As I waited for its release, I’ve always felt SocialSpark held great potential for spreading the word about good causes. I just didn’t realize how easy it would be.
I created a free Spark (organic post idea) about Human Powered Cause Discovery and asked bloggers to do 3 things: 1) Create a Spark about their favorite Cause; 2) Blog about their favorite Cause, pointing readers to the Spark they created; and 3) Point readers to the Spark I created so readers can continue the cycle of spreading the word about worthwhile Causes.
However, it doesn’t end there. Let’s keep the cycle going. Please take the time, today, to pick a favorite Cause, blog about it, Spark it at SocialSpark, and point readers to my Human Powered Cause Discovery Spark.
I received a couple more VC FAQ questions. This time from an entrepreneur and investment banker who saw Angie’s List close a $35M round with Battery Ventures. That large funding, and others in the social media space, left her wondering how value is measured and created in online businesses.
Her site, roxiticusdh.blogspot.com, appears to be an early step towards a “Best of” site for various cities around New Jersey and elsewhere. I say “early step” with no details, because the name and domain are clearly ripe for improvement. Her questions were:
How do VC’s value an online venture? The “valuation question” is probably the most often asked question I hear directly from entrepreneurs or on venture capital panels. Entrepreneurs are either trying to understand how crazy high valuations in the news are justified or how crazy low valuations (in their eyes) offered by early-stage VCs are justified. I’ve been on the entrepreneur side of the table and now the VC side and I know the answer, but it’s rarely satisfying for entrepreneurs to hear.
First, there is no one way to value a company. Different funds use different methods, and when you’re talking about M&A time it’s highly dependent upon the synergies a specific acquirer is trying to buy. Approaches also differ based upon the stage of a company. Because I focus on seed and early-stage companies, any suggestion by entrepreneurs of discounted cash flows makes me run the other way — the future is way too uncertain for such calculations.
So, if there isn’t one way, what can I expect on the fundraising trail? A mix of Art, Science and Voodoo. The Art of valuation takes into account your Market, Management, Magic and plenty of other soft factors to create a spectrum of investor excitement. The Science of valuation takes into account private and public comparables (what price are similar companies commanding in the marketplace), and some spreadsheet work with future revenue/income potentials. The Voodoo of valuation brings in such factors as fund size, typical/expected ownership % and the termsheet competition. At the end of the day, it comes down to getting multiple funding offers so you can actually reach a “market price” — zero or one offer does not a market make.
I’ve even created a short presentation that reviews the Art, Science and Voodoo of Valuation and included it below:
Applying all of this to an online venture doesn’t change the process much. One oddity in online ventures is the value placed on eyeballs (by some), with the potential of a freemium revenue model (most users are free, pro users pay). Because of these oddities, I’d put more weight on the Voodoo elements — divide your round size by the typical ownership expectation of the fund you’re speaking to, and you’ll get pretty close to the valuation they will offer (if they offer anything).
Do you have any advice on short, medium, and long-term strategies to maximize the value of a blog or online business? For a blog, I’d start with the First Commandment of blogging: frequent quality content = traffic. Frequent content isn’t enough alone and quality content isn’t enough alone. It may be heresy, but I’d suggest frequency is even more important than quality — assuming some periodic quality a reader can expect. Readers aren’t expecting every blogger to be a professional writer, but they are looking for unique access or unique perspectives on information.
I’d also say that pro blogging is a contact sport. It’s hard to do it well if you don’t live the blogosphere life of social networking, bookmarking and engaging your readers. Just reporting information isn’t enough.
Then, assuming traffic comes, the question becomes how do you make a business from your efforts. There are thousands of get-rich-blogging pundits, but I’d focus on the networks or marketplaces that help you earn by doing what you already love. If your blogging has to change significantly for monetization then I’m not sure it’s sustainable. Write the way you enjoy and find marketplaces that will bring advertisers to you, from a variety of topic/product areas so you and your readers don’t tire of the sponsors.
Last, for blogs, I’d suggest setting your expectations appropriately. Getting rich blogging is unlikely. However, there are thousands of bloggers paying a mortgage, buying new cars or taking extra vacations with their earnings. Consider anything beyond that just icing on the cake.
For non-blog online businesses, it’s hard for me to give one set of value-creating actions. It really depends upon the business. As an investor who has been around viral businesses since HotMail first pioneered the approach, I encourage every online business to 1) find ways for new customers to learn about your business specifically because current customers use it and 2) streamline your referral/signup process to remove every barrier to adoption.
So there you have it, valuation and value-creation in one handy-dandy blog post. I really only scratched the surface, but I hope you find a nugget of interest. If nothing else, I must have prompted another question…if so, blog me another VC FAQ.
As SocialSpark was in private alpha I wanted to try out their Spark feature. Even if you aren’t looking to monetize your blog, Sparks allow you to highlight a hot topic, pose a question or share a good cause — providing a true “marketplace of ideas” for bloggers to pickup and blog about. I don’t blog nearly as often as most bloggers and yet I sometimes get writer’s block. Combine that with the fact that more posts equals more traffic, and Sparks can be a valuable firehose for blogging ideas.
I created one Spark for Tyler’s Hope and another for VC Frequently Asked Questions. The VC FAQ Spark also tested SocialSpark’s BlogUBack feature — whereby I asked for posts I could blog about. Specifically, I asked people to share some common questions for VCs and/or specific questions they have for me as a VC. I really appreciate the questions I’ve received and my thoughts on the first few from caseyjenks.com are below:
How and why did you transition from being a developer into a venture capitalist? While working at IBM’s Networking Labs, I convinced management to allow me to pursue a dual MBA/JD degree from UNC Chapel Hill during the day — fulfilling my operating responsibilities at night. I focused on entrepreneurship and new media at UNC, dove into venture capital topics pretty heavily and helped found/build some local startups. Via the Kauffmann Fellowship program I got introduced to Draper Fisher Jurvetson and was invited to help launch their first east coast fund. After building two funds with DFJ, I founded Inflexion with my current partners and Village Ventures. Breaking into VC was a combination of unique Engineering/MBA/JD education, technology operating experience, passion for startups/VC and a boatload of luck.
How does your experience as a developer help you with your current career?
Being a passionated developer taught me a crazy work ethic, especially on things I enjoyed working on. My VC efforts benefit from that drive. I also believe my background provides a unique view into technology investments and future strategy — especially when initial prototypes don’t show all that’s possible and I can riff with entrepreneurs about what’s possible. Last, I think developers (or engineers generally) learn the benefits of fixing problems once with well-thought solutions rather than applying patches. You’d be surprised how many times that perspective pays dividends in company building — when quick fixes feel so easy.
If you were to go back to programming, would you want to go back to doing the networking research type stuff you did at IBM, or something new?
I still dabble in programming and have a blast with open source offerings — makes it so easy to build something substantial quickly. I’ve got a notebook full of ideas and no time to pursue them. If I jumped back to the operator side, I’d focus more on quick-to-prototype applications with minimal adoption friction, simple/clean design and maximum viral potential — with the potential for changing the world (e.g. not another bookmarking service)
What emerging technology excites you the most?
There are tons, but a couple I’ve been spending cycles on lately are open-source search (e.g. Nutch, Hadoop) and wireless power (e.g. WiPower, Witricity). Search feels like something that will eventually be open-source supplied with a combination of solid search algos, grid storage/computing and self-perfecting AI (to improve algos based upon user/community feedback). Wireless power has been a long-term obsession of mine and we’re getting closer.
I hope these answers were helpful. If anyone else has questions for my VC FAQ, try out my Spark and I’ll answer any here that make sense for FVB readers!
Thanks for stopping by. In case we haven't met before, I'm Dan Rua, Managing Partner of Inflexion Partners, an early-stage venture capital fund based in Florida and focused on the Southeast US. Prior to Inflexion I was a partner with Draper Atlantic, DFJ's first east coast fund based in Northern Virginia. Prior to that I co-founded an email software company and was an engineer with IBM's Networking Software Labs in RTP, NC.
This blog is for sharing stories and discussing entrepreneurs, venture capital, technology, and Florida -- particularly when I can provide perspective unique from the typical Boston (B) or Silicon Valley (S) view. Inflexion is my third fund and all my funds have focused on building world-changing companies in regions outside the BS...
All of the thoughts on this site are mine. Inflexion Partners, its affiliated funds, its portfolio companies and its personnel are not affiliated with this blog in any way. That said, you should understand that I have vested interests in: CallMiner, Capitalism, Celsia, Databanq, Family, GAIN, Grooveshark, GTEC, Inflexion, IZEA, Liberty, NVCA, Persystent, RedPath, Technology, UF, UNC, Visible Assets & WOMMA -- in other words, I'm biased when discussing those topics.