2013 Will Bring A Talent Correction in Digital Media Sales

“Data Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is by Adam Chandler, CRO in Residence at Lerer Ventures.

This fall, a number of companies, most notably Federated Media, announced sales force downsizings. In the process, these companies began what I expect to be a defining trend in 2013: the shrinking of the legacy sales force for the post-commodity era.

I’m optimistic this trend will close the widening gap between client needs and sales capability, by forcing digital media to get back to sales fundamentals.

It’s estimated that at least 50% of online display advertising will soon be purchased through programmatic buying. This means the essential job of sales teams will be to consult with clients and design marketing strategies that mix a number of a media companies’ assets to solve a specific business problem.

Some sales teams aren’t up to this challenge. In fact, banner sellers have gravitated to digital media because we’ve sought them out as online advertising grew. When the barrier to entry disintegrated and everyone could become a publisher, the universe of media properties exploded. Add the supporting cast of ad network, social, video, adtech, and mobile tech companies, and we’ve got a glut of providers growing fat in the system.

Suddenly, there weren’t enough experienced digital salespeople to meet the demand. Some of us took print and TV reps and tried to train them. Most learned the pitch but not the business. They could sell inventory but they couldn’t create custom programs to solve specific client problems; they didn’t fully understand the capabilities of the media and underlying technology. If they had a committed manager to train them, they could adjust.

Here’s the rub: Training can be an anomaly in the startup world. Many digital media companies simply don’t have the time to train. They’re too driven by aggressive VC targets. One CEO told me point blank, “Don’t hire anyone we have to train. We don’t have time.”

So what do we need? In the words of Doug Weaver of the Upstream Group, “Technology and new business models have gotten us to a place where the customer doesn’t even know what’s possible, so Media Seller 3.0 will move the customer out of his comfort zone and into a space where truly new possibilities and ideas can be explored.”

That takes strategy.

To solve real business problems, salespeople need to really understand a client – something machines will never accomplish. They need to challenge assumptions. They need to think like a client marketer first, and put together media assets second. They need to think conceptually about creative strategy and media platforms to launch a business idea, rather than plan a pinpoint solution for one website. And they can’t be afraid to ruffle some feathers in the process.

We call this breed “challengers.” They earn a voice in the upstream conversation with the people who determine budgets, not just the downstream fight over where they get invested.

In one respect, this is back to the future. Before the media system got institutionalized to numbers-based buys, the original sellers had to create business solutions that solved specific marketer needs. They had to know how to have a business conversation, not just a media one, with a client.

What’s different now is customization has a more profound effect on digital media than it ever did in other channels. Marketers love out of the box, but it really strains product developers. Challengers can sell what’s good for the marketer to their product people. They do it by showing how audiences will engage with a new idea and create demand from other advertisers – so the incremental revenue becomes evergreen. They can also protect against the inevitable churn at agencies; so the media company doesn’t lose access when a client switches shops.

The good news for challengers is they’ll always be in demand. The media ecosystem depends on expanding sales creativity at least as much as automation. That’s nowhere truer than in the young companies responsible for much of the innovation in the business. The more they learn to hire, support and develop challengers, the healthier digital media will be for everyone.

Follow Adam Chandler (@chandleradam) and AdExchaner (@adexchanger) on Twitter.

Facebook retargeting, what Twitter should do next, and why this is just the beginning of a magical moment in mobile monetization.

From: Tobias Peggs – http://tobiaspeggs.tumblr.com/post/32941678899/facebook-retargeting-what-twitter-should-do-next-and
 
OCT 05

 

I got retargeted on Facebook today – and it was magical.

Here’s what happened. I wanted to buy a Ted Baker gingham check sports shirt. So first I went to Google and searched for “Ted Baker gingham check sports shirt”. That’s a pretty explicit signal indicating that I’m looking to buy a pretty specific item. The top result was for a matching product page on Nordstrom.com, which I clicked. On that page, I then looked at different colors, scrolled down to read the reviews, but didn’t buy. Said another way, I signaled that I was engaging with the content but for some reason didn’t complete the purchase. From Google to Nordstrom to engaging with content… Close, but no sale. Yet.

Then I went to Facebook to see what my friends were doing.

Typically, the ads on Facebook are targeted based on my demographic info (age, gender, location, etc), and things I’ve liked (aka my “interest graph”).

However, this time, I got an ad on Facebook featuring the specific Ted Baker gingham checked shirt I’d searched for, that I could buy Nordstrom.com. In other words, I got retargeted.  From Google to Nordstrom to engaging with content… to Facebook, to clicking on the Ted Baker ad, back to Nordstrom.com, and finally this time to purchase. This time they got me.

 

As a former ad-tech guy, I love re-targeting for a number of reasons:

  • The revenue opportunity is huge. Millions of potential online sales get dropped just before the point of purchase. Before re-targeting, those potential customers simply vanished into the ether. Now they can be reeled back in and converted.
  • The technology is cool. In the above example, cookies are dropped on my browser which indicate that I am in the market for specific shirts; the option to show an ad to me when I land on Facebook is made available on an Ad Exchange, along with the information that I’m market for shirts; Demand Side Platforms bid for those ad impressions on behalf of their advertising clients, pricing their bid on that shirt information; and the winning bidder dynamically creates an ad to show me specific products that I’ve previously looked at but haven’t yet bought. It’s the nerd-perfect blend of data flow, systems integration, targeting, and creative – and it all happens in real-time. Totally cool. And, according to super smart folks like Triggit’s Zach Coelius, it works
  • The user experience rocks. A lot of ads you see on the web are poorly targeted, meaning they are not relevant to the user and – surprise, surprise – are completely ignored. Worse, they can be annoying. A re-targeted ad shows me something I’m clearly interested in, and adds to the experience rather than detracts.

However, as a social technologist, this type of retargeting on Facebook is interesting for other reasons. Primarily because it indicates that Facebook can’t effectively monetize with “just” the mountain of the demographic and interest-based data it has about you.

The Interest Graph vs Intent Data

Demographic and interest-based targeting is good for top of funnel brand awareness. For example, an advertiser like Nordstrom could target males, 30-40, who have “liked” various fashion brands – and make them aware that Nordstrom.com offers a good selection of fashionable clothes. It’s like advertising in GQ Magazine – you know the audience is broadly in your target, and you hope that some of them end up buying something at your store. But it’s a bit hit-and-hope, which is why – as an advertiser – you wont pay top dollar for it. Or, from the other angle, Facebook can’t charge a lot for that type of advertising space. 

The real money is made on bottom of funnel conversion. If Nordstrom know that I am this close to buying a Ted Baker shirt, and now have a chance to advertise that very same shirt to me, they will pay a lot of money to do so. i.e. Facebook can charge a lot of money for that type of advertising space.

But in order to offer that premium opportunity, Facebook needs to understand – and share with the advertiser – my recent intent to buy. And it’s never going to derive this from my Facebook activity or my interest graph. I go to Facebook to catch up with friends and family, not to signal that I’m market for a new shirt.

This is why Google, in comparison, is such a money making machine.  Every time I search for a product on Google, I’m showing my intent to buy – and lots of advertisers will pay lots of money to show their ads intermingled with those search results. In fact, it’s this very need to understand intent – to command higher advertising dollars – that has so many commentators harping on about Facebook needing to build a search engine.

However, as clearly demonstrated in the Nordstrom example above, Facebook doesn’t necessarily need to do that. Thanks to the underlying ad-tech that traces a user from site from site, Facebook can instead exploit the fact that I’ve searched on Google, then landed on a product page on Nordstrom.com before going to the social network. From those clicks, before I got to Facebook, it can understand my recent intent and sell high priced advertising against that information.

So is the interest graph – from a monetization perspective – useless? Is making serious money all about understanding intent?

Well, no.

I’d like to think that re-targeting can be refined with a blend of interest graph data and intent data, and a big dollop of data science. Which is where the technology could get really cool…

Let’s say Nordstrom retarget as above, showing ads on Facebook to users who’ve previously been to their product pages but didn’t make a purchase. And let’s say Nordstrom could also access the interest graph of the users that subsequently converted to purchase as well as those who didn’t. A data scientist would have a field day trying to decipher a pattern between intent and interest data that resulted in the highest number of sales. Who knows, maybe 35 year olds in New York who like Joy Division and Manchester United are more likely to buy Ted Baker shirts than 40 year olds in San Francisco who like REM and like eating at good restaurants. Those two characters might show the same intent (e.g. both searched for the same thing on Google, and both checked out the same product page), but the data might show that one has a higher propensity to ultimately buy. And if you were Nordstrom, armed with that information… you might now spend more money to retarget to the very specific niche – based on intent and interest – that you knew converted at the highest rate.

Twitter, Retargeting, and… mobile magic

I’ve talked mostly about Facebook here, but what about Twitter? Well, of course, they can do exactly the same. At OneRiot, we discovered that Twitter has an implicit interest graph every bit as strong as Facebook’s. But, as Facebook are finding out, to make real money, they need to sell against retargeted intent. Likewise, Twitter needs to enable retargeting.

Now, the ad in a retargeting campaign can take the form of any creative – be that a sponsored post on Facebook, a traditional banner ad, or a Promoted Tweet. So, let’s say in the above example… I went from Google, to Nordstrom and then not to Facebook but to Twitter. Just as on Facebook I saw an ad that had been dynamically created to show me the exact product I had just been looking at, I could now see a Promoted Tweet talking about the same Ted Baker shirts at Nordstrom.com. It could even be hyper-personalized and structured as an @reply.  That would be awesome.

 

Where this could get super exciting for Facebook and Twitter is if they supported retargeting cross-platform (web and mobile), and combined that with geo-location… to enable localized, multichannel, bottom of the funnel advertising. Lots of buzz words there – let’s break it down into plain English:

Let’s say I’ve searched for Ted Baker shirts on Google again, landed on the product page on Nordstrom.com, not bought… and then stepped away from my computer to head down town. While I’m walking the streets, coincidently in the near vicinity to a Nordstrom, I open my Twitter mobile app… and at the top of my stream is that retargeted, personalized, Promoted Tweet from the retailer. But now that Tweet also includes a link to Google maps giving me directions to the store. Using intent data gathered from my online activity, Twitter can deliver a bottom-of-the-funnel Promoted Tweet to my phone that’s informed by my current physical geo-location.

If you really push the boat out and get aggressive, Twitter could even send me a push notification, based on my current geo location, saying “Nordstrom just tweeted you about Ted Baker shirts”. Opening the app, I’d then find a Tweet that linked to not only to store directions but also included a 10% discount voucher redeemable for the next 30 minutes. That would definitely reel me in!

 

However, for the above examples to work – for that type of cross-platform, geo-located, personalized ad targeting to work – my intent (the information that kicks this whole cycle off, the information that says “this guys wants a shirt!”) needs to be explicitly tied to my personal profile. Today it’s buried in some cookie linked to an abstract understanding of an anonymous user tied to a desktop web browser. That’s just not useable in a cross-platform, multichannel world. Said another way,  “@tobiaspeggs” on the desktop needs to be identified as the same “@tobiaspeggs” that opens his mobile device downtown 1 hour later. 

I can hear privacy wonks screaming already – and that’s another discussion altogether. But if we can get over that hurdle, cross-platform retargeting becomes a reality. i.e. Bottom of the funnel mobile ads can be targeted based on your earlier, desktop web browsing behavior. And the ad-supported properties with massive numbers of logged-in users who engage with them in pervasive, cross-platform ways (i.e. switching from desktop to mobile and back) become the big winners. Which is why I’m so hot about Twitter and Facebook. They are with us all the time, whether I’m tied to a desktop or walking the streets. And they can show me retargeted ads – focused on conversion, and driving me to purchase online or in a physical store if I’m near one – at any time.

 

Broadening the target on mobile

Of course, one of the paradoxes of targeted advertising is: the better you target, the smaller the audience you can hit. If you are Nordstrom, and you want to send a promoted Tweet with a discount code to Twitter users who open their app within half a mile of a store, who have recently displayed intent to buy a shirt, who like Joy Division and Manchester United because they tend to convert at a higher rate… then you are looking at a very small audience. Broadening the audience, without losing site of the target, is key.

This is where Facebook have got the technology lead right now – and I’m thinking here specifically about Facebook’s new mobile ad network. Launched in September, it means an advertiser can now run ads “Powered by Facebook” across thousands of other 3rd party mobile apps. Which surely means, one day soon, advertisers will have the ability to retarget, from web to mobile, not just to users who open the Facebook app (relatively small number)…. but potentially any app (relatively huge number!)

Think about this example. Let’s assume Rovio becomes a publisher in the Facebook mobile ad network. Now I could search on Google for a Ted Baker Shirt; poke around on Nordstrom.com but not purchase; go to Facebook and see a retargeted ad… but still not bite; head down town… stand in line at Starbucks, open my phone to play 2 minutes of Angry Birds… and see a Facebook-powered ad telling me to buy that Ted Baker shirt at the Nordstrom two blocks away. Now that’s powerful!

 

So where’s this all going?

Dave Morin has a great line about the disintegrating distinction between “online” and “offline”. He argues that there’s now just awake and asleep. When I’m awake, I’m connected – at my desktop or via my phone. This is really interesting from a retail perspective. It means it’s time to bring all the techniques we’ve developed to increase conversion and basket size online and bring them into the “awake state” – i.e. to bring them to the phone and to make them work seamlessly cross-platform.

Of course, we’re already seeing a lot of this beginning to happen. Mobile apps that show online reviews of a product I’m looking at in the store; QR codes that link to mobile web pages show more product information; realtime mobile chat that connects you to an expert in the very product you’re standing next to right now. Etc, etc, etc. But now, by tying intent and interest information to a user profile – a user profile that’s consistent cross-platforms – we could start to bring over all manner of ad-based conversion techniques to his “awake state” as well. Such as retargeting; Such as personalized ads (dynamic creative); Such as recommendations (“people who looked at your shirt also bought these jeans”); And even context-sensitive calls-to-action (e.g. directions to a store two blocks away that’s selling those jeans that would look great with your new shirt).

 

Nerds will rule the world

A lot of nerds love Minority Report for the cool UIs. I always loved Minority Report for the ads. In the movie, Tom Cruise walks past a billboard downtown which scans his retinas to trigger a personalized ad based on past purchase history and inferred intent. Something like: “You bought Kakhis last week, now you need a vest. The nearest GAP store is two blocks away”.

What I’ve outlined in this blog post is a small step away from what was envisioned in Minority Report… and you could pretty much piece it together today (replacing retina scanning and billboards for a Twitter ID and a mobile phone😉. Sure, there are plenty of holes and inaccuracies in what I’ve outlined – but that’s why it’s a blog post not a business plan. What i do know for certain is that there are smarter folks than me who are thinking more diligently about this space, and building out the required technology platforms that will turn into humungous business.

The first time I was retargeted on Facebook, I thought that was magical. But we ain’t seen nothing yet…

 

How Yahoo’s new COO got his 62 Million Pay Package

Aside

From Business Insider – Nicholas Carlson

 

Last week, new Yahoo CEO made her first huge hire.

She poached ad executive Henrique De Castro from Google to be Yahoo’s COO.
It wasn’t easy convincing De Castro to join up.
Mayer and Yahoo’s board agreed to pay De Castro $62 million over the next four years.
That’s…
$600,000 in annual salary
$540,000 a year in target bonus
$36 million in stock awards over three years
$1 million in cash within seven days
$20 million in stock over four years
Those figures have a lot of people in the industry stunned.
One former Googler in his own high-profile job emailed us to say: “The weird thing is the amount of money he is making. That is criminal.”
But the story of how De Castro’s compensation got so high is actually pretty simple.
According to two sources familiar with the situation it happened in 7 steps:
Yahoo offered De Castro a very large package, but one that was smaller than $62 million.
De Castro told his Google bosses about the offer.
Google matched the offer and created a new job for him with big new responsibilities.
De Castro told Yahoo that Google matched their offer and that if they couldn’t do better, he was going to stay.
Yahoo dropped the $62 million hammer.
De Castro told Google about the $62 million deal.
Google told De Castro: Good luck at Yahoo! (We’re told $62 million is more money than Nikesh Arora, Google’s own revenue boss, makes.)
So, is De Castro worth $62 million? Several of his former Google colleagues say no…

Read more: http://www.businessinsider.com/how-yahoos-new-coo-got-his-62-million-pay-package-in-7-simple-steps-2012-10#ixzz2A3ybBkd4

Why NBC Can’t Make Money From Its Latest “Saturday Night Live” Viral Vid

Published on October 22, 2012
by Peter Kafka – All Things D
“Saturday Night Live” used to worry that people would watch the sketch show on the Web. Now it embraces the idea.

The show even hires a social media agency to push links and embed codes out early Sunday morning after a new episode airs, so it will get maximum exposure.

But you can be as Web-savvy as you want and still bump into stubborn copyright laws. Which is what appeared to happen this weekend with a sketch that starred Brunos Mars as a Pandora intern.

As far as NBC.com is concerned, the sketch never happened, which means you can’t see it on the network’s site, or on Hulu, either as a clip or as part of the entire episode’s playback.

The very, very obvious culprit here are music licenses, which are almost always the culprit behind missing SNL sketches: In the course of seven minutes, Mars belts out pieces of songs from Katy Perry, Green Day, Aerosmith and Michael Jackson. And if the show doesn’t have the digital rights to a single piece of a single song, the whole thing goes black on the Web, legally speaking.

Still, it’s a sketch about a big, well-known tech brand, and those things always do well on the Internet. So you can still see it all over the Web — including our site — but none of the benefit accrues to NBC or its affiliated sites.

Instead, the winner here is something called GossipCop, which turns out to be part of the Dan “Mediaite” Abrams stable, all of which are very happy to take stuff that runs on TV and replay it over the Web.

But even that is a step forward for NBC, which must surely be aware that Abrams is making money off its clip, but isn’t grousing loudly enough to make him take it down. So, until/unless he does:

interesting story on the Huffpo’ mafia

“Do you know the moment I knew it was over?” Jonah Peretti says, with a half-nostaligic, half-stockholm-syndrome smile looking across the table at Ken Lerer.

Lerer doesn’t know.

“That last Christmas party we had as an independent company,” Peretti says.

“I don’t remember it,” says Lerer. The group around the table– former Huffington Post CEO Eric Hippeau, technical wizard Paul Berry and co-founder and viral whiz kid Peretti all laugh. I make a joke about stout egg nog. “I don’t think I went,” Lerer shrugs.

Peretti’s refreshes Lerer’s memory: “There were so many people there and everyone is getting their free sweaters – which is an Arianna tradition. So there are all these sweaters and I’m walking through them and I didn’t recognize 80% of the people there… Kenny and Arianna stood up to give a little talk. Kenny looked kinda miserable and Arianna was beaming ecstatically and talking to all the people wearing the sweaters.”

“As we walked out, I remember putting my arm around you,” he says to Lerer. “I remember saying, ‘We can’t do another one of these Christmas parties.’”

They didn’t. Before the month was out, they’d sold the company to AOL.

Two crest-fallen founders silently commiserating amid a sea of festive sweaters was an ignominious end for the biggest blog content company ever built. You can see why Lerer didn’t exactly cherish this memory.

But what has sprouted up since the Huffington Post’s decision to sell to AOL for $315 million might be even more remarkable.

Arianna Huffington has only become more powerful within AOL, but the rest of the principals who created the company bearing her name have moved on. Berry has started RebelMouse. Peretti has started BuzzFeed — the next great page view machine — with Lerer as chairman. And Lerer, his son Ben, and Hippeau have together formed Lerer Ventures, and Soho Tech Labs– which is run by Berry. To further compound all this incestuousness, RebelMouse, BuzzFeed, Lerer Ventures and Soho Tech Labs are all based in the same building. Thrillist, Ben Lerer’s company and a tangential member of the mafia, is across the street.

In particular, Lerer Ventures is on a tear. It became more than just a father-son angel firm after the acquisition, with a new fund and a partnership with Ron Conway’s firm SV Angel. Lerer’s deals would have an inside track to get funding from the Valley’s legendary Ron-father and the Ron-father would offer up an intro to Lerer if Valley companies had the slightest need to navigate the New York world. That was a nice endorsement.

Taking a page from SV Angel, Lerer Ventures has been busy. Their site shows investments in some 82 companies, and among the logos are the hotter recent New York names like Birchbox, Warby Parker and Rap Genius.

The Lerer Ventures gang lacks the rarefied air of the picky and prickly Fred Wilson, the undisputed don of the New York scene. But they beat most other firms in volume and breath and hustle.

Between all these ventures they are building a network of capital, specialized mentoring, incubation and contacts that Hippeau told Ad Age could collectively be “the largest infrastructure in New York for entrepreneurs.”

Not surprisingly given their roots, they also invest in a category that almost no other VC will touch: Content and tools content companies desperately need. (That includes a small investment PandoDaily.)

In a relatively young ecosystem like New York the SV Angel of that market needs to do more than widely invest in companies. It needs to be part-cheerleader, part-tough love dispenser. And above all it needs to do the thing that everyone says has made Ron Conway so valuable: Become the ultimate human router of the ecosystem, hooking entrepreneurs up with people they need to know to help make them bigger.

And it just so happens a lot of those contacts go back the Huffington Post days. In addition to Peretti, the Lerers, Hippeau and Berry, the Huffington Post’s head of advertising Greg Coleman is another key member, and Lerer’s other portfolio companies have used the PR services of Mario Ruiz– long the Huffington Post spokesman who spun off on his own late last year.

The only person noticeably missing from the rolling company reunion is the woman most associated with it by the general public: Arianna Huffington. (More on that later.)

I spend roughly a week a month in New York and the more meetings I do, the more I appreciate how deeply the Huffington Post alumni’s tentacles are extending into the New York scene. They missed the Tumblr/ Foursquare wave, as they were largely still busy building their own company, but since the AOL sale, they’ve more than made up for lost time. To further capitalize on that momentum, Lerer Ventures is in the middle of raising its third fund, according to LPs I’ve spoken with. It’s said to be in the $30 million range. (The company cannot comment mid-fundraising.)

It occurred to me that this may be the first real bonafide startup “mafia” the New York ecosystem has seen, in terms of size, reach and resources.

I sat down with the leaders of the HuffPo mafia a few months ago for a rare on-the-record discussion. It wasn’t so much about what they are doing now, but what happened in those early Huffington Post days that made this crew so tight and what makes their DNA distinct from other collections of former co-workers who just can’t quit each other. I came away struck by how different the Huffington Post mafia was from many of the mafias I’ve dissected in Silicon Valley like Fairchild, Oracle, Excite@Home, PayPal, and Facebook. And that speaks volumes of the DNA of the New York ecosystem versus Silicon Valley.

But before we get into that, let’s clarify what I mean by a mafia. The stunning results out of the PayPal “mafia” — and cover stories talking about them– made the word popular shorthand for groups of coworkers who move on from a company but can’t quite move on from one another.

But the concept of a mafia has since been bastardized by many a blogger to mean any time the alums of a company go on to do new things. People have talked about the “Digg Mafia,” listing people who weren’t founders or early employees and aren’t creating new things but rather people who simply worked at Digg but no longer do today. That’s like saying I’m part of the Chili’s mafia because I waited tables there in high school.

Most mafias share a few attributes. The companies stood for something or blazed some trail in their prime, but there’s frequently a sense of unfinished business or thwarted opportunity– frequently from selling rather than staying independent. There’s a tendency when members are together to wax on about the glory days, even exaggerating them the way marines tell war stories.

The bonds forged are stronger than what they feel for regular co-workers, and they outlive the original company. Mafia members continue to work together– whether its co-founding, advising, investing in or working for one another in a wave of next ventures.

In the case of the strongest and most enduring mafias, the sum of these distributed but connected ventures — influenced by heavy lessons from a shared past — wind up being larger than the original company that spawned it all. That’s definitely been the case with Fairchild, PayPal and Netscape– three of the most iconic mafias in the Valley. I’ve written before about how partial liquidations and secondary sales forged a unique Facebook mafia long before its IPO.

Most important, each of these mafias stood for something. There was a way of doing business– either because it worked or they react strongly from what didn’t work– that permeates them whether they consciously realize it or not.

To figure out what it was in the case of HuffPo, I sat down with Lerer, Peretti, Hippeau, and Berry for a several hour talk on what made the Huffiington Post succeed, what made them sell, and what had stuck with them. In the weeks since that meeting, I’ve filled the reporting out with half a dozen other interviews of people close to the group.

Noticeably missing from this story is Arianna Huffington. That’s mostly because she’s the only major figure from the story who stayed at AOL and is not an active part of all of the collective.

So what characterizes the Huffington Post mafia? Here are the five things that jumped out at me most:

They were total misfits. The HuffingtonPost sat on the outside of a lot of camps. It came up at a time when New York wasn’t nearly as startup crazed as it is today. Few people– including Lerer– thought it would turn into a business. His goal originally was to compete with Matt Drudge and get a Democrat elected president.

The Huffington Post decidedly did not fit within the East Coast media elite; and that same media elite always reminded them of that outsider status by dismissing HuffPost’s content as little more than unpaid blog posts, kitten photos, celebrity contributors and SEO. The recent Pulitzer was hard fought vindication by Huffington who always chaffed at these criticisms.

But we forget today just how polarizing the HuffingtonPost was to bloggers as well. Back in the early days of HuffPost, blogging was seen as the great equalizer and a tool for the common man. Arianna Huffington was anything but that. “Blogging was a tight knit community back then and she was that fancy socialite who ran for governor once,” Peretti says.

In Silicon Valley, entrepreneurs like to pretend they are rebels, but in reality entrepreneurship is the safe, accepted thing to do there. In the case of the Huffington Post there was no cozy ecosystem of funding, support and mentorship. They had to create it all themselves, which is one reason the crew is still so tight today.

Not Central Casting. Between Peretti, Lerer and Huffington the company was early on dominated by a collection of strong personalities that weren’t dormmates or best friends or even similar at all. Each of them had dramatically different skills, and none of the three had ever started a Web company before. This inherently gave the company a different feel to your typical startup.

We talked a great deal about how those dominant personalities all worked together– particularly as others like Hippeau were brought into the company. They paint a picture of people trusted to do their own thing well, who mostly stayed out of each others’ way. Many people couldn’t hang with this group, something they would typically realize quickly. When someone was out of favor Lerer would stop talking to them first, Berry said. When Huffington stopped talked to them, they were done.

They almost schizophrenically iterated. Yes, every startup talks about iteration. But at the Huffington Post it was a way of keeping the peace. These strong personalities all had very strong ideas of what the company needed to do.

Enter Berry. His job was to take all of these suggestions and task them to an army of outsourced Eastern European developers who’d build them all, see what worked, A/B test them and rapidly kill things that failed.

Rather than fight with the personalities, they’d build it, try it and kill it once they had data. “That tension and passion could have lead to fights, but if we were able to iterate we could try two ideas simultaneously and that eases the tension,” Berry says. “That’s why I started building a global team immediately, because I thought, ‘Well, my God, Kenny wants this and Arianna wants this and Jonah is right about this, and then Eric would add from the board level too.’ We had to execute all of the ideas rather than choosing one.”

It doesn’t sound like an enviable job, but Berry loved the challenge. He gives the example of Lerer’s pronouncement one day that they needed splash pages on each individual story page. “There was a joke I would always tell about Kenny– and I never told you this,” Berry says turning to Lerer before continuing. “The joke was that Kenny is always right because he’s never specific enough to be wrong.”

When he told Berry to have splashes on every page, Berry had no idea what that meant. “I’d have a designer come up with something and he’d say, ‘This is boring! It’s boring!’ ” Berry says. The designers would try to interpret it again. Eventually this yielded a page layout with three stories running across the top. It’s a layout that’s widespread across news sites today, but it was considered crazy to put promotions over a specific story before HuffPost did it. Berry attempting to keep peace between these forces yielded hundreds of little innovations for the blog world. “There was this feeling of if we made a decision on Monday and it’s Thursday, why aren’t you looking at it?” Berry says.

Importantly, this meant that no one really “owned” product, it was shared by everyone and integrated tightly with editorial. “Even when we had the resources to have a product group, we made sure we all owned the product,” Hippeau says. “The content and the technology guys lived in the same room and if they disagreed they absolutely had to hash it out.”

They had a strong mission, but not necessarily a shared mission. Everyone around the Huffington Post’s management and founding team had a strong sense of mission– of conviction of how important this thing they were building was for the world. That was crucial given the uniqueness of what they were pulling off and what outsiders they were in both new and old media.

But unlike Google’s central and clear mission of “organizing the world’s data,” the mission of the Huffington Post was a Rorschach test. Everyone saw a bit of themselves in what it was, and everyone thought it was something different. Lerer’s original ambition to elect a Democrat president was never shared by Hippeau. Beating Drudge got boring for Peretti once they scaled to a certain size. Huffington clearly became obsessed with being accepted by the New York media elite. And while Hippeau was inspired by his heritage of being from a family of journalists, he believed Huffington Post could be a huge independent media business.

“It can be incredibly lucrative,” Hippeau says of why he likes journalism. Lerer makes a dramatic face. Hippeau continues, ”Journalism attracts a highly educated, affluent audience and advertisers will reach a premium to reach them.”

Then he shoots Lerer a look.

“Don’t mind me,” Lerer says with an eye-roll.

This individualized sense of mission was good for a time. It allowed all of this different personalities from different backgrounds to put their egos aside and build something they thought was so vitally important to the world– even if everyone had a unique view of why it was so vitally important. But that wouldn’t always last.

They had a pragmatic, business-centered approach. While many tech startups fixate on getting to a $1 billion valuation, the Huffington Post crew focused on more attainable goals. When they got to a certain level of traffic or revenues, that became the new minimum. But the maximum wasn’t the end goal; it was something just a bit bigger. “If you get hundreds of millions of visits, that should be your new low point forever,” Lerer says. “If you can get to that on Monday, there is no reason you can’t get to that on Tuesday.”

It’s easy to see how this approach drove the aggressive SEO nature of the site. But while it kept the company on a traffic and growth treadmill traditional media companies may find distasteful, it was a more achievable way to build a company than a company that raises a seed fund and says it’s going to change the world. “It was both humble and ambitious,” Peretti says. “If we knew we could get here, we could figure out how to get one level higher. People would say, ‘I don’t see how this thing will scale to become gigantic,’ and it was like, well, duh, we’ll figure it out when we get there.”

Part of this was a result of being misfits that neither old nor new media was rooting for. “If you did it in bite-sized pieces, you didn’t get depressed,” Lerer says. Because of the diversified backgrounds there was a pragmatic business approach that also scaled up step by step along with the product.

* * * *

In the end, what had made the Huffington Post so strong was also its undoing: The clash of personalities who had fervent missions that weren’t exactly the same. It became too much for one site and Berry and his team of foreign engineers to handle. More to the point: It wasn’t fun anymore.

Some 18 months later, Lerer can’t emphasize enough how thrilled he still is with the sale. When some founders say this you can tell in their body language they are over-compensating for a pang of regret. They unspool elaborate arguments as if they are trying to convince themselves as much as me.

Lerer does neither. “I was so certain it was the right time to sell and looking back I am so certain it was the right decision,” he says leaning back in his chair confidently. “It was 1000% the right thing to do and the smart thing to do. Hopefully everyone is happy with the outcome and if they’re not, they are wrong.”

At the time, those “wrong” people included Hippeau and Oak Investment Partners’ Fred Harman who thought they it could be a $500 million company and an IPO candidate. “At the time they were happy to keep going, but I was so hellbent on selling the company it wasn’t even funny,” Lerer says, while Peretti giggles across the table. “I don’t mind leaving money on the table. I was very happy where it was.”

He says a variation of these statements about ten more times. In 15 years covering entrepreneurship, I’ve never quite heard an entrepreneur be this happy passing his company off and walking away — and still be happy about that move years later. And let’s be clear: Ken Lerer bled into this company as much as any entrepreneur in its formative years. “I used to get up at 5am for the first two and a half years and write every headline,” he says.

Ok, so I finally, ask why. What was he so miserable about on stage at that Christmas party that made such an impression on Peretti? What was so awful that the company had to be sold at the peak of its power?

“Because even the Beatles broke up,” he says. “Partnerships don’t last forever. People change.”

“Does that mean it wasn’t working between you all anymore?” I ask.

“No, it was working beautifully but you know, it was time for me to split. When I looked into the future I didn’t think the group there would hold together for the long term, and I didn’t want to deal with it. That was going to be someone else’s problem.”

“Why would the group not hold together?” I ask.

“Because even the Beatles broke up,” he says. More Peretti laughter. It sounds more like he’s sharing an inside joke than it is nervous laughter, but I’m not totally sure.

Finally, a bit more clarity: “The new Huffington Post fits the current management’s ambitions and what they want to do certainly didn’t fit mine.”

Peretti says it more cleanly, “One of the key’s to Huffington Post’s ability to do so many things well was Paul’s ability to have Arianna suggest an idea she was into and then Kenny and then others, but it started to get too crowded with a thing that didn’t really share a voice. The brand was growing up and it’s hard to be three or four things when you want to grow up. You can be a doctor or a fireman or a policeman but you can’t be all three.”

He adds: “Having Huffington in the URL made us be able to punch above our weight and build a brand much quicker. I realized how much harder it was at Buzzfeed. But now that we have built and scaled and our brand is known, there’s a lot more freedom because it’s not tied to an individual person.”

At the end of the day, what made Huffington Post so strong limited its upside. It was no longer a wild growing company and those many missions and that endless iteration had to be brought under control. In part because Huffington owned the name, she owned the heart of what the company was. And the other personalities were too strong to subjugate to that single mission or single personality.

Of the four I spoke with, Berry is the only one who stayed after the others left. And it was clear to him– even though Lerer’s vague feature requests could make his life hell for a moment– the magic was gone. He left the company and joined the mafia. “We have much bigger things to do as a group,” he says.

Like all good mafias, Berry’s comments hint at unfinished business. You can see the seeds of unfinished business in the companies that have come next, and a nostalgia for the old Huffington Post they miss in the way the four laugh, taunt and clearly enjoy one another’s presence. There are the lessons they hammer their portfolio companies on– insisting their content companies do more with product, encouraging them to approach a huge mission in bite-sized chunks and iterate constantly.

You can see a reaction against the Huffington Post most clearly in Buzzfeed– not surprisingly since its CEO is Peretti and its chairman is Lerer. In addition to not centering the site around a celebrity this time, Peretti made a clean break from the ineffective banner ads that never made sense to him at Huffington Post, helping to pioneer sponsored content instead. And he gladly embraced the science of generating massive page views through social media over generating massive page views by writing headlines and stories for Google’s robots.

So what does all of this say about the New York ecosystem in which Huffington Post mafia is increasingly investing and influencing? It’s very different from Silicon Valley, and it reflects a lot of things we’ve seen out of New York. While being an entrepreneur is the thing you do in San Francisco, it’s still more of a misfit pursuit in New York. Entrepreneurs need a stronger sense of mission– not just lifestyle– to make it work, and the good ones approach it more pragmatically because the resources are more limited. The most successful founders out of New York don’t tend to be the dropout developers from Harvard or Stanford, but those from a more diverse backgrounds, particularly including media content and sales.

But another factor may be bite-sized ambitions. So far, the largest exits in New York — aside from the Huffington Post– have been DoubleClick for $3.1 billion, BuddyMedia for $745 million, and OMGPop for $180 million. Not bad, but not near enough to sustain a reputation as the second most thriving startup ecosystem in the US.

What was remarkable about the PayPal mafia was that its second acts all added up to so much more than the first. For the Huffington Post mafia to live up to that, it’ll have to become less content with leaving money on the table in the future. That goes for the rest of New York’s entrepreneurs too.

 

http://pandodaily.com/2012/10/22/without-arianna-the-huffington-post-mafia-is-taking-manhattan/

 

by: Sarah Lacy @pandodaily

Get In The Start-Up Arena – Adam Chandler

Get In The Start-Up Arena – Adam Chandler

Demo Days offer a way past the Catch-22 of entrepreneurialism.

Some things you just need to experience live. Entrepreneurialism is one of them.

I’m a big rock ‘n roll fan – big bands, big arenas, and big occasions. When you’re there you get it. On film, the Pearl Jam 25th anniversary concert is just data. In the arena, it was a visceral, three-dimensional connection to the band, the music, the community, and the meaning of it all (personally, historically and communally).

It’s that way with starting and growing digital companies, a big game for which there’s no established playbook (the plays are just being written now). The only way to know what the game is like, what it values and rewards, and if it suits you, is to be on the field.

I know that’s a kind of Catch-22. You can’t acquire the experience without taking the risk, and people are less likely to take the risk on you unless you’ve got the experience. I know a lot of good marketing and sales people with startup dreams but mortgages and families keeping them in check.

That’s why the presentation days that incubators put on are so valuable. Last week I went to my first Demo Day at the Brandery (www.brandery.org) in Cincinnati. I went because I’m now advising startups on sales and marketing – I’ve been a startup CRO twice, at Martini Media and Thrillist – but I experienced why anyone with a startup gleam should be there. In one day, I saw entrepreneurialism from all angles.

The day kicked off with Tim O’Shaughnessy, founder of LivingSocial, telling us how the company started, pivoted, and grew from 1 to more than 4,500 employees around the world. Tim was real and plainspoken about the problems he’s had to find answers to. You could probably piece together the facts on his story from any number of articles, but you’d miss the energy of the telling.

Next came presentations from 12 startups that create digital solutions to common problems for consumers and businesses. Think of Shark Tank without the judges. For example:

· CrowdHall (www.crowdhall.com): An online venue for crowd-sourced town halls. Gives the audience a more amplified voice thanks to their social technology and allows more organization and perspective around crowd sourcing.

· Repp (www.myREPP.com): Ever wanted to buy a couch from someone on Craiglist but were spooked out by the randomness? REPP is an online identity platform that doesn’t just identify you via your social networks but also through a third-party background check. Now you can actually know more about a potential date than all the flattery they post.

· Impulcity (www.impulcity.com): A location-based event discovery platform that makes it easy to find the things you want to do locally.

· Flightcar (www.flightcar.com): “A” for effort and guts. The 17-year-old founder explained how the company aims to create a marketplace – owners who have parked their cars at the airport renting them out to fellow travelers.

You can realize things from 12 presentations that you can’t from one or two. Patterns emerge. I came away with a clearer sense of gap filling. These companies got to be on stage because they are filling gaps that investors can understand and (to varying degrees) customers will support. They talked authentically about their opportunities and threats at various stages, from the pure idea to the monetization model.

Until you surround yourself with the right people to drive the business from money, reference, and partnership perspectives, a business idea and plan don’t mean anything. And until you’ve experienced the interchange, you can’t sense if you want the startup environment, you see anything you can bring to it, or you’re up to the high wire act if can be. The presenters engage with more than 400 people in positions to help charge their businesses forward. And everyone makes connections.

If you have an idea that fills a gap in the market but haven’t gotten businesses off the ground before, or if you’ve got the itch to trade the corporate job for a startup adventure, check out the startup accelerators. Organizations like the Brandery shorten the time window on establishing the viability of the business.

As a first step, go to a presentation day. Demo Day can be Decision Day for the would-be entrepreneur. I mean that whether you’re a prospective founder, employee or consultant. The energy will inspire you, set the appropriate level on expectations, and reveal what you need to be ready for – strategically, financially and emotionally. It’s simply the quickest way to experience what’s ahead.

Adam Chandler is a CRO in Residence at Lerer Ventures advising early-stage digital media companies on all things revenue. He is former President & CRO of sales at Thrillist, CRO of Martini Media, and Executive Director of sales for Yahoo.

Read all Adam’s MediaBizBloggers commentaries at The Chandler Files.

The opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaBizBloggers.com management or associated bloggers. MediaBizBloggers is an open thought leadership platform and readers may share their comments and opinions in response to all commentaries.

Startup = Growth

By: Paul Graham = http://www.paulgraham.com/growth.html

September 2012

A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth.

If you want to start one it’s important to understand that. Startups are so hard that you can’t be pointed off to the side and hope to succeed. You have to know that growth is what you’re after. The good news is, if you get growth, everything else tends to fall into place. Which means you can use growth like a compass to make almost every decision you face.

Redwoods

Let’s start with a distinction that should be obvious but is often overlooked: not every newly founded company is a startup. Millions of companies are started every year in the US. Only a tiny fraction are startups. Most are service businesses—restaurants, barbershops, plumbers, and so on. These are not startups, except in a few unusual cases. A barbershop isn’t designed to grow fast. Whereas a search engine, for example, is.

When I say startups are designed to grow fast, I mean it in two senses. Partly I mean designed in the sense of intended, because most startups fail. But I also mean startups are different by nature, in the same way a redwood seedling has a different destiny from a bean sprout.

That difference is why there’s a distinct word, “startup,” for companies designed to grow fast. If all companies were essentially similar, but some through luck or the efforts of their founders ended up growing very fast, we wouldn’t need a separate word. We could just talk about super-successful companies and less successful ones. But in fact startups do have a different sort of DNA from other businesses. Google is not just a barbershop whose founders were unusually lucky and hard-working. Google was different from the beginning.

To grow rapidly, you need to make something you can sell to a big market. That’s the difference between Google and a barbershop. A barbershop doesn’t scale.

For a company to grow really big, it must (a) make something lots of people want, and (b) reach and serve all those people. Barbershops are doing fine in the (a) department. Almost everyone needs their hair cut. The problem for a barbershop, as for any retail establishment, is (b). A barbershop serves customers in person, and few will travel far for a haircut. And even if they did the barbershop couldn’t accomodate them. [1]

Writing software is a great way to solve (b), but you can still end up constrained in (a). If you write software to teach Tibetan to Hungarian speakers, you’ll be able to reach most of the people who want it, but there won’t be many of them. If you make software to teach English to Chinese speakers, however, you’re in startup territory.

Most businesses are tightly constrained in (a) or (b). The distinctive feature of successful startups is that they’re not.

Ideas

It might seem that it would always be better to start a startup than an ordinary business. If you’re going to start a company, why not start the type with the most potential? The catch is that this is a (fairly) efficient market. If you write software to teach Tibetan to Hungarians, you won’t have much competition. If you write software to teach English to Chinese speakers, you’ll face ferocious competition, precisely because that’s such a larger prize. [2]

The constraints that limit ordinary companies also protect them. That’s the tradeoff. If you start a barbershop, you only have to compete with other local barbers. If you start a search engine you have to compete with the whole world.

The most important thing that the constraints on a normal business protect it from is not competition, however, but the difficulty of coming up with new ideas. If you open a bar in a particular neighborhood, as well as limiting your potential and protecting you from competitors, that geographic constraint also helps define your company. Bar + neighborhood is a sufficient idea for a small business. Similarly for companies constrained in (a). Your niche both protects and defines you.

Whereas if you want to start a startup, you’re probably going to have to think of something fairly novel. A startup has to make something it can deliver to a large market, and ideas of that type are so valuable that all the obvious ones are already taken.

That space of ideas has been so thoroughly picked over that a startup generally has to work on something everyone else has overlooked. I was going to write that one has to make a conscious effort to find ideas everyone else has overlooked. But that’s not how most startups get started. Usually successful startups happen because the founders are sufficiently different from other people that ideas few others can see seem obvious to them. Perhaps later they step back and notice they’ve found an idea in everyone else’s blind spot, and from that point make a deliberate effort to stay there. [3] But at the moment when successful startups get started, much of the innovation is unconscious.

What’s different about successful founders is that they can see different problems. It’s a particularly good combination both to be good at technology and to face problems that can be solved by it, because technology changes so rapidly that formerly bad ideas often become good without anyone noticing. Steve Wozniak’s problem was that he wanted his own computer. That was an unusual problem to have in 1975. But technological change was about to make it a much more common one. Because he not only wanted a computer but knew how to build them, Wozniak was able to make himself one. And the problem he solved for himself became one that Apple solved for millions of people in the coming years. But by the time it was obvious to ordinary people that this was a big market, Apple was already established.

Google has similar origins. Larry Page and Sergey Brin wanted to search the web. But unlike most people they had the technical expertise both to notice that existing search engines were not as good as they could be, and to know how to improve them. Over the next few years their problem became everyone’s problem, as the web grew to a size where you didn’t have to be a picky search expert to notice the old algorithms weren’t good enough. But as happened with Apple, by the time everyone else realized how important search was, Google was entrenched.

That’s one connection between startup ideas and technology. Rapid change in one area uncovers big, soluble problems in other areas. Sometimes the changes are advances, and what they change is solubility. That was the kind of change that yielded Apple; advances in chip technology finally let Steve Wozniak design a computer he could afford. But in Google’s case the most important change was the growth of the web. What changed there was not solubility but bigness.

The other connection between startups and technology is that startups create new ways of doing things, and new ways of doing things are, in the broader sense of the word, new technology. When a startup both begins with an idea exposed by technological change and makes a product consisting of technology in the narrower sense (what used to be called “high technology”), it’s easy to conflate the two. But the two connections are distinct and in principle one could start a startup that was neither driven by technological change, nor whose product consisted of technology except in the broader sense.[4]

Rate

How fast does a company have to grow to be considered a startup? There’s no precise answer to that. “Startup” is a pole, not a threshold. Starting one is at first no more than a declaration of one’s ambitions. You’re committing not just to starting a company, but to starting a fast growing one, and you’re thus committing to search for one of the rare ideas of that type. But at first you have no more than commitment. Starting a startup is like being an actor in that respect. “Actor” too is a pole rather than a threshold. At the beginning of his career, an actor is a waiter who goes to auditions. Getting work makes him a successful actor, but he doesn’t only become an actor when he’s successful.

So the real question is not what growth rate makes a company a startup, but what growth rate successful startups tend to have. For founders that’s more than a theoretical question, because it’s equivalent to asking if they’re on the right path.

The growth of a successful startup usually has three phases:

  1. There’s an initial period of slow or no growth while the startup tries to figure out what it’s doing.
  2. As the startup figures out how to make something lots of people want and how to reach those people, there’s a period of rapid growth.
  3. Eventually a successful startup will grow into a big company. Growth will slow, partly due to internal limits and partly because the company is starting to bump up against the limits of the markets it serves. [5]

Together these three phases produce an S-curve. The phase whose growth defines the startup is the second one, the ascent. Its length and slope determine how big the company will be.

The slope is the company’s growth rate. If there’s one number every founder should always know, it’s the company’s growth rate. That’s the measure of a startup. If you don’t know that number, you don’t even know if you’re doing well or badly.

When I first meet founders and ask what their growth rate is, sometimes they tell me “we get about a hundred new customers a month.” That’s not a rate. What matters is not the absolute number of new customers, but the ratio of new customers to existing ones. If you’re really getting a constant number of new customers every month, you’re in trouble, because that means your growth rate is decreasing.

During Y Combinator we measure growth rate per week, partly because there is so little time before Demo Day, and partly because startups early on need frequent feedback from their users to tweak what they’re doing. [6]

A good growth rate during YC is 5-7% a week. If you can hit 10% a week you’re doing exceptionally well. If you can only manage 1%, it’s a sign you haven’t yet figured out what you’re doing.

The best thing to measure the growth rate of is revenue. The next best, for startups that aren’t charging initially, is active users. That’s a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users. [7]

Compass

We usually advise startups to pick a growth rate they think they can hit, and then just try to hit it every week. The key word here is “just.” If they decide to grow at 7% a week and they hit that number, they’re successful for that week. There’s nothing more they need to do. But if they don’t hit it, they’ve failed in the only thing that mattered, and should be correspondingly alarmed.

Programmers will recognize what we’re doing here. We’re turning starting a startup into an optimization problem. And anyone who has tried optimizing code knows how wonderfully effective that sort of narrow focus can be. Optimizing code means taking an existing program and changing it to use less of something, usually time or memory. You don’t have to think about what the program should do, just make it faster. For most programmers this is very satisfying work. The narrow focus makes it a sort of puzzle, and you’re generally surprised how fast you can solve it.

Focusing on hitting a growth rate reduces the otherwise bewilderingly multifarious problem of starting a startup to a single problem. You can use that target growth rate to make all your decisions for you; anything that gets you the growth you need is ipso facto right. Should you spend two days at a conference? Should you hire another programmer? Should you focus more on marketing? Should you spend time courting some big customer? Should you add x feature? Whatever gets you your target growth rate. [8]

Judging yourself by weekly growth doesn’t mean you can look no more than a week ahead. Once you experience the pain of missing your target one week (it was the only thing that mattered, and you failed at it), you become interested in anything that could spare you such pain in the future. So you’ll be willing for example to hire another programmer, who won’t contribute to this week’s growth but perhaps in a month will have implemented some new feature that will get you more users. But only if (a) the distraction of hiring someone won’t make you miss your numbers in the short term, and (b) you’re sufficiently worried about whether you can keep hitting your numbers without hiring someone new.

It’s not that you don’t think about the future, just that you think about it no more than necessary.

In theory this sort of hill-climbing could get a startup into trouble. They could end up on a local maximum. But in practice that never happens. Having to hit a growth number every week forces founders to act, and acting versus not acting is the high bit of succeeding. Nine times out of ten, sitting around strategizing is just a form of procrastination. Whereas founders’ intuitions about which hill to climb are usually better than they realize. Plus the maxima in the space of startup ideas are not spiky and isolated. Most fairly good ideas are adjacent to even better ones.

The fascinating thing about optimizing for growth is that it can actually discover startup ideas. You can use the need for growth as a form of evolutionary pressure. If you start out with some initial plan and modify it as necessary to keep hitting, say, 10% weekly growth, you may end up with a quite different company than you meant to start. But anything that grows consistently at 10% a week is almost certainly a better idea than you started with.

There’s a parallel here to small businesses. Just as the constraint of being located in a particular neighborhood helps define a bar, the constraint of growing at a certain rate can help define a startup.

You’ll generally do best to follow that constraint wherever it leads rather than being influenced by some initial vision, just as a scientist is better off following the truth wherever it leads rather than being influenced by what he wishes were the case. When Richard Feynman said that the imagination of nature was greater than the imagination of man, he meant that if you just keep following the truth you’ll discover cooler things than you could ever have made up. For startups, growth is a constraint much like truth. Every successful startup is at least partly a product of the imagination of growth. [9]

Value

It’s hard to find something that grows consistently at several percent a week, but if you do you may have found something surprisingly valuable. If we project forward we see why.

weekly yearly
1% 1.7x
2% 2.8x
5% 12.6x
7% 33.7x
10% 142.0x

A company that grows at 1% a week will grow 1.7x a year, whereas a company that grows at 5% a week will grow 12.6x. A company making $1000 a month (a typical number early in YC) and growing at 1% a week will 4 years later be making $7900 a month, which is less than a good programmer makes in salary in Silicon Valley. A startup that grows at 5% a week will in 4 years be making $25 million a month. [10]

Our ancestors must rarely have encountered cases of exponential growth, because our intutitions are no guide here. What happens to fast growing startups tends to surprise even the founders.

Small variations in growth rate produce qualitatively different outcomes. That’s why there’s a separate word for startups, and why startups do things that ordinary companies don’t, like raising money and getting acquired. And, strangely enough, it’s also why they fail so frequently.

Considering how valuable a successful startup can become, anyone familiar with the concept of expected value would be surprised if the failure rate weren’t high. If a successful startup could make a founder $100 million, then even if the chance of succeeding were only 1%, the expected value of starting one would be $1 million. And the probability of a group of sufficiently smart and determined founders succeeding on that scale might be significantly over 1%. For the right people—e.g. the young Bill Gates—the probability might be 20% or even 50%. So it’s not surprising that so many want to take a shot at it. In an efficient market, the number of failed startups should be proportionate to the size of the successes. And since the latter is huge the former should be too. [11]

What this means is that at any given time, the great majority of startups will be working on something that’s never going to go anywhere, and yet glorifying their doomed efforts with the grandiose title of “startup.”

This doesn’t bother me. It’s the same with other high-beta vocations, like being an actor or a novelist. I’ve long since gotten used to it. But it seems to bother a lot of people, particularly those who’ve started ordinary businesses. Many are annoyed that these so-called startups get all the attention, when hardly any of them will amount to anything.

If they stepped back and looked at the whole picture they might be less indignant. The mistake they’re making is that by basing their opinions on anecdotal evidence they’re implicitly judging by the median rather than the average. If you judge by the median startup, the whole concept of a startup seems like a fraud. You have to invent a bubble to explain why founders want to start them or investors want to fund them. But it’s a mistake to use the median in a domain with so much variation. If you look at the average outcome rather than the median, you can understand why investors like them, and why, if they aren’t median people, it’s a rational choice for founders to start them.

Deals

Why do investors like startups so much? Why are they so hot to invest in photo-sharing apps, rather than solid money-making businesses? Not only for the obvious reason.

The test of any investment is the ratio of return to risk. Startups pass that test because although they’re appallingly risky, the returns when they do succeed are so high. But that’s not the only reason investors like startups. An ordinary slower-growing business might have just as good a ratio of return to risk, if both were lower. So why are VCs interested only in high-growth companies? The reason is that they get paid by getting their capital back, ideally after the startup IPOs, or failing that when it’s acquired.

The other way to get returns from an investment is in the form of dividends. Why isn’t there a parallel VC industry that invests in ordinary companies in return for a percentage of their profits? Because it’s too easy for people who control a private company to funnel its revenues to themselves (e.g. by buying overpriced components from a supplier they control) while making it look like the company is making little profit. Anyone who invested in private companies in return for dividends would have to pay close attention to their books.

The reason VCs like to invest in startups is not simply the returns, but also because such investments are so easy to oversee. The founders can’t enrich themselves without also enriching the investors. [12]

Why do founders want to take the VCs’ money? Growth, again. The constraint between good ideas and growth operates in both directions. It’s not merely that you need a scalable idea to grow. If you have such an idea and don’t grow fast enough, competitors will. Growing too slowly is particularly dangerous in a business with network effects, which the best startups usually have to some degree.

Almost every company needs some amount of funding to get started. But startups often raise money even when they are or could be profitable. It might seem foolish to sell stock in a profitable company for less than you think it will later be worth, but it’s no more foolish than buying insurance. Fundamentally that’s how the most successful startups view fundraising. They could grow the company on its own revenues, but the extra money and help supplied by VCs will let them grow even faster. Raising money lets you choose your growth rate.

Money to grow faster is always at the command of the most successful startups, because the VCs need them more than they need the VCs. A profitable startup could if it wanted just grow on its own revenues. Growing slower might be slightly dangerous, but chances are it wouldn’t kill them. Whereas VCs need to invest in startups, and in particular the most successful startups, or they’ll be out of business. Which means that any sufficiently promising startup will be offered money on terms they’d be crazy to refuse. And yet because of the scale of the successes in the startup business, VCs can still make money from such investments. You’d have to be crazy to believe your company was going to become as valuable as a high growth rate can make it, but some do.

Pretty much every successful startup will get acquisition offers too. Why? What is it about startups that makes other companies want to buy them? [13]

Fundamentally the same thing that makes everyone else want the stock of successful startups: a rapidly growing company is valuable. It’s a good thing eBay bought Paypal, for example, because Paypal is now responsible for 43% of their sales and probably more of their growth.

But acquirers have an additional reason to want startups. A rapidly growing company is not merely valuable, but dangerous. If it keeps expanding, it might expand into the acquirer’s own territory. Most product acquisitions have some component of fear. Even if an acquirer isn’t threatened by the startup itself, they might be alarmed at the thought of what a competitor could do with it. And because startups are in this sense doubly valuable to acquirers, acquirers will often pay more than an ordinary investor would. [14]

Understand

The combination of founders, investors, and acquirers forms a natural ecosystem. It works so well that those who don’t understand it are driven to invent conspiracy theories to explain how neatly things sometimes turn out. Just as our ancestors did to explain the apparently too neat workings of the natural world. But there is no secret cabal making it all work.

If you start from the mistaken assumption that Instagram was worthless, you have to invent a secret boss to force Mark Zuckerberg to buy it. To anyone who knows Mark Zuckerberg that is the reductio ad absurdum of the initial assumption. The reason he bought Instagram was that it was valuable and dangerous, and what made it so was growth.

If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it’s a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. Growth explains why the most successful startups take VC money even if they don’t need to: it lets them choose their growth rate. And growth explains why successful startups almost invariably get acquisition offers. To acquirers a fast-growing company is not merely valuable but dangerous too.

It’s not just that if you want to succeed in some domain, you have to understand the forces driving it. Understanding growth is what starting a startup consists of. What you’re really doing (and to the dismay of some observers, all you’re really doing) when you start a startup is committing to solve a harder type of problem than ordinary businesses do. You’re committing to search for one of the rare ideas that generates rapid growth. Because these ideas are so valuable, finding one is hard. The startup is the embodiment of your discoveries so far. Starting a startup is thus very much like deciding to be a research scientist: you’re not committing to solve any specific problem; you don’t know for sure which problems are soluble; but you’re committing to try to discover something no one knew before. A startup founder is in effect an economic research scientist. Most don’t discover anything that remarkable, but some discover relativity.