My friend Tom Evslin, who writes one of THE best blogs around on just about anything and everything (especially tech start-ups, but a lot more than that), summed up some thoughts from the recently announced acquisition of MyBlogLog by Yahoo!. Before turning you over to Tom, just want to draw out important points specific to Jerusalem Capital, the venture fund I have the honor of leading as Managing Partner. Disclosure: I am a registered user of MyBlogLog (proud to be one of 50,000 and counting).
1. An acquisition of $10 million is wonderful for a fund like ours, as we typically make investments of several hundred thousand dollars for double digit percentages of equity -- this type of acquisition would be a return of 200% or more for a fund like us. In dollar terms wouldn't budge the overall return of a large fund ($100 million+), but for a sub-$20 million fund, goes a long way toward bringing us to our goal of making money (yes, with all of our ideology and having fun, we do this to make money for ourselves and our investors).
2. MyBlogLog would have been overwhelmed by a classic multi-million dollar venture round, and would have been forced to do silly things (e.g. take a large booth at CES with irrelevant give-aways). And without large funds involved, the founders had the flexibility to take a good deal from a great company.
3. Too often we see seed stage start-ups with line items in their budget called "marketing," and the founders have no idea what that would actually mean, they just believe that marketing money is necessary. Well, if you are trying to build a Web 2.0 business, the goal should be taking it as far as possible without needing to spend any cash on marketing. You will need to invest significant time and energy, and as Tom says below, you need to have an outstanding product/service/solution--but don't try and raise money for some nebulous marketing plan. Be honest! Just say you have no idea, leave it blank, we will figure it out together.
And now back to our regular scheduled programming, Tom Evslin:
Social networking company MyBlogLog just sold itself to Yahoo for a reported price of just over ten million dollars. Since MyBlogLog was a five employee virtual company operated on a shoestring with no VC or angel funding, it is a counter-example to my assertion that Web 2.0 startups need to raise more money now than they used to and usually must spend marketing dollars to rise above the clutter. They are a viral success story; no marketing dollars. And, even though this kind of success is now harder to achieve amidst the clutter of companies launching cheaply, it’s certainly a story worth understanding.
According to Om Malik, who was having dinner with MyBlogLog Chairman Scott Rafer when the deal closed, the company was founded in 2005 by Eric Marcoullier and Todd Samson as a traffic measurement tool for bloggers.
My take is that they wouldn’t have been able to build the social networking part if they hadn’t first succeeded in being useful as a tool for gathering user behavior statistics on blogs. I installed MyBlogLog on Fractals of Change because I wanted to know where my visitors are coming from, what pages they visit, and where they go when they leave. Also saw their service functioning on a couple of other blogs and liked the way a thingy pops up when you hover over a link which says how many times that link has been followed today.
Even if social networking had been their goal, there was no network to begin with so there was no network value to us early adopters. That’s why it was critical that they offer us better information about out readers and give the readers themselves information about what outbound links are hot on the site. Very much like del.icio.us (also acquired by Yahoo) first offering value as a way to tag web pages so you can find them again and having network effect kick in later when enough people were using it to tag so that the aggregate tags were useful to each new user.
When I posted that Web 2.0 startups now need to raise more money and do marketing, Scott Rafer posted this comment:
“We brought a social network into public beta this summer and did fine with no budget. Marketing is critical; but for a social site, no-budget social marketing is the only kind that builds lasting value.
“VC funding of social sites is best spent on product management and scaling. Except in very odd circumstances, VCs shouldn't invest unless the site already has early adopter traction and growth. VC-derived marketing budgets at launch don't help if the service isn't addictive. And if the service is addictive, spending marketing money at launch will not contribute to your success. You'll spend it on the wrong things as your users' passions will surprise you -- always.”
Thought you might want to know more about their success so I emailed Scott and we had an exchange which he gave me permission to post:
TE: How important would you say your ability to gain a critical mass of members by supplying bloggers with statistics was to your eventual success in building network? Do you think someone starting today could duplicate your trajectory or is there too much noise and/or not enough space left uncovered in social networking to provide the opportunity?
SR: The founders had 14k bloggers registered in the system when i met them in Feb 2006, versus the 50k we have as of today. That early base was critical because our success was a one-two punch. We were the leading reporting tool among a certain segment of bloggers and then parlayed that into a social app. I don't think it could have been done in one step. The basic issue is that a marketing budget would have been useless or worse at each of the reporting launch in march 2005 and the community launch in july 2006. The management distraction it would have engendered might have been fatal.
TE: I know that MyBlogLog was NOT VC funded which is an interesting point in itself. Is there any public information (or information you care to make public) either abut how it was funded or what the burn was up to the point where it progressed from analytics to social networking and from then to acquisition?
SR: The company was an on-spec project of a profitable, 10yo web apps shop in Orlando called cloudspace. They put in a couple hundred grand of in-kind coding over two years, I put in $24k to supplement server rental when traffic started popping (half in September and half of it after signing the Y! term sheet), and the Pro accounts (around $20k over time) paid for the rest. They have a variety of software libraries which leveraged everyone's time nicely, and their existing hosting relationship helped a lot. It's so pedestrian that it's certainly not confidential.
Founder Eric blogged: “Special thanks go out (what is this, the freakin' Oscars) to a couple of key people: Josh Kopelman for originally asking why the heck social networks were stuck on a single site, Fred Wilson and Brad Feld for becoming true believers and Andy Baio for inspiring me to create a link blog about this time two years ago, without which I never would have asked Todd to figure out how to track my links.”
Nice story and happy ending. If you’re about to launch a Web 2.0 company, here are the lessons from this one:
- You’ve gotta offer something besides social networking to your first subscribers since you won’t have any network worth thinking about until you attract a bunch of subscribers.
- Your funding’s gotta match your strategy. Here an eighteen month low profile attack could work because there was no impatient money AND because having no outside investors meant that an acquisition for “just” $10 million gave everyone a good payout. Apparently, had the buyout not happened, the company would have raised a venture round. They would have been in a good position to do so because there were no earlier outside investors AND because they had already established value.
- Great product is essential.. Don’t really mean this to be number three in importance. If it didn’t work, if it didn’t offer data we bloggers wanted, if it were hard to install, if it were ugly – MyBlogLog would’ve failed.
- Good contacts are important. Don’t know how influential VC bloggers Fred Wilson and Brad Feld got hooked on MyBlogLog initially for their blogs (they’re not investors in this, obviously) but their use of it and evangelism attracted others including me.
- Viral marketing has to start somewhere. See #4 above.
- Great programming is getting more and more expensive. They had a good way to get the code they needed inexpensively.
- You CAN succeed without formal marketing.
- That was then and this is now (don’t want to be a wet blanket but…). Starting in 2007 is not the same as starting in 2005. There’s more competition for attention and the great programming you need is even more expensive. There’ll still be shoestring success stories but the odds are much worse than they were.
Web 2.0 – Greater Initial Investments Required was the first post in this series. Next was Changing Ingredients for Web 2.0 Success – Continued with Reader Help.
is about how del.icio.us created value.