JayWeintraub.com - Internet Advertising Analysis and Commentary

You Down with OMG? Yeah, You Know Me. Tumblr And A Whole Bunch of Cray-Cray.

Quite a bit has been said about Yahoo buying Tumblr. $1.1bn is a staggering amount for a company that earned $13mm last year and has declining growth in its users and pageviews. It's been said that the business will generate around $100mm in 2013, which is impressive growth and suggests that the company could make $200mm to $300 fully optimized. And, assuming a conservative 20% EBIDTA, it will take *only* 20 years to make back the $1.1bn, which by the way happens to equal an entire year's worth of free cash for Yahoo. Seriously, imagine selling a business where the decimal in the sale price is $100 million. This isn't $10.1 million or $100.1 million. It's $1.1 billion.

I think one of my favorite write-ups comes courtesy of The Onion, with their piece, "Yahoo Back On Top After Purchasing Millions Of 13-Year-Old Girls’ Blogs." While in jest, the article brings up two serious questions, "REALLY?" And, "WHY?" Please remember that "Why not," and "We needed to do something big," do not qualify as answers. While I know of one friend that was an investor, so I feel happy for him, I struggle with the acquisition of multiple levels.

On the business front, I almost get what Yahoo is trying to do. They don't have a sexy media play that can take part in the new hashtag reality. They've given up on search, don't have a social play, aren't a mobile player, so with Tumblr, they get a piece of social, a piece of mobile (views), and not just scale to sell against, but an ad format / methodology currently in vogue. BUT, user generated content is really hard to monetize. Ask Twitter and Facebook. They have done an astounding job at creating ad products that big brands want and feel safe using while balancing the user experience. Not an easy task. Where Yahoo will struggle, and why I have a hard time understanding the price is that major brands don't promote their Tumblr presence on TV. It's not the digital calling card, and in a world of YouTube, Twitter, Facebook, Pinterest, etc., asking a company to add and master another platform is no easy task. Google+ anyone?

On the personal front, I have more issues. I'm a bootstrapped entrepreneur, so the company's money has always felt like my money. This reminds me of the issues I have with the government. It's other people's money. Success or failure of this deal hurts CEO Mayer very little. She did not have to put personal money into the deal, and if it fails, it becomes a write down. If it really fails, the way Bebo did for AOL, someone looses their job, potentially her, but by that point, her own wealth has already increased by $20mm at the low end. And, no matter what, she will be remembered as a risk-taker, willing to make bold decisions. That's all very good, and were I in her shoes, I cannot say I would do things differently with the system we have in place today. That's the problem. The system is broken.

One part of the system that is broken is on the early side of entrepreneurship - the acquihire. It's something Marissa Meyer has publicly decided she supports, and sadly only perpetuates the entrepreneurship bubble. Make no mistake, this is not an internet or tech bubble we are in. This is an entrepreneurship bubble, and when companies with no right to hop on the bandwagon do, it creates a potentially toxic scenario. The entrepreneurship bubble is the quick flip of businesses and people, fueled by hype, speculation, and a false sense competition. Unlike Facebook, Yahoo is not a tech company and does not have a tech culture.

Yahoo will fail at keeping the talent, which is fine if they are buying assets and not people. And, as Mark Suster points out so well, as an operations business, Yahoo needs good, talented operators. Make a young person rich and you do nothing to help your business except give the person you need a strong desire to leave or stay but give less and the person who won't stay anyone time and a runway to start their next thing.

Getting back to Tumblr. They did something special. They created a platform that attracted an enormous user base (110 million blogs created) without spending any real money on paid user acquisition. The team and the investors had an astoundingly successful outcome, and they played the game perfectly. What's wrong then? The game is arguably flawed.

Incentivizing the wrong behavior. That's life's version of greenhouse gasses, and it's arguably getting worse and worse. A result of which and the hardest problem to solve let alone address, as even mentioning it brings about a Pandora's Box of conversation, is the wealth divide gap. As of May, according to Wikipedia, Tumblr had 175 employees. The money isn't going to them, 20% is going to the founder, 10% max to other employees, so 70% to investors. All of which is how the game is played, but we do nothing to help sustainable job creation and the resuscitation of a healthy, true middle class. The vast majority of the proceeds go to a limited number of players, with little being put back into play.

I will guess of the $1.1 billion that $100 million gets reinvested in the next generation. One winner from the Tumblr sale should be the NYC and broader tech communities. The new $100mm available for startups and investments will create a modest amount of jobs, and a meaningful percentage (is it 20%, 30%, more?) will go to people young in their careers, for whom this is also not their money, and failure often means a lead up to another job. What we haven't had is another Google, a game changer that has created a large number of jobs not to mention a well respected culture and benefits to try and get hired for. Large, long-term growth. That's not Yahoo, and it wasn't Tumblr.

The ability to be an entrepreneur is one thing that makes this country great. But, there's a case to be made that it's gotten a little out of hand and that the game is no longer an even playing field, or at least one with the proper alignment of incentives. We are also losing the battle to create a healthy and sustainable middle class. Are the two directly connected? I don't possess the scope to really say, but something is happening that we will need to fix. Or maybe, I'm just one of the haters. No matter what, it's cray-cray.  

Lessons from the NICU - The Trouble with Not Being Able to Measure

My wife and I have been spending quite a bit of time in the NICU. She gave birth to our first children, fraternal twins Ryan and Madeline. (Like backstories and context? Keep reading. Otherwise, go to Part 2.)

Part 1: The Personal Story and Current Journey

All things considered, we are very lucky. While born 8 weeks and 3 days early, we have according to medical professionals, healthy kids. Their small size, fragile appearance, the CPAP obscuring their face, the IV in their arm, and multiple connectors to constantly measure heart rate, oxygen saturation, and respiratory rate make it very difficult for us to feel they are healthy and progressing as they should.

Knock on wood, they have not needed any surgeries, transfusions or significant intervention. They are starting to put on weight, are able to eat, sleep, and poop, all things that we cannot take for granted, especially when all we have to do is look at some fellow NICU-mates whose struggles are much greater than our own.

After the first week, we started seeing noticeable differences between our boy and our girl. The medical staff set our expectations for her to develop much faster than him, and that has been the case. She has grown faster, consumes more, and most importantly, can spend time off CPAP. He on the other hand has not shown many signs of progress. Had we only one kid and had we just celebrated his two week birthday, we might feel differently.

Instead of two steps forward and one back, it feels like one step forward and two back with him. The nature of the NICU is partially to blame. In many ways, it is the definition of stressful, and it also epitomizes the squeaky wheel gets the grease. Each of the three continuously monitored metrics has an acceptable range, and if any of them outside the range, an alarm goes off. Sit in the NICU for more than a few minutes, and that's what you hear. With our boy, it's what we hear seemingly non-stop. It's a form of torture. You have few to no tools at your disposal to assist, and your mind can only focus on the alarms.

With three babies in a nurse's care generally, someone needs something almost always, so it's anything but calm or easy. The issue is not just the feeling of helplessness, it's the balance between what is measurable, trackable, and known versus the unknown and thus subjective.

The balance, or imbalance in this case, also leads to something else, a high sensitivity (on my part at least) to our babies' nurse. "Hospital" may be close to "Hospitality" in spelling, but that's where the difference ends...on so many levels. Let's look at one. Unlike your typical higher-end hospitality environment, the nurses are very much people with individual styles and personalities. There is not a higher brand and code under which they operate. That is not a criticism, but when assigned a personality and style that does not match your own, it adds additional friction to an already charged situation.

Part 2: Connected-Future and the Unknown

Having had a wide range of nurses has led to many observations, especially about our medical system, but a way to frame our experience not just this experience but others as well. It stems from balancing good enough with doing all that can be done. In so much of our life, this is what good versus great looks like, or hard work versus less hard work, etc.

In sports especially, we see the difference between hard work versus not as hard work. In school, we see it too, and it often looks like this. You know what you have to put in to get to good enough, and some choose to do more. It can be personally motivated (just a high achiever) or reward driven (achieving highly to get to a good school).

If you want to raise performance, you have to either install a minimum threshold or raise it.

When situations aren't as measurable, at least in the connected-future*, that's where it gets hairy. The NICU that our babies are in is rated very highly, but that's because they do many procedures on difficult cases. The actions taken have measurable results and in the connected-future. This is where you want to be when certain neo-natal procedures might be needed. But, what if there isn't a procedure? Then, there is a prescribed course of action that revolves around monitoring and "good enough."

Our nurses tend to fall into two camps. Those that optimize to good enough and those that optimize to all that could be done, even if the results of those actions can't be felt in the connected-future. Some are high achievers, others not as much. Some are just driven because they can't live life not giving it what they can; others are satisfied at giving just enough. In other words, nurses are people personified.

Why we care about is that this isn't a restaurant; it's our kids lives. The potential delta between good and great is immeasurable and exponential. How much more could you do and have if you were 1% better? 5%? 20%? 50%? In the NICU, we're talking about kids in the very beginning of what any parent hopes will be a long, fulfilled life. How can we not obsess at what good enough and better than good enough means for them - mentally and physically. That more than the constant alarms eats at me. CPAP not bubbling consistently but "good enough?" Oxygen saturation low but "good enough?" A greater number of bradies, where they recover but with a lower low? No one knows what it means. The high achievers try to make sure more time is spent well above good enough. The other group doesn't try to optimize for achievement. There is no connected-future incentive that would force a good enough achiever to reach higher. The result. This.

Without better metrics, we struggle to optimize to anything but the minimum, as it relies on people doing more just because. And, when the potential difference between good enough and better than good enough can be immense, not having tracking commiserate to the gravitas of the situation creates an imbalance in the parties and potentially toxic scenario. 90% of a great meal is very different than 90% of a great life. This situation isn't unique to being in the NICU, but it highlights the gap in a unique way.

As my father would have said, "Way to over think it." Give me some proof that it doesn't matter, and maybe I'd agree. Until then, for me it's all about alignment and optimizing.

 

*The connected-future means a timeframe where a person responsible for an action feels the real result of the action. By and large humans optimize for the connected-future not the eventual-future, because our system of incentives places the maximum benefit on the connected-future instead of the eventual-future. Alignment of incentives and the disconnect between for what we are generally incentivized and what we should be incentivized is a topic of extreme interest to me.

Why developers are leaving the Facebook platform and that is OK

Many in the customer acquisition, especially the newer genre of "growth hacking" know of Andrew Chen, whose career has spanned the earliest days of behavioral targeting to today's platform era. I was reading a recent essay of his, titled "Why Developers Are Leaving the Facebook Platform," in which he writes, "In recent conversations with fellow entrepreneurs in Silicon Valley, it’s become a common belief that Facebook has become an undesirable platform for a startup to build their company."

As even those in the lead gen world know, that attitude could not be further from the Facebook App ecosystem of 2008 - 2011. I remember a conversation I had with one of my favorite people, Saar Gur, a partner at Charles River Ventures, not long after he invested in a firm that was early leveraging the MySpace ecosystem for app installs. This was before Facebook had officially opened up its platform to developers. He had a such a great way of explaining what at the time was a very simple ecosystem, comprised mainly of people sending hugs and the like. He called them light touch activities, and it made perfect sense. It's why we "Like" more than "Comment," follow more than friend, text more than call, etc. It's easier, safer, and a way to engage without having to use conscious thought and face rejection.

The light touch app phase became less prominent as Facebook's algorithms for what was shared and what wasn't. The opened the door to more intricate casual games, who for several years also enjoyed phenomenal gains, not the least of which came from shrewd news feed optimization, ok gaming the rules. And, if there is one thing that always happens, it's holes are plugged and rules tightened, so that experience ultimately harmful to long-term user happiness does not become the dominent experience.

For app developers who relied on these hacks, a more crowded playground with stricter rules is absolutely an uphill battle, and I can see why it would make for less investible, if not uninvestible business. On first glance, shifting developer interest sounds like a bad thing for Facebook. Is it bad for Facebook or just bad for developers?

I think the changing developer landscape and interest in Facebook is a non-signal for the health and wellness of Facebook. Facebook is a platform, but it is a very different business today than several years back. Facebook today is a media business. It is a no longer a platform for entrepreneurial developers to build their own audiences via Facebook. It has shifted to become a platform for businesses to interact and grow their audiences. It makes money off ads, and is catering to those who will drive its business going forward.

The prototypical entrepreneur product-developer doesn't build for Google's search engine any more. That hasn't hurt Google, and it won't hurt the Facebook of the future. Games, for example, will never be able to spend enough money to help Facebook earn the revenues they need, and games / third-party apps aren't core to the experience Facebook wants. Agencies and the long-tail of SMB's will determine Facebook's fate. Making sure they have "apps" for businesses is Facebook's priority, and it's a smart one. I still think the company must continue to have a vibrant third-party publisher platform, and it must continue to have a healthy developer base. But it's ok that the developer base is changing. And, it's ok that we're entering a period where their developers aren't necessarily product-entrepreneurs looking to build their own media property versus helping others use Facebook to maximize theirs.

Idea Versus Execution - A Tale of Two Founders

It's been six months (wow) since I wrote "Idea Versus Execution - A Stupid Simple Framework When Thinking about Starting or Running a Business." The genesis was personal, as a way to look back on my own successes and failures, to codify the thinking, especially since I now have the good fortune to interact with an increasing number of entrepreneurs. 

My first business was a dud. I spent almost a year, off and on, trying to launch it. I had a site, checking account, several domain names, a phone number, stationary (it was 1998), etc., all the trappings of a real business. It went nowhere, but it wasn't for it being a bad idea. I could also make a case that it didn't fail for lack of cycle decidated to it. The problem was that the size of the idea exceeded my ability to execute that idea. 

In thinking through ideas versus execution, there are three things I've had to come to terms with personally. The first is that I'm an idea guy through and through. The second is that a large number of my ideas exceed my ability to execute, and the most difficult is that almost all of my ideas have been thought of first by others. The ONLY thing that matters is who executes best - not even first but best. For idea guys, this principal can be painful, because it means learning to let go of ideas and realizing that ideas aren't where the value is. 

Part 1: “I'd never join a club that would allow a person like me to become a member."

Recently, I had the chance to meet two different founders. One reminded me of me when I was just starting out, which unfortunately for him, is probably not a good thing. Age, I should mention seems only loosely if not at all correlated with entrepreneurial success as we see. This founder had an interesting idea that is best summarized as doing what Uber did for the for-hire industry to another field. It begins with the assumption and understanding that with mobile devices in the hands of customers and consumers, you can leverage that device to radically change how the two sides connect. 

We met because he hoped I would become an investor in his business. As I enjoy the ideation process, I chose not to tell him that if someone actually needs my money we're both in trouble. After listening and asking, the problem with his business is not the idea; it's the likelihood he could execute on the idea. On the surface, he had a big market and a way to add value to it. He even had his first handful of partners that were generating revenue. What I was looking for was how it went from 0 to 10, 10 to 100, 100 to 1000, etc. 

I'm sure his idea can get from 0 to 1000, but can he? He needs to be able to show that you understand every nuance of the business opportunity. He needs to have crafted a story strong on numbers standpoint. He needs to show that he understands the metrics that dicate the current ecosystem, understanding how customers and providers connect today and what specifically he would do to increase the yield such they would make a behavior switch. He should be able to paint the picture in a way that even if the investor said no, they would leave thinking, "Wow. That's a great opportunity. I wonder who might be interested in it." 

Part 2: The ONLY thing that matters is who executes best - not even first but best.

About the same time, I had the chance to meet another Founder, this one of a company that grown like a rocket-ship. The idea in many regards is less interesting, the opportunity less accessible. Yet, it is this business that has investors wanting to pour money into. The idea is fine, but even the founder will tell you, his business is not about the idea, which was enough to get him going. It's an execution business. What makes his business even more impressive is that it is not a purely digital one. It is part of the new breed in customer acquisition businesses. It requires sourcing, warehousing, fulfillment, customer service, not to mention unique financing challenges all while trying to become experts in marketing. 

I'm not saying this founder has succeeded because he predicted everything he would run into before beginning the business. The criticism of the previous founder is not an expectation of expertise that could predict the future. It is in hopes of knowing the entrepreneur could handle what they will face. The way they frame the opportunity now tells a lot about how they think and how they will solve future problems. That is what people invest in as that acts as expertise acts a proxy for execution.

Business building never goes as planned. That's why it's the execution not the idea that matters. Let's face it. The vast majority of the top businesses today were somebody else's idea! 

Why Entrepreneurs Often Make Horrible Investors

I had dinner last night with a good friend who built a highly profitable business and had a significant liquidity event. I built a profitable business and had a liquidity event, so I look at him as a role model in many ways. He was in NYC, for among other reasons, to speak to a handful of potential investments - from companies to funds.

As soon as my business started to generate more than I needed to live, I couldn't help but do some angel/startup investing. It's almost impossible not to, especially if you live in an area with high startup concentration. Add to that Angel List, and you might as well just get ready to write checks. My friend has done some angel investing but not much. He mentioned that many people he knows who have had some liquidity do it, but he came to the conclusion that it was probably not a good idea.

Not good for entrepreneurs to invest in other entrepreneurs? 

The answer he says is pretty simple. The optimism that guides and makes many entrepreneurs successful makes it very difficult to properly judge the success of a startup. The optimism means being able to see what you would do if you were running the company - to figure out the various angles, potential pitfalls, market opportunities, etc. There is only one problem? You are not running the company.

To succeed at investing, optimism is not your friend. An ability to question, to think rationally, remove oneself from the decision, that is your friend. You don't have to be cynical, just realistic. You don't have to look for why it can't succeed, but unless you are run the ship, stop looking how it could succeed. Start looking for what could go wrong, and can they figure it out. That is why you often hear that investors back people more than ideas. 

It is the person that navigates the ever-changing, often challenging landscape. So, if you really know the person, have proprietary access, in depth sector knowledge, or relationships that will absolutely move the needle, (or enough money that you just don't care), then perhaps it could make sense to allocate some of your money to this asset class. If you don't, while it might feel good, realize it's really an investment in your own ego. From a purely financial perspective, arguably the best thing to do is take whatever money you were going to invest in someone else and invest it in your next business.