Benjamin Kuo’s Blog

There’s a great post on Mashable by Steven Hodson today on how the attitude users seem to have nowadays that all services must be free is hurting web businesses.

One of the most basic tenets of Web 2.0 has been this idea that everything can and should be free for everyone on the Web to use because whatever inherent costs incurred by a service can be paid for by advertising; or in some cases it would seem - by VC dollars.

A similar thought, penned earlier this year by Hank Williams — entitled Free is Killing Us, Blame the VCs — also expresses the frustration many companies have in trying to establish real businesses on the Internet. The crux of the matter: that CPM-driven, advertising dollars are just not enough for many businesses which cannot attract enough eyeballs to give it all away for nothing and sell advertising against it.

I recall sitting through Economics 101 in college and the concepts of elasticity of demand. Elasticity of demand is the relationship of price to demand — for example, if you lower the price on a car, how many more buyers are you going to get by lowering the price? The premise of many a web-based business is that the world is infinitely elastic, that is — if you lower the price to free, everyone in the world will want to become a customer, meaning you will get millions and millions of pageviews which you can then sell on a CPM basis and make your company infinitely wealthy — or at least, that some Big Internet Company will find very attractive and take off your hands.

In part — and this is why the “blame the VC” part comes into play — the gambit being made by a lot of web businesses today is that they can go ahead and jump on the “everything should be free” bandwagon because they are looking to build it big, and sell it fast. That is, if you can build up your web traffic/pageviews/etc. up fast enough, you can sell it quickly to a Yahoo/Google/Microsoft and not have to actually worry about monetization. Sometimes, this works (witness YouTube) — but more often than not, it ends in a quick flameout. Enough VCs are willing to subsidize the efforts, that users have been mislead to thinking that everything must be free. The problem is, in the end, someone has to pay for those services. At the moment, VC dollars are keeping many, dollar sucking Web startups alive, who otherwise wouldn’t be able to survive under the free model.

The problem is — there are many businesses which are inelastic in nature — that is, even if those services are free, you aren’t going to get many more customers. Frankly, there are many, many markets which just aren’t big enough — and will never be big enough–where CPM driven advertising will be a viable formula.  Even if you price your service at free, even if you have 100% of the market of online customers in that segment, you couldn’t cover your costs. I’ve heard some of the more sensible venture capitalists I know talk about this dilemma — on how they’ve passed on Web 2.0 companies because they just don’t have a big enough market, and how they could never actually reach enough people to make CPM advertising profitable.  It doesn’t seem like there has been enough thought on market sizing by many, Web 2.0 startups, to figure out they’re actually in an inelastic market where free doesn’t make sense, rather than a very broad, horizontal market where free/CPM-based ad models actually might work.

I wrote a few days ago about the dearth of venture capital for projects in the video games space. Two interesting developments in the area are worth watching in the area: the effect of executives from the video game space becoming investors. Two examples from the last week: the launch of GCube Ventures, which includes Shiraz Akmal from THQ as one of the principals (my interview with GCube is here); and  an investment made Mitch Lasky (of JAMDAT fame) now at Benchmark Capital, in Riot Games today. Is there a shift in the air?

For those of you who do not know Omid Rahmat, he’s the former CEO of the immensely successful technology publication Tom’s Guide. I’ve been lucky enough to get to know Omid over the last year and get a slice of his insights and knowledge. Omid’s penned a new article for our insights and opinions section, on Succeeding in a Recession, which is well worth a read.

Yes, we are in a recession. Maybe not a textbook definition of one, but textbooks tend to be behind the times. So, we’re in a recession. You can feel it. You can see the change in the business climate. Interestingly enough, those who have the resources – secure funding, or wealth – are relishing the inherent contradictions of the marketplace. They know that this is a time of great opportunity.

There’s been a lot of hand wringing over the dearth of technology IPOs lately, which got me to thinking about two broad categories of companies I see here in Southern California: companies that are built to be sold, and companies that are built to grow. It seem to me that one hidden strength we have here is that there are a number of companies (usually quiet) who are built to grow, rather than being solely reliant on the public markets or the typical buyers to sustain the company.

Companies that are built to sell, are designed — usually, from day one — to fill some technology or market niche and look attractive as an acquisition candidate. Usually, when you talk to their founder, CEO, or other executives, the entire raison-d’etre for the firm is to build it fast, and sell it for a quick exit.

Companies that are built to grow, usually are run by executives who think that they’ve got such a great idea that they have to just grow the company as far and as fast as they can. They are not specifically looking for an acquisition, aren’t specifically looking for an exit, and are just happy with market share and growth in revenues. It’s not that they don’t get acquired–usually, the very good ones do for a very good price–but they aren’t specifically looking for a sale.

Usually, companies that are built to sell are venture funded from day one — backed by VC funds hoping they will get a quick exit from a Google/Yahoo/FIM/etc. buying the firm. It’s a legitimate strategy, one which has returned well for investors many times in the past. However, it’s fraught with danger — particularly when there are a small number of potential acquirers and lots of competition, and when IPO markets are in the state they are now. You’re gambling that you are the one company out of 10 competitors which has something so compelling someone is willing to pay a premium for. this is the prototypical, early stage VC-backed company — lots of risk, lots of potential reward, swing for the fences or go down in flames.

Conversely, companies that are built to grow are usually bootstrapped, though not always, though they very often take significant venture funding later in their life cycle to accelerate their growth. These companies aren’t chasing the latest fashionable sector, but often are targeting their efforts on the most profitable or fastest growing sectors of the market. They tend to be quieter about what they are doing, and often only show up on the radar when they start showing up on the “fastest growing company” lists in revenue.

It’s an interesting contrast in styles; on one hand, companies built to sell often make the headlines, and encourage lots more startup activity here (founders/employees cash out quickly and go on to found their second/third/fourth startup). On the other hand, companies built to grow usually don’t get a lot of attention, but end up creating huge, profitable businesses employing lots of technology workers in the area. Some companies along those lines that come to mind here are Oversee.net, Specific Media, and The Search Agency, among recent firms — and historically, companies like Kingston Technology and Linksys.

Both kinds of companies have their place, but in this no-IPO, depressed M&A market, it’s to our benefit to have those “built to grow” companies who aren’t dependent on continued venture funding to pay the payroll, and grow to become major businesses without depending on someone funding their deficit spending. Yes, they might (and often) take venture capital to accelerate market growth, but they’ve got fundamentally sound businesses and aren’t dependent on the fickle M&A market to survive– a key to growth in this kind of market environment

The Los Angeles Times said yesterday that it is cutting 250 people, including 150 news staff, and is reducing news pages as it attempts to cut costs. Times Editor Russ Stanton put it best:

Thanks to the Internet, we have more readers for our great journalism than at any time in our history. But also thanks to the Internet, our advertisers have more choices, and we have less money.

I’m one of the few folks who actually enjoys the “dead tree” version of the news, whether that is the Los Angeles Times or our other local papers, and it’s unfortunate that the current news business is facing such a crisis. We are entering a time where the vast resources available to the formerly powerful newspapers — including very dedicated reporters willing to work on very tough stories, global reach, and dollars to invest in stories — will no longer be contributing to the quality of coverage.  While those of us online serve a niche, there’s always been value in the deep digging, and impartial analysis that the traditional news media has offered. While blogging and online media has its place, it’s often conflicted, biased, and for the most part is far more opinionated than impartial.  The billion dollar question, of course, is how to fund the level of coverage traditional journalism has provided in the day and age of the Internet. It seems, the LA Times — and the rest of the industry — has yet to figure that out.

My proposal for a new nametag standard for social media and networking events:

I was driving around today and was pleased to see the number of drivers who were actually (surprise!) using both hands while driving, now that California has made driving while holding a cell phone while driving illegal. Now, it’s the first day of the law, so it’s likely with the publicity and attention to the subject only the very stupid would be driving around with their cell phone, but in any case, it’s a dramatic change from seeing about 8 out of 10 cars on the freeway with someone jabbering away on their mobile phones, gesturing with both hands (off the steering wheel), or otherwise not driving.

However it seems like “calling while driving” is just another symptom of today’s information overloaded world, where there are so many competing demands for our attention, we have begun to evolve into hyper-multitasking-short-attention-span creatures.  There are so many competing demands on our attention nowadays — from email, to RSS feeds, social networking services like MySpace, Facebook, and LinkedIn; to SMS, twitter, and other instant messaging services — that I sometimes wonder how anyone can focus and pay serious attention to the task at hand.

Back when I was managing a software development group, we used to talk about how the best developers seemed to be able to shut out the world — cut out the “noise” from day to day life, email, and interruptions from other developers — in order to really focus and deliver on their code. We even set up “isolation rooms” for teams, where they could basically be locked up without interruption — by managers or others not on the team — so they could figure out the “really hard” problems involved in their projects.  The ability to really focus, and I mean 100%-of-your-brain-on-the-problem really made a huge difference to the productivity, and success, of the teams. Given that prior experience, I wonder how much the instant-communications, always-on environment is truly affecting the quality and work of companies today?

I’ve been rather amused to read a number of job posts today from startup companies that describe themselves as “pre-IPO” in trying to attract employees. Given the news today that there were no IPOs in Q2 of this year, it appears that in reality most of the technology startup world is in a permanent “pre-IPO” condition.

Once upon a time, in the world of technology startups, “pre-IPO” meant that your company was planning to go IPO–soon–as your exit strategy. For awhile–during the bubble–that meant you were ready to file, most likely to have an IPO in the next 6-9 months, and basically you were luring the idea of pre-IPO stock to try to grab those employees.

Now, with such a dismal exit environment, I suspect you’re going to have to wait more than a few months (years?) for the “Pre-IPO” company to actually turn into an IPO, if it ever does.