad inventory coupled with relatively low demand for quality ad experiences thus far has resulted in effective CPMs that are 1/5th the price of desktop internet advertising. This disparity in monetization capabilities between mobile and desktop is forcing public investors to reevaluate consumer tech investments where mobile is becoming impactful enough from a usage perspective to potentially affecting earnings. With Millennial Media, a pure-play mobile ad network, and Pandora Media, whose ad-supported internet radio audience is now 75% mobile, still not profitable as publicly-traded companies, investors will continue to discount the mobile businesses of public consumer technology companies for the foreseeable future.

Without having proven their business models to Wall Street yet, Millennial and Pandora can’t be considered mobile bellwethers, which is needed to preserve the private-to-public valuation relationship. Companies such as AdMob and Instagram might have achieved bellwether status if they hadn’t been acquired before realizing their potential as stand-alone public companies. As such it might be left to existing ad-supported consumer internet tech leaders who are able to make the audience and business transition into mobile to perpetuate the ecosystem. Facebook, which has faced scrutiny over its performance as a public company in part due to mobile, has the momentum in user growth and sheer audience size to accomplish this transformation if they can prove their various mobile ad products can profitably scale. Because of this you could argue that Facebook actually went public too early, instead of too late, if you look at it as a mobile-first company. Probably the best positioned public company though is Google which acquired what is now the most popular mobile operating system in Android, largest mobile ad network in AdMob and is seeing mobile growth in its core search business as well as across YouTube.

Mobile is Really Two Different Experiences

The second part of the answer to the valuation disconnect is in the definition of mobile. When research companies forecast trends and investors talk about opportunities they always speak about mobile as if it were one cohesive distribution channel when in fact it is composed of two distinct experiences- smartphones and tablets. Being able to differentiate between the two is critical because of the activities each device is best suited for based on the physical limitations of each display as well as their monetization opportunities.

Smartphones

While Apple might be credited with ushering in the consumer mobile era with the launch of the iPhone in 2007, it was the launch of the App Store the following year that enabled smartphones to properly leverage their mobility as the physical limitations of mobile phone screens (3 to 5 inches in length) required task-specific applications be built instead of all-encompassing web experiences. Because of this, the most successful app experiences, as Benchmark Capital’s Matt Cohler eloquently describes it, mimic a remote control in that they are easy to use and provide a specific utility to consumers. In turn, advertising on mobile phones need to abide by these same principles in order to be valuable.

Rare Crowd’s Eric Picard described the current mobile ad format problem in a recent article while also presenting a possible solution for smartphones that is interruptive without being intrusive- and can be delivered at scale. For app developers that have large enough user-bases though, creating native experiences, especially ones that can leverage location, will always result in better value for both the advertiser and consumer. Expanding on sponsored ad units that Facebook (via Sponsored Stories) and Twitter (via Promoted Tweets) have popularized in the social activity stream and more recently on mobile, location-based social exploration platform Foursquare launched Promoted Updates for local merchants this past summer and crowd-sourced traffic app Waze launched its own self-service advertising platform earlier this month that focuses on solving users’ location-based needs.

Tablets

Like smartphones, Apple can also be credited with jump-starting the tablet market a mere 3 years ago. The company was prescient in introducing the iPad as a tool for consuming media as users have made watching TV shows, playing games and reading the primary uses for the device. This makes sense when you consider the screen size of tablets (ranging from 7 to 10 inches) allows consumers to replicate the offline experience of reading a magazine or watching television in a more convenient and personal format than traditional computers allow for. Because of this, advertising on mobile tablets can be interruptive like traditional media and less concerned with other vectors such as location since most people are using their tablets at home and as a second screen complement to watching television. That means online video and rich media interstitials, which are higher-valued ad units than traditional banner ads, will work with minimal refactoring compared to smartphone ad experiences. That doesn’t mean there isn’t an opportunity for companies to innovate around the ad experience as start-ups like Kiip are proving by rewarding user engagement and retention within mobile apps with real world rewards.

When It’s All Said and Done

With tablets expected to outsell PCs by next year, focusing efforts on this part of the mobile market might be the most prudent move for consumer tech companies with mobile audiences since the advertising experience most closely resembles the desktop internet from both a format and value perspective. The smartphone advertising market will take longer to scale simply because of the utility-oriented nature of the user experience.

As these advertising solutions sort themselves out though, so should the discrepancy between public and private market investor valuations around ad-supported business models. As start-ups fill these gaps in the consumer mobile space with monetization solutions that prove to be effective, so to will public investors get comfortable with the long-term value mobile users have to offer, which, at the end of the day, will benefit everyone involved in growing the value of the mobile industry.

The 6 Letters Holding Back TV Everywhere

TV Everywhere- the ability to watch any televised program at any time on any device- isn’t a matter of ‘if’ anymore but rather a question of ‘when’ once you consider the evolving viewing habits of US consumers and the changing dynamics of the pay television business. The ‘when’ for TV Everywhere becoming a mainstream consumer experience though will largely be determined by the letters F, G, L, N, P and R. Let me explain.

GRP: The metric used to allocate more than $60 billion in television advertising spend each year is known as Gross Ratings Points (GRPs). This figure estimates the size of the audience reached for a particular commercial during each television program over the life of the ad campaign. Unfortunately traditional online metrics like unique visitors, clicks and video starts don’t capture online audiences in a manner that can be translated into a GRP equivalent so broadcasters haven’t been able to take the credit they deserve, in the form of greater ad dollars, for delivering audiences to advertisers through their own websites and mobile apps or those provided by aggregators like Hulu. The thinking goes that if broadcasters could get compensated appropriately for aggregating consumers for advertisers, regardless of the screen through which the content is being watched, more television programming would be made available outside of the traditional TV model in hopes of capturing the broadest audience possible for ratings and advertising purposes.

The first major attempt at addressing the disparity between television and online audience measurement was introduced last week by Nielsen. Dubbed Nielsen Cross-Platform Campaign Ratings, the multi-screen ad measurement service leverages Nielsen’s Online Campaign Ratings (OCR) with their established proprietary National People Meter TV panel to provide unduplicated and incremental GRP measurement. Nielsen’s OCR has gained momentum in recent weeks having been adopted by 15 online ad platforms as well as by the CW Network to guarantee online audiences to advertisers for the recently started television season.

Regardless of whether it’s Nielsen, comScore’s vGRP, or something else, bridging the audience measurement gap across viewing screens is an important step in bringing the discrepancy between digital ‘dimes’ and analog ‘dollars’ in advertising. This effort shouldn’t siphon money away from traditional television but instead reallocate ad spending in media to reflect the actual time being spent with media across different mediums, which will benefit the internet and mobile. The result will be an increase in advertising dollars for video across all platforms and the availability of more content to support this additional spend, which can most easily be made available to consumers via TV Everywhere.

NFL: Major League Baseball (MLB) has it. The NBA has it. Even the NHL, when they decide to get back to playing, will have it. The NFL? Not so much. What I’m talking about it the ability to watch any game live, in HD quality video across any number of connected devices. The NFL only offers its subscribers the ability to buy access to replays of games only after they have been televised.

With only 1/5th the number of regular season games versus both the NBA and NHL and 1/10th that of MLB, it is much easier for the NFL to package the sale of television rights at a national level for all of their games than it is for these other professional leagues (which rely on regional sports networks and local television stations to broadcast the majority of the regular season). Football’s reining popularity combined with the scarcity of game content versus alternative sports options has enabled the NFL to command $7 billion per year in total broadcast licensing fees from CBS, DirecTV, ESPN, Fox, NBC and Verizon Wireless to broadcast each and every NFL game (in comparison MLB generates about $1.5 billion in national broadcast revenues from a combination of ESPN, Fox and Turner). In the following chart you can see exactly why the NFL commands such a premium:

As you can see, the NFL is the only television program that can concurrently deliver an audience of tens of millions to broadcasters who in turn sell this reach to advertisers for more than $4 million for a 30 second sport during the Super Bowl.

Timing

The current agreements the NFL has in place with these 6 broadcast, cable, satellite and mobile providers run through the 2021 season so it could take another decade before the most popular content on television make a full foray across viewing screens (through the licensing of full content rights, including digital). NBC’s simultaneous live broadcast of last year’s Super Bowl on TV and the internet was a starting point, but without an economic model that can simultaneously grow revenues for the League while providing fans with additional access to content, the NFL has no reason to upset the current revenue apple-cart. When the time comes, expect GRP to play an important role in enabling this.

The issues surrounding TV Everywhere aren’t limited to just these two issues of audience measurement and content accessibility, but most other items, like user and device authentication, can be solved with improvements in technology. It’s the negotiations that will take place between content owners, distributors and advertisers that will eventually determine what user experience audiences are left with, which might not necessarily in the best interest of the consumer. If these three parties can find common ground with evolving consumer consumption needs though, not only will TV Everywhere become a reality, but the groundwork will be in place for the next evolution in television: unbundled, on-demand and IP-based program delivery.

Not All Users Are Created Equal (For Ad-Supported Consumer Businesses)

Facebook’s first earnings announcement as a publicly-traded company last week was not well-received by investors, as the company’s stock hit new all-time lows after only being able to meet analysts’ already lowered financial expectations.

Most of the discrepancies between Facebook’s growth trajectory and stock performance can be summed up in these two slides from the company’s earnings release:

While directionally these charts look good, going up and to the right, a closer look reveals a growing problem in the relationship between Monthly Active Users (MAUs) and Average Revenue Per User (ARPU). The MAUs chart shows quarter-over-quarter user growth in each of Facebook’s four geographic regions over the past two years. The largest of these regions, Rest of the World, is growing the fastest though (at 9% over last quarter) while US & Canada, which is the smallest region in terms of MAUs, is growing the slowest (at 2%) which is an issue since Facebook is able to monetize US & Canada users over seven times better than Rest of World users on average according to the ARPU chart. Optimizing per user monetization is further exacerbated when you consider that growth is increasingly coming from mobile-only users where advertising is still in its infancy.

Facebook’s ability to attract and monetize a large U.S. audience is what has enabled the company to go public. Whether Facebook becomes a successful publicly-traded company will rest largely on how quickly it’s able to reduce the ad monetization gap between U.S. users and every other region of the world. Until then, the financial markets will continue to recalibrate Facebook’s valuation (downward) to reflect the realities of the company’s current revenue capabilities.

This situation isn’t unique to just Facebook though. For example Twitter, the second largest social network out there, recently passed the 500 million account mark according to analyst group Semiocast, which also saw the proportion of U.S. user accounts decline relative to the rest of the world since the beginning of the year and identified Jakarta, Indonesia as the most active tweeting city- statistics that have a similar looking trend to what Facebook has experienced, growing but mostly in less mature advertising markets. As any free consumer tech services starts to grow quickly, they too will eventually face this same situation.

If you’re fortunate enough to be involved with such a consumer product that is gaining millions of users, focus on growth in countries where advertising is a mature industry so mobile will also be monetized more quickly (places like the U.S., Japan, Germany, and U.K.) and also accessible (so not China). If growth takes off in less-mature ad markets, but sizeably populated countries such as India or Indonesia, find a local advertising partner with strong ties to large conglomerates and marketers in the region before committing resources.

So when Josh Elman, venture capitalist at Greylock Partners, blogs about getting meaning from growth numbers provided by startups, we should probably add users by region to the discussion for ad-supported consumer start-ups in order to better understand the real opportunity and value being created for investors.

Disrupting Retail Commerce and Real Estate

At last month’s TechCrunch Disrupt the best interview of the multi-day conference was that of Chi-Hua Chien, partner at venture capital firm Kleiner Perkins Caulfield and Byers (if you haven’t seen it yet, I urge you to put aside twenty minutes to watch it here- it’s that good). In the interview Chi-Hua discussed Kleiner’s investment thesis in the context of technology’s ability to democratize industries. Previously technology had been leveraged to disrupt information (through the internet and search), distribution (through social media) and computing (through PCs and mobile devices). Now he says we’re in an era where commerce is being democratized. Through the “unwinding of that aggregation of commerce” companies such as Home Depot, Safeway and Walmart, which have succeeded historically by aggregating consumer demand through credibility and inventory, now have to compete with new demand aggregators coming from smartphone apps. The effects of this are already being felt by the retail electronics industry as Best Buy recently announced it was in the process of shrinking its physical footprint due to a drop in same-store sales which some are attributing to internet retailers benefitting from ’showrooming’. This disruption isn’t just be limited to physical commerce though, as retail financial services are also undergoing their own transformation thanks to more activities (such as depositing checks) being performed via mobile devices, which is reducing the number of transactions taking place inside bank branches across the U.S.

As a result retail real estate is becoming less important as a marketing and demand generation vehicle. So what will become of big box stores and strip malls?

Chi-Hua, during his interview, and start-up founder/angel investor Chris Dixon on his blog recently,  both alluded to the answer- companies that can create differentiated and superior customer experiences and not just compete on price will be the ones that succeed in this new retail environment. Starbucks was the first modern-day brand to successfully build a business around creating an experience for mainstream consumers (even resulting in a book being written about The Starbucks Experience). Then there’s Apple, the best example of how to build a successful retail presence. In the 11 years since the first Apple Store was launched, the company has opened up over 360 retail outlets worldwide and has become the most profitable retailer in America in the process while competing with electronic retailers such as Best Buy.

New opportunities to disrupt commerce will open up as a result of this excess capacity in real estate and Amazon might just be one of the biggest benefactors of this. As the company continues to grow its Amazon Prime subscriber base and potentially extend its Kindle line of devices this will increase Amazon’s need to grow beyond its current 34 warehouses in an effort to get the most popular inventory closer to its customers for faster delivery (for Prime subscribers), in-location pick-up (for consumer convenience) and product testing (for newly launched Kindle devices). An even more likely scenario will be an increase in temporary retail store experiences (also known as ‘pop-up shops’) where brands can leverage physical presences for short periods of time in order to support the launch or promote new products or services, which Samsung is looking to do in order to better compete with Apple for example.

The most exciting opportunity that could further transformation the physical retail experience is the democratization of manufacturing through technology. This next wave of disruption will come courtesy of 3D printing, which aims to digitize manufacturing and enable individual production quantities of many objects at massive scale. Currently 3D printers from the likes of MakerBot and Shapeways are used primarily used by hobbyists to create single-compound objects (usually plastic or metal). From this you can imagine a point in time in the future where more complex objects (made of multiple compounds, colors, etc.) are offered by developers through specialized retail store-fronts where consumers can submit orders for pre-fabricated products or design their own specifications to be printed out and picked-up. Each 3D retailer could specialize by type of product (ie plastic toys such as action figures or Legos) or production capabilities (ie motors for remote control vehicles) depending on their capabilities and demand.

The beauty in all this is that there will always be a need for retail real estate and technology will play a part in its evolution.

Twitter’s Evolving Broadcast Network

Last week signaled a big step in the evolution of Twitter as a broadcast medium. Starting with the announcement of a weekly email digest that summarizes the most relevant tweets from within each individual’s network, Twitter moved from being just a carrier of tweets to a curator of them as well. Combine this with the partnership announcements made at the end of the week, Twitter is starting to look less like a consumer technology platform and more like a traditional media platform. But what else does Twitter need to do to complete this evolution?

Slowing Down the Stream to Grow Faster

One of the primary challenges that Twitter needs to overcome to make this transition will be to develop a broader-based audience. Six years into its existence Twitter has reached 140 million users. But compare with Facebook which hit 500 million active users in the same time frame and Instagram, which will most likely pass 140 million downloads by the end of this year if they continue on their current growth trajectory- a mere 2 years into its own existence. So why hasn’t Twitter, which has similar brand recognition as Facebook and exceeds that of Instagram experienced similar growth? It boils down to simplicity and relevance. Facebook started out by focusing on photo-sharing and communication on the web while Instagram took photo-sharing to a new level in mobile. Both services were built in a manner that makes it easy for users to find and consume individual posts by highlighting the most relevant content in their feed based on their social graph’s interactions with it. Twitter on the other hand has always been about real-time distribution with little framework around how to use it, making it intimidating and not intuitive for newer, mainstream users. If Twitter hopes to reach 2 billion users it will need to focus less on what has made it popular to date (the real-time nature of the platform) and more on how the rest of the world consumes content (at their leisure). The new weekly digest feature, combined with the launch of the Discovery tab on Twitter’s apps at the beginning of the month should go far in simplifying the on-boarding process for new users by making the entire content experience more digestible.

The Reality of Real-Time Monetization

At the same time, Twitter needs to solve how best to monetize the real-time web experience beyond Promoted Tweets. For all the interest and excitement around real-time feeds, except for a few situations, no one has yet to prove there is a business model that can be built around it. Finance is the only traditional industry that operates in real-time to begin with, so companies like Stocktwits are in the enviable position of having already built their business around capturing the stream of stock market commentary on Twitter and providing additional analytics and services around that information that professional investors are actually willing to pay for.

The one area where Twitter seems to have identified opportunity around monetizing real-time communication is live events such as sports and award shows. The most popular events on Twitter, in terms of concurrent volume of tweets, have been sports-related, the Champions League soccer semi-final followed by the Super Bowl from this year, which had the highest tweets per second volume of any topic ever discussed on Twitter. The partnership announcement between Twitter and ESPN last week to create interactive programming around major sporting events is the first attempt to monetize this highly engaged audience on Twitter through advertising. Combined with the announcement the following day with NASCAR to curate tweets from a variety of sources around specific race events, you can see how Twitter could build a real-time business around curating the second-screen media experience.

Beyond these examples, all the other information being tweeted (except for natural or social emergencies like earthquakes and riots which cannot be monetized anytime) doesn’t require real-time distribution to be effective. The killing of Osama Bin Laden? The passing of Beastie Boy Adam Yauch? Great information to have, but isn’t any more critical or particularly more valuable when provided in real-time nor can it really be monetized appropriately. So by slowing down the stream experience, Twitter might actually be able to increase their monetization options beyond their current offering.

Continuing to Evolve Through Acquisition

Twitter’s broadening platform capabilities have benefited greatly from  acquisitions. The weekly digest looks like it is leveraging Twitter’s acquisitions of both Summify (a provider of daily summaries of the most relevant news from social networks) at the beginning of the year and RestEngine (a personalized email marketing service) earlier this month. For Twitter to continue down this path as a media broadcast network, additional acquisitions will be likely. While the biggest headlines Twitter has made on the acquisition front recently have been for the latest photo-sharing app it didn’t buy, the company should look at Pocket (formerly Read it Later) on the consumer side that allows users to save content for consumption at a later time- a sort of DVR for the real-time tweet stream- as an example of potential add-on services for its platform. On the business side, enhancing its analytics offering to compliment the tools and services it already provides to media publishers and advertisers should be Twitter’s primary focus.

From Content Carrier, to Curator, to Creator?

Ultimately, the type of broadcast network Twitter decides to evolve into will depend on whether or not the company gets into content creation. A recent job posting by Twitter aimed at journalists seems to indicate just that and may expand on the previously announced ESPN and NASCAR relationships. Luckily the evolution from carrier to curator to eventually a creator of content isn’t without precedent. Comcast was a carried content over its broadband networks until it decided to buy NBC a couple years back (after an unsuccessful attempt to acquire The Walt Disney Company years ago) to get into the curation and creation businesses. And as Matthew Ingram from GigaOM pointed out, YouTube has undergone the same progression with the announcement last fall of a $100 million fund via Google to invest in online content creators.

With each new step Twitter takes in its evolution as a broadcast network, the company exposes itself to greater business risks, but also greater financial rewards, by owning and further streamlining the process of getting content in front of consumers. Finding the intersection that optimizes the content consumption experience for users with Twitter’s own platform strengths and capabilities should be the main focus for the company going forward. If Twitter can find that optimal mix, it can become the internet’s answer to traditional media broadcasting.

Rise of the Middle Class (Ad Inventory)

In the past month or so I’ve had the chance to attend several online advertising industry events where a recurring topic of conversation has been how can publishers better monetize their remnant ad impressions. While technologies like real-time bidding (RTB) have made accessing and transacting this type of inventory easier for buyers, the corresponding growth in the use of RTB has not translated into increased revenues for online publishers. There is hope though.

By applying the same underlying technologies that power RTB, a new class of ad inventory has emerged that exists between traditional direct-sold (tier 1) and remnant (tier 2) inventory that is being referred to, conveniently enough, as tier 1.5 inventory that might be able to bring together the best of both inventory worlds. In a traditional RTB environment, ad inventory from one publisher to the next becomes indiscernible outside of pricing, removing the contextual relevance of each ad impression in the process. Even if you incorporate audience data for targeting specific web visitors, without knowing the context or even website that will be surrounding the ad prior to bidding on the impression, campaign performance, and thus publisher CPMs, will remain poor. It will be the ability to automate the entire process of targeting the right user on the appropriate website alongside relevant content that will improve the fortunes for all parties involved.

That’s where private exchanges come into play. They bring the efficiencies of RTB into an environment where advertisers know the context of where their ads will be delivered and publishers can set parameters as to which advertisers can have access to their audience and at what prices. Entities like quadrantONE for local news in the U.S. and the just announced pact between three of Canada’s largest broadcast companies are taking this one step further by pooling impression inventory from multiple online publishers across the same content types to provide a larger audience pool for advertisers to target in hopes of garnering larger portions of ad budgets. Layered on top of this, semantic technologies from the likes of Crystal Semantics, Peer39 and Proximic, can be leveraged as part of the set-up and bidding process within private exchanges to better organize content into categories in an effort to complete the contextual picture for the available ad inventory.

Instead of relying on advertisers coming into their web environments, others like the New York Times are looking at new ways to expose their content for monetization by leveraging social media. The company recently announced the release of Ricochet from their R&D Ventures group, which allows advertisers to wrap their ads around relevant articles from any Times Co. publication that these brands can then distribute across social media channels to interested fans and followers.

All of these opportunities don’t mean that publishers can get away with just enabling technologies for ad buyers at the transaction level in hopes of improving their indirect revenues though. In addition to building audiences through more engaging content, there are a number of services being brought to market by start-ups at the user interaction level that can help drive a better web experience, which can translate into more ad revenues. Companies like Visual Revenue are helping online publishers determine what content to highlight on their homepages through predictive analytics, while Sailthru’s Concierge provides content recommendations to keep users engaged once they are on the site. Finally, Yieldbot is attempting to tie all this activity together into the appropriate context for advertisers to target users on an impression or even session basis to create an on-going advertising experience.

In society, a growing middle class is beneficial to the overall health of the economy. The same can be said for online advertising where the rise of middle class ad inventory will benefit the entire online ad ecosystem. This doesn’t mean that tier 1.5 inventory will be a panacea for all remnant inventory nor will it replace direct sales relationships. Instead it will offer buyers and sellers more choice around how inventory is bought at scale thanks to the ad standards developed over the years by the IAB. There will always be a need for full service ad sales teams that can create a native advertising experience that guarantees audiences for those advertisers willing to pay for better access and services. It’s those companies that figure out the right experience for their site and users and can optimize revenues across these 3 tiers of ad inventory that will be able to gain the advantage in a still nascent ad market.

Photo image source: Time Inc.

How To Convert Underpants Into Profits

Yesterday I was invited by Fortify Ventures to speak to some of the start-ups at their accelerator The Fort where I am a mentor. Since I am the Chief Revenue Officer of my company they thought I could cover the topic of revenue models. The title for my presentation (embedded below) comes from the classic South Park episode ‘Gnomes‘ where gnomes that are stealing underpants from one of the boys try and explain their business model of turning these underpants into profits (to no avail). Swap ‘users’ for ‘underpants’ and you have the dilemma that most start-ups not named Instagram face in converting a user base into a profitable business.

Let me know what you think and how I can improve the presentation for future use.