VCinJerusalem

Broken Business Models in "Non-Profit" Start-ups; Case Study: Jdub

Last week I had a packed Wednesday, starting off the day leading a Wexner Heritage Leadership  group focused on the New Economy of Israel. OK, so the new economy is not so new, been around for almost 20 years, but what can I tell you, Americans are slow to pick up on these things. Anyway, talked to them for hours about entrepreneurship in Israel, start-ups, wealth creation, and more. To kick off the day I asked my friend Jon Medved to join us, who is featured prominently in Saul Singer's book, Start-Up Nation. 

And then I walked down the street to meet with the PresenTense 2011 Global Summer Institute fellows, to talk about business models in the non-profit world, where most of the fellows are planning to make their mark in the near term. 

I told them that from my perspective, there is a false distinction drawn between "for-profit" start-ups and "non-profit" start-ups. The only real difference is that in a for-profit the goal of the founders/investors is take money out of the business in some fashion at some point in time (either by dividends, IPO, trade sale). In a non-profit, the founders/investors are happy to let it ride, i.e. not to take any money out, except for salaries for paid staff members. Otherwise, all start-ups should be run in the same manner. Now, that doesn't mean that there aren't trade-offs all the time between generating usage/traction/influence and financial stability/sustainability. Twitter for many years did not think at all about generating revenues, let alone profits. Same for Facebook. And so many others. In the Venture Capital world right now people go ga-ga over Groupon which is generating massive losses, because they are showing "growth." Sustainable? Probably not, but the founders/early investors of Groupon have already cashed out in a big way. And current investors believe that with enough growth a profitable business model will be developed.

But lets look at non-profits. How should they pay the bills in a sustainable manner? Well, like their peers on the for-profit side, at first need to find investors (which could and should include the founders themselves). Very quickly comes the question: what is more important, short term financial stability or growth? Usually growth wins out, but there is no secondary market for shares of "non-profit.com" -- which means there is no liquidity event, nor will there ever be -- but on the other hand, there does need to be financial sustainability. Well, after many years Facebook turned on the revenue generation, and now they bring in (profitably) billions of dollars a year. Twitter slowly making their way there, and so on. 

The time has come for non-profits to realize they need a business model, more than "let me try to raise a lot of money to pay my staff." The same metrics that VC use to decide whether to keep pouring money into start-ups that aim to one day provide liquidity for their investors should apply to "social ventures," whose goal is making the world a better place. (I am one of the few that believe we can make the world a better place and provide liquidity with the same venture, but that's a different conversation). Relying on passive donors for the bulk of the budget is a recipe for financial meltdown at some point. And it does not reflect any "buy-in" from those actually benefiting from the venture itself. 

As a case study let's look at Jdub, which I have known since their very first baby steps. As some of you know, Jdub announced yesterday they are shutting down, and founder/CEO Aaron Bisman sent out the following letter:

Dear Friends, Fans, and Supporters,

I have to share some unfortunate news.  After almost 9 years in operation, JDub's Board of Directors has decided to wind down the organization.

The decision to close was entirely financial, as the challenges facing our business model are too great to overcome.   We were never a normal record label, nor were we ever just a record company.  We always knew that in order to discover, curate, and promote unique, proud Jewish voices and role models in the mainstream we would need to rely, at least in part, on philanthropic support.   In addition to buying our albums, sharing the music with your friends, and attending our concerts and events, so many of you supported us as donors, talent scouts, and stream teamers.  Thank you, thank you, thank you. 

JDub would never have grown into the organization that it was without you.

JDub earned half of its annual budget from mission-related revenue, including album sales, concert tickets, and consulting fees, and the other half from foundations and individual donors. The collapse of the music business in the decade that JDub has existed, combined with recessionary effects and aging out of the cohort of Jewish "start ups," made securing the necessary operating support an insurmountable challenge.

We have shared some incredible memories - bringing 3,500 people together for The Unity Sessions at Celebrate Brooklyn; watching Balkan Beat Box play to sold out crowds of Gypsy bikers in Portland; jumping into a spontaneous hora at The Independent in San Francisco while a half naked Golem played frenetically onstage; putting many of you onstage at the Bowery Ballroom for an American Shmidol karaoke battle; being told "I've never felt Jewish until tonight." 

We'd love to hear your memories and reflections as well.  Please post them on Facebook, or tweet them to @jdubrecords.

Just as JDub modeled what a new Jewish organization could look like and achieve, we will also model how one appropriately winds down.  We plan to share as much information as possible, and seek appropriate homes for our successful programs and assets.  We hope that our albums will continue to be available on iTunes, Amazon, and record store shelves long into the future. 

We are extremely grateful to all of our fans, funders and supporters, the creative and inspiring artists with whom we've had the pleasure to work, their devoted fans, and our innovative and energetic team. We close with heavy hearts, but incredible pride in our collective accomplishments and impact.

We hope you will join us for the last official JDub event this Sunday night on the Roof of the 14th St Y in NYC, where Deleon will play songs from their new album, Casata, which you'll get, along with free beer, when you attend.

Thank you again for supporting us in all our endeavors.  It has been a true honor.

Sincerely,

Aaron Bisman

Co-Founder & CEO, JDub

OK, so what is wrong with the above letter?

1. Well, for one, not enough transperancy. It's not clear if the half of his budget that came from "mission related revenue" was profitable. If it was, why shut down? Why not cut back and live off revenues? If you are going to tell us you are shutting for financial reasons, tell us more -- you are a public entity (a non-profit). 

2. Aaron talks about the success they enjoyed, but he doesn't show us on a graph if they plateaued at some point, or if the growth continued. If they reached their maximum somewhere over the past decade, that is the point at which they need to say: "this is how big we will be, how do we make this work." If they did keep growing, why couldn't they find additional investors (donors)??

3. The statistics fall far short of showing me whether this really was a successful venture. That 3500 people came to a concert is not a massive accomplishment. Discovering Matisyahu was -- and not clear why that and other achievements didn't generate enough revenue to support a modest music operation. Aaron in a postscript to his farewell letter sums up 9 years of work as follows:

A final JDub snapshot:

- 150,000 event participants in 472 cities

- 35 album releases

- 3 Gold Records

- 3,500 attendees at The Unity Sessions, the largest Israeli/Palestinian concert in the history of the United States

- 52 songs placed in major films, TV shows, or ads

- 800+ mainstream press stories including The New York Times, The New Yorker, The Wall Street Journal, MTV, CNN, NPR, David Letterman, Conan O'Brien, Rolling Stone, SPIN, Billboard, and Pitchfork

- 26 foundation and Federation funders

- 630 individual donors

- 2.7 million unique visitors to Jewcy.com since JDub's adoption

It is very difficult to analyze the above without understanding development of the venture along a timeline, together with a business plan. 

 

4. Donors are simply investors called by a different name, and need to be treated as such. They need to be shown how their investment is generating results -- and results means more than paying the overhead (or half the overhead) of an organization. Again, results could mean many things, ranging from user traction to revenue growth to public awareness, but it needs to measured and proven. 

 

Bottom line: if a venture is delivering bang for a buck (or a shekel), it will be sustainable. It's up to us entrepreneurs to figure out how. 

 

Should We Be Talking More? The Larry 2 Email Rule

 

This past week I spent 7 hours in a “sulha.” A sulha is an middle eastern conflict resolution tradition, an attempt to bring together parties with severe differences, probe the issues, and leave in a different place than when the sulha started.

What caused the need for this sulha? Email. Huh? Yes, you were expecting some family honor issue, or a deep ideological divide. Nope. The sulha revolved around a series of emails in a start-up I am part of (I am the Chairman of the Board) which spiraled out of control, and almost caused the company itself to run off track. What happened? A simple misunderstanding, a word used in a context that was out of place.

Email is a valuable medium. Email is based on thousands of years of written communication. The written word in general has a core place in our Western tradition. In fact, I am part of a people who are literally called the “people of the book,” and the written words take center stage in our life. But on the other hand, it is people who read the book, aloud, and discuss the written word on a regular basis. The written word on its own is dry, unforgiving, lifeless.

In our modern culture we are in tension between constant communication that is anything but real soulful communication. Over 100 years, in ever speeding evolution, we have moved from the Pony Express, to telegraph, to fax, to email, to SMS, to instant message, and then disparate variations (Facebook messages, wall posting, Twitter tweets, 4square check-ins, and more). But what about talking? Somehow we keep inventing new ways to avoid actually talking to one another.

I broke my entrepreneurial teeth 15 years ago helping to disrupt the telecommunications industry (in co-founding Delta Three [NASDAQ: DDDC]). The first business conference I ever spoke at was “Talking on the Net,” the pre-cursor to the successful VON series of conferences sponsored by my good friend (and now business partner) Jeff Pulver. Then we were sure that we were part of a wave of technology advancement that would allow people to talk more. We believed that “free” speech (or at least very low cost) would make the world a better place. I still believe that, and have seen how in using technology to avoid speaking we sometimes “communicate” at each other, rather than with each other.

Oh, we don’t think we are avoiding speaking. We think we are communicating. But when we rely too much on written words, we lose the meaning. In the Jewish tradition the written word never stands alone, and even though is said to be the word of God, it is the oral interpretive tradition that takes precedence in Jewish law. It is the conversation of the study hall that talks through the issue raised in the written tradition.

A lesson I shared in the sulha process last week was one I learned from a CFO I worked with many years ago at a company called Omnisky. His name is Larry, and he had a “2 email rule.” Put simply, if an issue did not get resolved with 2 emails being exchanged, the parties needed to at least speak to each other by phone, if not meet in person. Not sure what Larry would say about tweets, but I am sure he would not be in favor of conversations based on tweets running back and forth. Sure, for very short staccato type messages Twitter/SMS is fine. “Where are you?,” “I am here,” and so on. But even then…we lose some much in not hearing the other person.

At Omnisky, which acquired a company I started called NomadIQ, we were pioneering mobile email (a distant competitor at the time was a start-up called RIM with a device called Blackberry, we didn’t think they would make it, we were writing software for the Palm OS platform….). We did not imagine then the rapid back and forth communication that would soon emerge with Blackberry, Iphone, and now Android. Push email was still cumbersome then – you had to pull down your email (like walking out to the curb to check if the mail came yet).

Have advances in technology helped? Sure, I enjoy being able to be out with my family for the day but still be “on-line” for important email messages, releasing me from needing to sit in an office or next to my laptop. But a blackberry (or an iphone) or even a laptop is no solution for a phone call, or for an in-person meeting when possible.

Recently, in a meeting with a senior person at a large mobile operator, I was told that they “value voice at zero.” It’s all about data. Well, at some levels I agree that voice is a data application. But she (and her team) is forgetting that voice is THE application. All other applications are but a distant cousin of voice. And we do expect service providers to helps us talk to one another, not only at one another. Posting a thought on Facebook is cute, but it doesn’t rise to level of intellectual conversation, even with healthy comments.

Too often meaning is lost when we rely only on the written word, especially today when the written word comes so cheap (when you wrote in stone you gave it a lot of thought before etching out those words…).

I know we cannot turn back the clock, and people will not suddenly put down their mobile email device of choice, SMS and Twitter will continue to be influential medium. But perhaps we can all remember the Larry rule, and if it looks like a conversation is going off course, pick up the phone. Talk it through. Try it, it works.  

 

Should I blog? Tweet? Facebook status posting? or...write a column?

OK, so it's been some time since I have posted to my blog, but even that admission seems so archaic (in Internet time). These days one has the option of tweeting, Facebook status update, Facebook "note," good old email blast, etc. Of course, newspapers do still exist. And my wife, Rabbi Dr. Haviva Ner-David recently started a column in the Jerusalem Post weekend edition. But her articles also appear on-line. And she also writes a column in an on-line only publication called Zeek. 

Can all of these options enter the mainstream? I don't think so. What will need to happen is a form of leveling, with Twitter and similar services acting as notification engines, Facebook as a semi-closed circle of "friends," and blogs staying what they were intended to be: "my" voice out into public domain. Blogs are essentially a diary exposed to the world. Some tend to use the medium for more professional reasons, others more personal, and some (like me) a combination. 

In one of the companies I am involved in, AttracTV, we are starting to see this all come together. AttracTV developed a platform for "Vidgets," which are applications that run as overlay on video being streamed. Amongst the first vidgets we released were Twitter and Facebook applications. And we see the different usage patterns, around the same content, playing out in real time. We also operate our own proprietary chat application, which is a very closed community (only people watching that content). 

But as we know, 99% of the population reads, listens, and watches.  They do not create. Facebook has nudged those statistics a bit, and while FB have not released stats yet, I would guess less than 10% of FB users actually update their status on regular basis. Thus the key in moving forward is how do the 99% process the Tweets, FB status updates, blog postings, news flashes, etc. Jeff Pulver has over 350,000 followers to his tweets. How many read each one? (especially given at the rate that Jeff puts information/thoughts/opinions out there...). What does it mean to have 350,000 followers? I subscribe to Jeff's blog, but I couldn't deal with his never ending tweet stream, turned it off hours after I opened up my twitter account. 

If Twitter is smart and wants to continue to be the channel they are, they will need to give the 99% of us the tools to manage the avalanche of information. I assume they (and hundreds of third party developers) are hard at work at it right now. 

In the end, we will remain the same human beings we are right now. Most of us are passive, some of us are active. The active ones will seek out the best ways to make their voice heard. 

Twitter: Not A scientific survey, but these people share my thoughts...

Ok, so I was wrong [so far] about Facebook...they have turned it into a sustainable platform and profitable business. Will Twitter succeed as well? Based on random interviews below...doubtful. But as I say, I have been wrong before.

Back to Business: Facebook on path to $1 BILLION Annual Revenues (I was wrong)

Just before we start to shut down for the holiday season (here in Israel we started "early," as Hanukka started last week...) want to admit where I was wrong--looks like Facebook is well on the road to becoming a serious cash machine, like it's cousin Google.

According to recent reports, besides passing 350 million active users, Facebook is on a run rate to hit $1 billion in annual revenues. In 2009 it is reported they already will exceed $500 million. While we [at present] do not have info on how much Facebook is spending, should be safe to assume less that their revenues, and they are starting to not only be profitable but generating some serious cash reserves.

I need to admit that I was wrong. I did not think Zuckerberg and team had it together to translate massive usage into business, but I guess the usage was just to massive to get it completely wrong...slowly but surely they are monetizing that user base (again, little visibility into numbers, but seems to be from display ads, virtual goods, and very focused ad campaigns).

I still do not think Facebook is any kind of new operating system, and if a better FB comes along they could be left in the dust. While my 11 year old is a FB addict, my almost 9 year old doesn't use it at all [yet]. If a better FB comes along to capture her attention, FB is threatened. They have no intellectual property, no defensible technology advantage. "Just" massive momentum, which may make them too big too fall. But then again, where is Myspace today? My 11 year has never even tried it.

Bringing this back to our home court, the venture community in Israel, we need to think more about what it means to scale up, and monetizing success. Facebook, I still maintain, is the exception to the rule. Now lets see if Twitter can start to generate Google-like revenues....

Twitter Humor: Twittelah for Your Jewish Mother

During this holiday season, when we repent, then jump back into family tension, then repent again, enjoy this twitter humor (thanks to Barry Pasikov for sharing):

Is Twitter Worth Billions? Jeff Thinks So. I'm still not convinced.

See this interview with my good friend Jeff Pulver on the "State of Now" and the "Real Time Internet." Oh, and by the way, Jeff thinks Twitter is worth billions. Now. Well, good thing Jeff is public that he is a shareholder, we wouldn't want him to be objective about this company...

19 Comments And Counting: the "power" of Facebook

I have writing a blog now for almost 2 years. From time to time get comments, sometimes an email (or even an old fashioned phone call, usually from Elie Wurtman) complimenting me on a blog posting. The feedback is nice, reminds me that I am not only writing for myself (which I am) but also for others.

While I am not the world's greatest fan of Facebook, or its bloated valuation, it definitely has created a public commons, a place where people feel free to express their opinions. Perhaps, like Wikipedia, it should be turned into a massive non-profit. Throw a search box in there, share the ad revenues with Google et al, will definitely be enough to cover costs of operation (like the Mozilla browser).

What prompts my thoughts on this? Well, was on a super boring conference call a few days ago, and was fiddling around with Facebook and decided to write something in the "status" box. I wrote that I was waiting for President Obama's speech to start, and that I hoped he would "say the right thing." That launched a debate (on my rather vague status update) which currently has more than 19 comments. More than any blog posting I have written, and the comments are well thought out, whole paragraphs, not just a few words here and there.

Incredible. As always, proves that people have way too much free time, but also that a simple to use interface, which will guarantee "exposure" will be enough for many to write and write. And it is somewhat unmoderated. As long as you are a "friend" of mine you could comment to anything I throw up on my facebook page. and yet for the most part the self moderation works...not too much abuse, language is kept in check, little outright digital vandalism.

Facebook has developed as a powerful medium, and I am not sure if it is yet at the peak of its power (we will have to see how its kissing cousin, Twitter, develops), but it certainly is no closer to developing a real business than a year ago. And perhaps that's OK, if Marc Zuckerberg gives up on dreams of billions of dollars, and instead decides to donate facebook to the people. He is young, I am sure he will figure something else out to make sure he gets his riches. And/or he could donate it with the caveat that he gets a $X million a year salary for 10 years, enough to feel that he has real money, but far short of Sergei like riches.

If any of you know Marc, pass this thought on to him. From an ego point of view, he did it. Now he needs to decide where to go from here. Meanwhile I am thinking up my next creative status update....

Twitter for $1 Billion: Good for the Jews?

Ok, you ask, what possibly could be the connection between the suggestion of Henry Blodgett that Google purchase Twitter for $1 billion and the Jews?[see Henry's full posting below] Well, besides the fact that there are a nice number of members of the tribe at both companies, I really am using the "Good for the Jews?" question as a way of asking two parts:
-Is this good for the world in general?
-Is this good for Israeli start-up scene?

On both counts, answer I come up with is NO!!

Regarding the world in general, or more specifically the start-up world, wacky prices paid to one-off "success" stories are never a good thing.  I am not going to start arguiing right now if Twitter has or has not brought about a real paradigm shift (as I believe Google did, not so much with search technology itself but how it was applied). (I do not believe Twitter has yet accomplished that). But paradigm shifts do not a business make (sometimes they could, a la Google).

Twitter has yet to show any clear business direction, and until they do their value is somewhere between zero and the amount of money invested in building the product and attaining the user base.

For the Israeli start-up scene, we need to be building businesses. The more entreprenaurs are fooled by Twitter-like companies that building a no-revenue company is a good idea we will sink deeper into a real depression of the tech sector here in Israel. We do not have the capital allocation in Israel that allows for silly investments (just think how many companies will get funded to be the next Twitter...if Google buys them for $1 billion).

Google Should Offer To Buy Twitter For $1 Billion (GOOG)

Henry Blodget|Apr. 3, 2009, 9:37 AM|54

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Tags: Online, Twitter, Google

GOOG Apr 6 2009, 09:41 AM EDT

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If Google isn't in talks to buy Twitter, it should be.

Specifically, it should offer the company $1 billion, cash. 

Why?

Five reasons:

Google needs a huge new growth engine and Twitter might just fit the bill.  The current search product cycle is coming to an end.  Google needs an "Office" to go with its "Windows."  It hasn't found one yet.  Twitter--and real-time search--could end up being a monster.  If Google waits around to see whether it really WILL be a monster, Twitter will be a hell of a lot more expensive.  Remember when Yahoo's Terry Semel whiffed on buying Google?

Twitter is a hell of a lot more relevant to Google's business than other big Google ideas, such as YouTube or Larry Page's plan to have Google solve the world's energy crisis (see his crazy talk of two years ago).  Twitter is also about communications, which is the one part of the content-communications-and-commerce Internet tripod that Google is still weak in.

$1 billion is couch change for Google.  Google generates $1 billion of cash every two months.  If Twitter ends up being worth $0, as some people persist in thinking, Google can just say "oops" and take a minor write-off.  If Twitter ends up being worth a lot more than $1 billion, however, as we and others think is likely, Google will make money.  If it ends up being a monster, Google will make a lot of money.

Twitter could conceivably threaten Google's cash cow--search.  This "real-time search" meme is actually a compelling story-line. If you want to know what people are talking about right now, you go to Twitter, not Google.  Twitter hasn't figured out how to make bank off that yet, but it may well do so.  Remember how much ridicule was heaped on Google's worthless "search engine" in the early days?

Like Google, Twitter is already a verb.  What company do you know of that owns two verbs?

Would $1 billion be enough to get the Twitter boys to part with their baby?  It might, actually.  $1 billion is still a lot of money, especially for a company with no revenue.  And Google's global distribution and technology infrastructure would be a help to Twitter.  So they'd be silly not to take the offer seriousy.

Twitter: Making Fools of All of Us

Yes, I continue to be stalked in Twitter land. I have not "twitted" (or is it "tweeted") in over a year, yet almost daily get messages that someone new has signed up to follow me on Twitter. Must be boring to follow me, as I have been standing in place in Twitter land. Yet the guys at Twitter continue to "succeed," by certain metrics. The media love them, elites all over the US have adopted it as a platform of "communication" (how much can you really say in 140 characters, perfect for the ultimate soundbite). And they continue to raise money from "serious" VCs.

Keep in mind, while they do theoretically have 6 million users (how many are like me?), as of today they have generated ZERO revenues. Nada. Nothing.

Now I think Twitter is inane enough that even as a non-profit it should be shut down -- I posit that their value proposition is negative. But that's another discussion. Now I want to limit myself to the question of value creation...why is Twitter worth anything in this environment, shouldn't the VCs wait to invest more until after some business model emerges (and has traction)? How much does it cost to run Twitter after all??

Twitter is succeeding at making fools of all of us that are calling for sanity in start-up culture, and has a negative influence on entrepreneurs (everyone wants to be Twitter).

Anyway, I think Jon Stewart best sums up my personal frustration on the service and its contribution to the world...see here:

The Daily Show With Jon StewartM - Th 11p / 10c

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