The Magic Formula
Michael Arrington
February 2007

Topics
• Market Timing
• Key Factors
• Areas of Opportunity

Looking Back At 2006
Was 2006 a “healthy” year for the web, or
was it the beginning of Bubble 2.0?

$600 million in venture capital
was invested in “Web 2.0”
startups in 2006.
…Bubble?

Not Yet
However, a single acquisition
was completed for $1.65 billion,
paid for in cold, hard Google
stock.
Nearly 3x the total amount invested by venture capitalists

Facebook was almost acquired
by Yahoo for $1.62 billion.

MySpace generates $25 million
per month in advertising
revenue.

My Point Is…
We’re just getting started.There is no
bubble. And the best Internet apps are
still to come.

What To Focus On
1. Have a good idea!
• Invent a market
• Destroy a market
• Remove Friction
2. Have a business plan
3. Have a revenue model
4. Build it cheap, test the waters
5. Avoid high burn rate

However
1. Threw away their original business
plan and one founder bailed out.
2. Flaunted international copyright law.
3. Had no revenue stream.
4. Was spending $1m/month in
bandwidth.

It worked because…
1. They removed friction by providing a
much needed service - IPTV (not user
generated video clips).
2. First to market.
3. So much growth that money poured in
to cover burn rate.

Case Study: MyBlogLog
1. Launched October 19, 2006
2. Acquired January 8, 2007
3. Never raised a venture round

Case Study: Amie Street
1. Launched mid 2006
2. Three university students
3. No capital raised
4. Can do to music industry what Digg
did to news industry

Case Study: Jingle Networks
1. Free business information (411)
2. Has taken 3+% of U.S. market
3. Forced AT&T to compete
4. UK opportunity?

Shared Attributes of Winners
• Passion for what they are doing
• Doing Something Extraordinary
• Removing Serious Friction
• Great Founder Dynamics
• Never Raised Big Money, or Raised It After They Won
• Perfect Revenue Model Not Required
• Had a lot of buzz about their product early on (free marketing)

Shared Attributes of Losers
• Poor Founder/Team Choices
• Lifestyle/Ego Entrepreneurs
• Raised Too Much Money
• Spent Too Much Money
• Over Business-Planned
• Forgot About Scaling (Don’t be Friendster)
• Had to try too hard at marketing

The Buzz Factor
To be successful you must create buzz about
your product:
• Solve a real problem
• Do not be the 200th video sharing platform
– Instead, be Aniboom
• If you don’t have a blog, start one now
• If buzz isn’t happening, seriously rethink your
product (not your marketing)

Areas of Opportunity
1. Offline/Online
• Apollo
• Firefox 3.0
• File system + html/flash/ajax
2. DRM and Music/Movies/TV
3. Data and service portability (teqlo, ning,
pipes)
4. Mobile

Discussion