Pres Monetizing Your Web 2.0 Venture 2007 R20

Maximize Your Revenue from
Your Web 2.0 Venture

Troy Angrignon
e: troy@troyangrignon.com
twitter: troyangrignon

*This presentation was originally presented in May 2007 at the AJAX World conference. It
has not been updated so the numbers and dates are anchored in that time period.

Tuesday, February 10, 2009 1
Every single day, we get up and go to work, trying to build the best company we can build - a startup, a team in a larger company, or a whole new division in a
large enterprise.

But when we get mired in the day to day business, we donʼt realize that much of what we do has little or no impact on the total revenue generation opportunity that
is in our businesses.

There are things that we can do that have far more leverage and that can drive far more revenue if we just stop and examine them, and maybe do things just a little
bit differently in order to get a much greater result.

When I was invited by Jeremy and Dion to come here and speak with you today, I decided to take what I had learned from working inside Business Objects, and
the work I have been doing with startups and build on that by going out and talking with CEOs of successful web 2.0 startups to get a sense of what is working and
not working for them as they attempt to grow their businesses.

In the next 30 minutes, we will cover the following things:

- Timeless Business Principles
- Web 2.0 Business Principles
- The Business Objects case

and then I will open up the ﬂoor to the group for Q&A. What might be even more interesting though might be for the group to share its own learning, its own ideas
on what makes a successful revenue generating web 2.0 venture.

Some business principles
are timeless


There are six core business principles that we all need to be reminded of.

1. To Maximize Our Revenue
Over Time, We Need To Sell...

More Customers
More Things
More Often
for More Years
for More Money


Revenue is really really simple:
- quot;delight more customers so that they buy more things more often for more years at a higher pricequot;
- the next slides explain how we do this.
- Everything we do should align to maximizing those numbers

2. Find the sweet spot

Something
Something
THE MARKET
YOU
Wants
$
Want

Somewhere
People want
to work
Successful businesses are found at the intersection of three areas:
• build something you want to see in the world
• build something that the world wants and is willing to pay you for

- KNOW WHO YOUR CUSTOMERS ARE

- it's more fun to build than it is to understand a market demand

- most companies don't make any money on v1.0; they just lose money until the end of v2.0

- Not sure about the market: go ﬁnd out!

- A market gap is not necessarily a sizeable market!!!

- ***The #1 reason for product failure is poor market research - Robert G. Cooper

- Market research has a 1000x return (or more) (show 1:10:100:1000 funnel)
• build a company where people want to work.

- In order to win in any given market, we have to have an “A” team

- There is a phrase that venture capitalists will often use: “I will fund an A team with a B plan...but not the reverse.”

Doing just the ﬁrst and ignoring the rest equals crazy inventor syndrome.
Building something that the market wants but that you donʼt care about is mercenary and probably not sustainable over time.
Building somewhere that people want to work while ignoring market reality is a recipe for a fun company that is irrelevant and will burn through its seed capital and
then fail.

Do all three things, not just one or two of them.
If we try to build something weʼre passionate about, that the market absolutely wants, and we have an A team building it....that puts us ahead of most of the
competition right off the start line!!

2a. Build Something YOU Want
(Follow Your Passion)
Ted Rheingold, CEO of Dogster.com and Catster.com, and Mike Canon-Brookes from Atlassian both said the same thing.

Find your passion

If you build your company because you are passionate about what it does, you will pay attention to your customers, you will do whatever it takes to make them
happy, then that will help to get you through the inevitable rough times that will follow.

If youʼre not passionate about it, donʼt start it!

2b. Joining or Disrupting a Market is the
fastest (and cheapest) route to success

✘
Create a
Market

Join a
✔
Market

Disrupt
✔
a Market

VISIONARY: it doesn't exist yet (hope you have lots of money)
- look 2-5 years into the future
- find things people are doing and make it easier for them to save time, make money, spend less money
- expensive bet!
- if you win, you might win big...or you might get killed by fast followers (next point).

EXISTING (GROWING) MARKET:
- example: wiki market: it exists and is growing at a blistering pace (fast followers have low expenses)
- jump in, differentiate yourself, get better network effects, and kickstart your client base any way you can
- address a real pain
- 9x rule - be 9x better than the alternative or people wonʼt change their behaviour! (Andrew McAfee)
- pain-killer not a vitamin; build something that addresses real pain so that people will actually pay you to alleviate that pain;
- market pull, not technology push. Find an existing market (i.e. customers in pain) and build something for them, rather than inventing something new and hoping
that you can find a customer for it.

DISRUPT A MARKET:
- if you can turn a $500M market into a $50M market and keep most or all of that - DO IT
- web conferencing is going through this right now;
- ThinkFree trying to do this to Microsoft Office and succeeding in certain ways - educational and non-profit markets for example that are very price sensitive;
- Plenty of fish did this to the paid dating site market which is a multi hundred million dollar market.

2c. Find a market large enough for your
aspirations but small enough to dominate

3%

YourCo
Competitors
40%
3%

98%
60%

98%

We need to find markets that are large enough to contain our aspirations.

One of the things that I have seen is that people are building companies that address tiny little market niches. Thatʼs fine if we want to build a tiny little company.
But if our aspirations are higher, then we need to find larger markets to play in.

Another error is going to too large of a market and committing the deadly 1% error: “If ONLY we could just get 1% of all the users on earth!!! “This is a guarantee
that nobody will fund your company because it means the company is not serious about finding and dominating a space. Plus the “1%” flag is used by investors to
determine if an entrepreneur is too green to talk to

Look for large markets that are growing quickly and seek to be a dominant player! Jack Welch taught GE that if they couldnʼt be first or second in their business,
that they should exit. The “Rule of Threesʼ dictates that in any given market, eentually you get the winner, then you get the second position company with
approximately half the market share of the first, and the third with approximately half the market share of the second. In other words, a standard power law
distribution curve.

And what about network effects? Market share = a power law with birth order and network effects vying to drive the eventual winners
• First-mover might win if it has greater “fitness”
• Fast follower can trump first-mover if they have greater “fitness”;
• Refer to Albert-Laszlo Barabi's LINKED book where he discusses quot;fitnessquot; as a combination of quot;birth orderquot; and quot;network effectsquot;.
• A “fit” first mover beats an “unfit” fast follower.
• A “fit “fast follower” can beat a first-mover through more powerful network effects.

One of the single most important things that we can do in our companies is to say, “Is there a larger market here that we can be addressing?” If so, how do we
create the fastest network effect in our market?

3. It’s much easier to
launch a business by
riding a wave (or two)

Things don't just quot;appearquot;: Ride a wave or preferably a couple of waves
- Geo location and Localization are becoming huge
- Mobile is still lousy in the US but cracks are appearing in the model (such as the European company that went to ﬂat-rate all-you-can eat pricing for data on their
mobiles.)
- Social Media is taking off (look at Digg, Now Public, and others)
- Web 2.0 leading to Ofﬁce 2.0 (non-integrated) leading to Enterprise 2.0 (deep integration)
- Web Services and Mashups are exploding although there are few revenue models for it yet other than the Amazon/eBay models where people are connecting to
their ecommerce platforms.
- Collaboration is a $31B market that is being pushed into everything:
- Immersive environments: We're at the beginning of this curve:

- Second Life has a nearly $1B economy; so does World of Warcraft; IBM is spending $100M on research into these environments.

- World of Warcraft: $800M-$1B market inside/outside of the game

- Club Penguin has 5M 8-13 year olds paying $5/mo!

- Gaia Online is the fastest growing virtual world for 13-25 year olds

4. Find Your Blue Ocean, Zag
When Others Zig, and Be Distinct

There are many names for this concept: Blue Oceans, White spaces, a Zag

The idea is to ﬁnd a spot that isnʼt completely saturated, and then be radically different from everybody else so that you stand out from the crowd.

John Zagula and Richard Tong call this the XYZʼs: We are the only X that does Y in Z unique way.

Seth Godin says “Create Purple cows” (memorable and different and doing something different than everybody else.)

EXAMPLE:

Freshbooks is a great little company building billing software. They are doing something that not a lot of other companies are doing, and there are second order
effects where the users get primary value, but then they also get benchmarking data and advice on how to improve their performance based on the performance of
peers in their industry. They even mail out invoices in the regular postal mail from their system. Strange but true - some people still receive bills by mail!

5.
We need to
LOVE
our
customers!

Find rabidly fanatic and passionate customers

Let them help you design, produce, and manage your business

Hell, let them fund your company!

I attended the Web 2.0 summit in Fall 2006. There was a common theme over the course of the session and it centered around: quot;how much do you optimize your
business for revenue or profit generation and at what point do the users tip over from 'this service loves me' to 'this service is trying to just make money off of me'
and start to leave in droves? Bob Parsons, CEO of GoDaddy.com commented on how analysts kept telling him he had to fire a bunch of his support staff. But that
generic principle (lower your overhead costs and costs of servicing the customer) in that case were inappropriate when his entire value proposition is: quot;the
cheapest domain names on the internet with great human tech support.quot;

Jim Buckmaster also spoke there and said that when people suggest they run more ads on Craigslist, he always says, “Last time I checked, they werenʼt asking
for them.” Their approach is one of “unbranding and demonetization - charging as little as they can”. And the result is something like 75% NET margin on $20-30M
of revenue.

It turns out that if you focus on revenue and profit entirely, you can often lose your customer. But if you focus on your customer, your revenues and profits are
more likely to follow. Itʼs a hierarchy of priority: Customer first, Margin and profit second...which in turn has s spin off of bringin in more customers from whom you
make more revenue. Itʼs a virtuous circle.

6. Chase TWO rabbits...
...Catch NONE
FOCUS on one thing and go after it with all of your resources

A focused company knows who its customers are (and arenʼt).

It knows which customers are the “lead pin” customers (the ones who when taken down, help you take down the rest of the customers with them.)

It knows what market it is in and why.

It knows who its competitors are.

It is efﬁcient with its resources

A company that picks a target and focuses on it relentlessly improves its chances of success greatly.

Nine Web 2.0 Principles
For Business Success

That brings us to the end of the six business principles that have not changed.

Now I would like to discuss the nine points about Web 2.0 that HAVE changed.

7. There are six business models
Ads
Transactions

eBay AOL

Biz Models
Subscriptions GAMEY Google

Microsoft
Yahoo

CAR
Commissions

Pricing models:
- transaction: merchandising, and metered APIs
- transaction commissions: eBay, metered APIs (Yahoo)
- subscription: memberships, etc. - going by the wayside for many walled gardens including AOL and being replaced with ad revenue
- advertising & sponsorship: $500M worth of offline advertising per year is beginning to look for a new home on the internet.
- GAMEY plan (get acquired by Google, AOL, Microsoft, eBay, Yahoo and let THEM worry about it!

- IPO route is mostly closed

- We'll get lots of eyeballs now and then we'll monetize later...

- Great if you have a lot of money to burn like YouTube which burned through $12M worth of VC funding. They were lucky to get bought and now theyʼre still
trying to figure out how to make money.

- It didn't work for most of the 1.0 dotcoms and it won't work for most of the 2.0 dotcoms.
- CAR plan: Company as resume. Many young smart guys are building companies that are really just expensive resumes. At the first hint of a job offer from one of
the GAMEY clan, they jump ship and get a job inside the corporate walls, bringing along their user base, which is often ignored, or worse, shut down, afer the
move. These types of moves are often defensive for the hiring company. They remove a future threat while also bringin in some users and a couple of smart
programers.

7a. The Real Revenue in the Ad Model is at the
Top of the Pyramid Where the Air is Thin

Hard
Prem
Sponsor
The real
Premium
money is
Adv
here

Afﬁliate Networks
But many of
us are Ad Networks
focused here Google Adsense
Easy
To Maximize Revenue, you have to do what very few companies are prepared to do:

Hire good people (who know ad sales)

Find good advertisers;

Sell them!

NOTES:
- Page views are dying; time spent is increasing; metrics are in ﬂux
- Therefore go for advertisers who understand this.

7b. Dogster’s “Circle of Trust”
for Ad Revenue

Customers

Circle
of
Advertisers
Trust

Your
Company

Prem sponsors

critical to keep the sales people in house

go for the premium sponsors; then for premium advertisers

circle of trust between yourco, advertisers, readers

advertisers must be deeply connected to this community to maximize it for all parties

this is a known model!

Dogster: quot;We're a magazine company - it's pretty simplequot;

7. Six Business Models (revisited)
Ads
Transactions

eBay AOL

Biz Models
Subscriptions GAMEY Google

Microsoft
Yahoo

CAR
Commissions

BUSINESS MODELS:

Ads: go high
Transactions / Subcriptions:

Build the no-brainer value proposition

Build it with a no-brainer value prop (i.e. it costs less than the alternatives by a lot)

SmugMug is the same principle; so is Flickr ($25/yr)

Positioning and pricing are an art;

ﬁnd somebody who understands how to price for your customer segments;

test, learn, adapt
Commissions: not that relevant to most people, use if you can though.
GAMEY: donʼt count on it!
CAR: donʼt rely on it to rescue you either.

WHERE ARE THEY FOUND?

Consumer = Ads/Comm/Subscription/CAR

Ofﬁce / Ent = Trans/Sub/Comm

8.
Making applications fast, pretty,
or functional may DECREASE
revenue!

We need to be careful about making the assumption that our site needs to be fast, beautiful and functional!

Ugly can be beautiful

Slow can be good

Addiction is key and that's variable, depending on your audience.

Plenty of ﬁsh / Markus Frind: found that depending upon your customers and what theyʼre looking for, that you need to optimize (NOT MAXIMIZE) things like
speed, look and feel, AJAX vs. HTML, and many other factors

AJAX might make you 20-40% less money because the second you turn it on...the page loads stop, the brain doesnʼt “reset” and people see fewer ads.

If your offering is ad supported beware of this

If youʼre using a different model, it might not matter

Remember that the goal is maximization of revenue and sometimes that means making our site uglier, slower, and less functional so that our users become more
addicted to it and therefore spend more time on the site!!

Be careful about your assumptions!

9. Our Customers Will Help Us Design, Build,
Maintain, and Run Our Company...If We Let Them

PEER PRODUCTION:
- pay the user first
- the more people use it, the better it gets
- turn network effects on by default;
- your users are smarter, faster, and better than you are

EXAMPLES:
- At TED 2006, Charles Leadbetter gave a great talk on peer production where he said something like: If you have 1000 employees but you have 100,000
customers, by getting 1% of your 100,000 customers (or 1000 more people) involved, you have doubled your work-force!!!
- Craigslist is one of the top 5 sites on the internet and they are running it with 21 people in a house in San Francisco. Their community of users creates all the
content and does much of the moderation.
- Youtube users are adding 65,000 videos PER DAY
- Freshbooks: the more people use it, the better the benchmarking information they get back. They use it for their own benefit, but other benefits come to them as a
result

10. A Hard-To-Recreate
Data Source Can Be Valuable

The ofﬁcial phrase for this is: Data is the next Intel Inside. I donʼt like that phrase. I think itʼs simpler to say: Obtain a hard to recreate data source and that can be
worth a lot of money:

- Amazon bought the ISBN data, enriched it over many years, and now own the best ISBN data set in existence

- Advanced Economic Research in Victoria has a copy of every single transaction that eBay has ever done - and they have done pattern recognition on it and
found incredible things which are now worth a lot more money than the original source data;

FILE FORMATS:

- Westlaw took all of the proprietary case law formats and came up with their own format and has been reselling case law in that format for many years and has
been able to successfully defend against incursions on that FORMAT via copyright law!!

- chunk your data and make it accessible and remixable so that you can see what others do with it

Do you have any data that you could componentize, increase the value of, and share out to the world?

11.
The Mashup Applications

ecosystem is
exploding. Web
(But revenue Services

opportunities
are still “in Widgets

progress”)

PATTERN:
- We are moving from Suites to apps to web apps to web services to widgets
- Year 2007 may be called quot;the year of the gadgetquot; by Time Magazine.
- The Web Services market is going from $2B to $32B in ﬁve years. This is a shocking explosion of innovation and services.
- Amazon runs >$200-300M of transactions through their APIs
- More than half of eBay's transactions come via their APIs - people never touch their site!!!

WARNINGS:
- hard to monetize unless you're Amazon/eBay using a commission model
- brittle and hard to keep running over time
- very early days and people don't know how to make money here yet (if at all)

LESSONS:
- Break your apps into services and possibly into widgets
- Watch to see what happens here next

12. Design our applications to
run across multiple devices

EXAMPLES:
- iTunes runs incredibly well across a PC, a Mac, and an iPod, including syncing bookmarks
- Newsgator syncs your Palm, Blackberry, Outlook, Mac, and web viewer - NICE!
- Shozu: Take pictures with your camera and they will be uploaded in the background so that your friends and family can view them on the web - no human
intervention required!
- Moblogging!

THIS IS ABOUT increasing the number of customers and the frequency of use of your product.

13. Deliver software on demand.

We are here

Ref. Phil Wainewright, Mar 12, 2007, ZDNet quot;SaaS hits the hockey stickquot; :

“Most surprising of all was a huge jump from 18% last year to 49% this year of companies planning to use SaaS for mission-critical applications. “

CUSTOMER BENEFITS
- Higher return on assets (ROA): Optimization of sourcing strategy resulting in cost savings. In other words, I already have a capability (e.g. CRM) in house, but
now I can source it more cheaply from the cloud.
- Shorter time to value: Opportunity to leverage software assets faster by shunting the deployment phase.
- Higher agility: Opportunity to leverage software that was not possible for me to leverage before due to lack of speciﬁc skill sets in house, internal policies or in
house regulatory compliance etc. In other words, SaaS offers me the opportunity to tap into a capability I was not able to have before. This results in the
opportunity to tap into a larger software asset pool enabling better business – IT alignment.

PROVIDER BENEFITS:
- we can see what theyʼre doing
- we can mutate the software faster to get to what the users want!

14. A niche market is not the
same thing as a long tail business

Definitions:

“niche market company” with little market size = little revenue

Long Tail = aggregator of many (hundreds or thousands or small niche markets) with a very low cost structure

EXAMPLE:

Tell the story of Richard Rosenblatt / Demand Media

1. Customer searches a domain

2. system provisions site there

3. customer adds content

4. next person hits same domain name and sees “content” and “like-minded individuals”.

5. If enough do this, it hits critical mass and goes exponential.

Rolled up 9 domainers with millions of domain names.

THATʼS a long tail business!

LONG TAIL BUSINESSES REQUIRE EXPERTISE WE MIGHT NOT HAVE

Sturgeons's law: 95% of EVERYTHING is crap so filters count and they're hard to build well.

Amazon has 7-8 filters just between the front page and the checkout!!!

If youʼre not good at filtering and aggregation, donʼt try this!

Tony Perkins moving Always On from an editorial model to an aggregation and filtering model

15. We need to get to critical mass
in quantum leaps as fast as we can.

Do what it takes to launch with a large core audience to gain critical mass

POF used advanced keyword arbitrage knowledge to drive massive adoption up front;

Digg / Kevin Rose had a TV show. At the last episode, he said to 200,00 (?) viewers, “come and see us at our new company: Digg! That was the ﬁrst quantum
leap.

There are things that we can do that have far more leverage and that can drive far more revenue if we just stop and examine them, and maybe do things just a little bit differently in order to get a much greater
result.

SIX BUSINESS BASICS
- find more customers and sell them more things more often for more years for more money
- find the sweet spot:

- making something you want by following your passion)

- something they want (by doing the market research to understand who your customers are and what their pains are)

- doing it somewhere that people want to work so that you can build an A team
- ride a wave or waves
- while riding waves, make sure they are in a blue ocean (where there are fewer competitors)
- love your customers
- chase one rabbit, not two

NINE WEB 2.0 PRINCIPLES
- There are only six business models; four of them work; the other two work once in a long while
- If going for ads, learn how to move upstream to where the air is thin and the revenue is much higher
- Remember that an ugly, slow, semi-functional site might make you more money - itʼs up to you to decide if you want to subject your users to that
- If you let your customers help you, they will design, build, produce, moderate, and generally help you run your company
- Creating a unique data source with your customers can be a valuable opportunity
- Moving from applications all the way to widgets is opening up a lot of opportunity - much of this still has to be defined
- Building your systems so that they span all devices is a way to make it more ubiquitous, thereby getting you more customers using your software more places.
- Deliver your applications via Software as a service in addition to any appliance or on premise solution that you might have - the market is ready and the advantages are well-documented.
- Kickstart your user population any way you can; build faster network effects than your competitors and if you do, you can even beat the first-movers who are ahead of you.

ARE WE GETTING THE MOST LEVERAGE WITH EVERYTHING WE ARE DOING HERE?

Questions? Speaking Opps?
Contact me at:

Troy Angrignon
email: troy@troyangrignon.com
web: www.troyangrignon.com
skype/twitter: troyangrignon

For businesses that want to accelerate their their transition by embracing the next generation web, we are the only
consultancy, training, and media company that can span from the Fortune 5 to the 5 person startup. Unlike traditional
consulting firms and newer Web 2.0 consultancies, we understand the scale and scope of change that is occurring and can
also ground it in real-world execution.

Hinchcliffe and Company is a boutique consultancy focussed entirely on accelerating business and organizational growth
through the application of Web 2.0 principles and practices. We offer Enterprise 2.0 consulting and strategy services,
corporate and public training, startup coaching, and media properties such as “the Enterprise 2.0 TV Show.” Our clients
include the Fortune 10 and the 10 person startup.

We look forward to understanding how we can help you grow your business!

Pres Monetizing Your Web 2.0 Venture 2007 R20

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