Cogblog

Man, John Ebbert didn’t call me on this, but I have an opinion and here I go:

AdExchanger recently asked a bunch of people about the value of “First Look” at inventory.

I felt like the answers reflected a range of sophistication on the topic, but I am here to tell you that first look is the whole ball of wax.

In fact, first look is so important that it drives home the value of RTB as a disruptive force in advertising: the chance to see every impression is incredibly valuable.

I have blogged a fair amount about the incentives and value of front-running inventory, but let me recap in brief:

• Getting “Frequency 1″ users allows a network to have more reach than competitors – a powerful lure for brand sales: This was one of the keys that helped (and continues to help) people like Yahoo! and Ad.com dominate the market.
• More visibility improves the reach of behavioral campaigns – if you see more of a user with a given behavioral characteristic (e.g. retargeting behaviors), you can show more impressions and make more money.
• The more ads a person has already seen, the worse an ad performs: The chance to use earlier impressions has a powerful impact on conversion
• More reach – particularly low frequency reach – is a key driver of monetizing CPA campaigns.

The result is that both DR advertisers and brand-focused ad networks reap substantial benefits from peaking at inventory.

RTB has been a great equalizer here – suddenly boutique companies that have very low fill rates or occupy a tiny niche in the market have the chance to peak at huge volumes of impressions without committing to purchasing them. This capability has helped drive the success of many of the ecommerce companies that have sprung up in the wake of the evolution of online advertising.

Being in sales is incredibly difficult. If you are not in sales and you wonder why some sales people make crazy money, the answer is that sales is hard. Most of sales involves experiencing a steady stream of belittling and rejection and your average person simply cannot cope with that. I, for one, am on the record as being a terrible cold caller. Calling 99 people and hearing how dumb I am so that I can get to that 100th person who will hear my story is very tough.

The result is that if a sales person has a good relationship, that is like a gold vein to them. You treasure it! Someone that you can call on again and again and they will buy from you repeatedly is incredibly valuable.

The result is that, at some level, a sales person will treat a new job with suspicion. They simply cannot afford to burn their valuable relationships if it turns out their new employers products suck. Many sales people would rather fail at a new job and keep their confidence and relationships intact than risk blowing up a customer.

The result is that for a company to get a salesperson going, they must instill 100% confidence in their products in a salesperson. Particularly for early stage businesses that are just building their sales organization, this can be very difficult.

Instilling that confidence is not second nature to most people. In fact, I would say that the average person wants to:

1. understate and overdeliver
2. be honest about capabilities

These two things can be deadly in early interactions with a sales organization.

Selling a tiny bit ahead of capabilities is critical for the success of most organizations.

Quick sidebar: I was working at a publicly-traded company at one point in my life and I was listening to the earnings call and I heard the CEO describing some capabilities we were developing. I turned to my boss and said, “Oh my god, that was a complete lie the CEO just told.” To which my boss responded: “About time he started competing with everyone else.” My bosses point was excellent: Everyone else in our industry packed their calls with lies. We knew this. Turnabout was fair play in this situation.

Similarly, I was confronted with an interesting challenge recently: We are building a large sales force basically from scratch. We had a product that is coming out in 30 days and during a sales presentation, I presented it as such: “Regarding X, This product will be available in a 4-6 weeks, I will give you plenty of details then.”

I do this for two reasons:

1. I am a believer in building my organizational credibility through meeting my commitments. If I say, “X will be done by Z”, it will be done. If I lack confidence, I refuse to give dates because I want people to know that when I give a date, they can bet their bottom dollar that it is going to happen.
2. I like sales to sell what we have. One of the things that drives me nuts about sales people is that when you tell them what is coming, they tend to tell their customers – which can cause a customer to hold off on placing an order – which can cause a salesperson to say that the reason they can’t sell is because “X product isn’t done”. So I always tell people, “Tell the salespeople that the product will never get any better. If they want to work here, they have to figure out how to sell what we make.” Of course we want our product to get better, but a good salesperson should figure out how to sell what we have. To be all Glengarry Glen Ross about it, if you can’t figure out how to sell our crappy product to these good leads, I don’t want to give you the good product to sell. Make it rain!

Regardless, my boss came over to me afterwards all fired up: “You need to go back to the sales force and re-characterize our capabilities in this area as being available today.” My response was, “But it isn’t!”. To which he replied, “That is not germaine to this conversation!”

Great line.

Moral of the story, if we waited 6 weeks to start selling a capability we will have in 30 days, we won’t see a deal for the next 90 days. And it is Q4! Now we have the capability and our team is actively closing business around it. Win/win.

While many product people, and many people in general, take the same approach I typically try do – organizational credibility development through constant under-promising and consistent over-delivering – it is critical to success in life and in business that you recognize moments where this philosophy serves you poorly and a little over-promising and then going out and making it happen is actually what it takes.

Furthermore, it is important to recognize that sometimes your organizational credibility isn’t what is important. If the business needs you to take a body blow – hey buddy, that is why you get paid the big bucks.

One more story: In my first company, I remember closing our first six-figure deal. Prior to that deal, our biggest job had been around $70k and this job was for $250k. My partner said to me when they offered us the business, “We might not be able to do this!” My response was, “If we can’t do this, we will never have the kind of company we are trying to build.” We took the job, we made it happen, we built a company I was proud of and led it to a great exit.

It is easy to always under-promise. Easy. Just push back whenever people push on you to over-commit. It can be a habit. But don’t think that just because you are always making your commitments and managing expectations that you are doing the right thing. What is hard is recognizing moments when you need to demand more of yourself and your team to catalyze change.

http://www.flickr.com/photos/metabolico/809618775/sizes/m/in/photostream/

When I worked at an ad network, many of our publishers wanted to be “blind” – that is, not identified as available inventory in our network. Let me give you an example: Yahoo might give an ad network some of its excess ad inventory to monetize. Yet Yahoo does not want other sales organizations out there telling advertisers, “Oh, I can get you on Yahoo inventory, buy from me instead of that Yahoo sales guy”. Yahoo wants the ad networks money and the network values high-quality, good performing inventory, so the best of both worlds is to be “blind”. The ad network promises not to use Yahoo’s name and Yahoo gives them the inventory on this “blind” basis.

As a product guy, I always respected the desire to be blind, but I always wondered how effective it was out in the field. People have to get paid and a lot of people will do what it takes. I generally imagined there was a fair amount of “wink, wink, nudge, nudge” that took place when agencies and network sales guys talked about inventory – “Let’s just say that I can get you a lot of inventory on sites about Yodeling”. It always seemed like there was a lot of potential for miscommunication about what was blind and what was not as well.

Now that I am in a product role as a company that is first party to a lot of inventory, this has tempered my thinking about a lot of network interactions: I don’t trust “being blind” as a panacea for channel conflict. I was already involved in a situation where one network that I gave inventory to on a blind basis told an agency that they had our inventory – we fired them the next day.

One of the amazing things about networks that don’t respect blind status is how the desperate sales guy – who may indeed close that one sale – thinks that it doesn’t get back to the publisher. OF COURSE IT GETS BACK TO THE PUBLISHER. Generally speaking, the agency has no horse in this race, so when the publisher asks why they aren’t getting a buy, the agency invariably tells them, “Network X said I could get your inventory through them”.

I would love to hear Ad Networks perspective on how they make sure that blindness is respected. Similarly, are there publishers out there that have a “system” to make sure that blindness is honored?

If you are a non-technical founder of a company similar to the kinds of companies that I might start, your job is to be a talent magnet. You have to convince awesome people to quit their jobs and join your start-up. If you can’t do that, then you probably aren’t doing your job. Your job as a non-technical founder in a very early stage software start-up is three things:

1. Get critical talent to join the team
2. Sign up a few customers
3. Raise money

If you can’t do #1, #2 is hard – customers like products.

If you can’t do #1, #3 is hard. As I told a group of entrepreneurs at a recent Founders Institute event: “If you go to a sophisticated investor and ask him to put money in, but none of your friends have joined your company, that is a huge red flag: If you can’t convince your friends to quit their jobs and join your company, why would a complete stranger trust you with their money.”

One thing I think about a lot when I think about what my next company might look like is Steve Newcomb’s “Cult Creation” essay. One section in particular is very compelling to me, so I am going to quote it in its entirety to give context to the rest of my blog post:

Create a Dominant Market Share – one of the things that I took notice of was Google’s move to develop a lot of their tools in Python.

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Curious, I thought.  Why would they do that?  At the time Python was a new(ish) language, although growing quickly in popularity.  Then it hit me.  They were going for a dominant market share in a specific talent pool. If you can get in on a new talent pool trend, the benefits can come back ten-fold.

Here’s the strategy.  Get the first luminaries in the field, then as that language grows in popularity you are labeled as the de facto place to go if you want to code in that language.  Then hiring get 10 times easier.

Brilliant.

In 2005, when we founded Powerset, we realized Ruby was the new Python, so we went after some A-level people in the Ruby community.  The top two we went after were first, Kevin Clark (a 20 year-old wiz-kid who we were trying to convince to quit school) and second Tom Preston Werner (now the founder of GitHub).

We got both of them, and within a matter of months, we had one of the largest Ruby teams on the planet.

Anyone who wanted to code in Ruby knew about Powerset simply from the Ruby meetups which were dominated by either Powerset or Twitter people.

We then did the same thing in the field of computational linguistics.  At one point we estimated that of the 200 or so people that really understood computational linguistics in the world, we had about 40 of them.

What’s the benefit?  Once we knew we had this level of talent market share penetration, we had almost a guaranteed worst case scenario that most startups would dream about.  We knew that our talent pool was so strong, that even in the event that we just ran out of money, one of the big three search engines would simply buy us for our team.

At that time we knew that a talented engineer in a tough to get tech was worth about $1.5 million per head.  Thus, I knew with relative assurance that since we were going to hire at least 70 people with our Series A money, that our worst case scenario was about a $100 million exit.

If anyone is paying attention, you are now saying, wait a minute!  Didn’t Powerset sell for $100 million to MSFT?  …. Yup, we nailed our worse case scenario!

That really struck home with me. Recruiting engineers is incredibly difficult and this implied that it might be easier: All you have to do is pick a language that you can dominate the market in and you are positioned to easily recruit engineering talent – one of the hardest parts of growing a company.

So what language should I choose if I am starting a company in the Baltimore/DC area?

Interestingly, Baltimore has a very large Rails community: So many Rails people that RailsConf has come to Baltimore several years in a row. But of course, that means there are already places that are Rails nexi for the community: 410 Labs and Smart Logic Solutions come to mind.

I think of Clojure or Scala as relatively specialized languages – probably inappropriate for whatever start-up I may one day have in mind. What choices do I have? PHP? Python?

I am interested in hearing people’s thinking here. What are the best languages for me to try and build a cult of ninjas around in this area?

Some of my favorite people have already responded, but I had been planning to write a blog post for so long that I feel like I still have to get it off my chest:

An article in Ad Age Digital, “The Dangers of Online Advertising’s ‘Math State’“, struck me as verging on irresponsible. I know people love a contrarian view point – look, I am blogging about it – but c’mon!

I had two immediate reactions:

1. I am as online quant geeky as it comes. But even I recognize the value of great creative. Making great creatives has not gone down in value – I predict it will be the primary driver of the growth of online advertising over the next 20 years. But there is science there. Everyone who has written software knows that “great process provides a framework that can unlock creativity”. We have not yet determined how great creative can be expressed online – there will be an element of math and science to that – but that is no reason for a creative person to be scared.
2. Kendall devalues what we have done online in the worst way. If I told you that we had developed tools that could determine with amazing precision, person-by-person, at an individually targeted level, the effectiveness of TV ads, would Kendall have said, “All the creativeness has been removed from TV advertising.” Not at all. We are introducing amazing new targeting and measurement in a new advertising world. That is good. The fact that the creative format is not as good today as it should be does not take away from the value of what has been constructed.

One of the things that I loved about this business from the moment I got started in 1993 was that we have the opportunity that John Wanamaker dreamed of: The chance to figure out what advertising is working and what advertising is not. And make it work better.

And I love math. Math is beautiful. Working with numbers is a beautiful act of creation and discovery that is fun and makes you a better person. Math is a gift to humanity that we have been given to explore our universe. Take that.

“Companies are bought, not sold”

This is a cliche as old as M&A, and there is a lot of truth to it. When I started my last company, from time to time we would get interest in acquiring the business from third parties. My wife would start to get excited if I mentioned this stuff and I always tempered her with a couple of comments. These are my M&A cliches and I want to share them with you now for the permanent record:

• Selling a company is a “large complex sale”. Just like real sales. That means you probably need 100 meetings to get a buyer. So I always tried to imagine that you need 100 meetings with different people to sell the company. That means that this meeting, no matter how optimistic the potential acquirer might sound, is unlikely to result in a sale and you should remain even-keeled about these things. The thing you should celebrate – and this is what my wife and I always did – is “We are one meeting closer to 100 meetings!”
• No matter how good a fit you think you are for the business, you have virtually no input into the process. This is where I always thought half of the cliche came from – the key things that have to happen to make this transaction take place are events inside the buyer where you have little or no control. The CFO wants to focus on integration of the last transaction, your champion is job-hunting and suddenly quits, there is a spat about who would manage the acquisition and someone ends up going scorched earth (“If I can’t have it, then no one can!”, the CEO resolves to focus on maximizing profits to hit a number this quarter, the buyers chief competitor announces a new product and they send M&A off to focus on other things as a result, or technology says they could recreate all of your core technology in a week. This kind of thing happens every day. Every day. There are third party forces at work, which you are unaware of, attempting to derail your acquisition. If the buyer gets distracted, the opportunity goes away.

But I am here to tell you that this is the truth, nothing but the truth, but a partial truth.

There are things you can do to make the sale of a company more likely.

First, go kill it. If you build a great business, people want that. It needs to be a blend of great proprietary technology and a large and growing customer base/revenue stream. Duh. I assume you are reading this because you don’t have all of that. Sales is easy when you have the perfect product.

Second, there are things I don’t know about. I have sold two companies now, and I know that there were things I did to make the sale more likely, but there are lots of people with bigger exits, more exits, and more experience here. Good lawyers probably have ten things that they would put on this list.

Third, momentum is your friend. People talk about deal heat all the time. If the deal is moving, make sure you move it along. The faster you move, the less time a naysayer has to insert obstacles.

Fourth, ABC, baby! Always be closing. When Greg Yardley founded Flurry and I was still at Aol, every time we had lunch, the running joke was that he would start the lunch by saying, “Just so you know, I have a fiduciary responsibility to let you know that we are for sale.” That is a little, ok maybe a lot, tongue in cheek, but you get the idea. Greg was doing two things right: Networking with potential acquirers and looking for opportunities.

Because here is the other half of that cliche: You never know when a company will suddenly decide they need to buy something in a space. When that happens, you want to make sure you that you broke bread with a player in the organization recently and told them your story. Otherwise you might not get the call.

Here is the bottom line: In every transaction I have been involved in, the buyer knew someone on our team, had a long term relationship (greater than one year) with that person, and was familiar with our business as a result. When they felt like buying, they called us.

And that is how we sold.

Let’s get an awesome comment thread started. Give me your reaction now!

Mike Brenner was kind enough to ask me to be a judge at Startup Weekend this weekend. I passed, but I never really told him why. I was talking to an entrepreneur this past week about his ideas and I better articulated my thinking. I thought I would document it here because I think my conclusions have interesting implications for some of Startup Weekend’s participants:

Judging start-ups at an early stage is a bullshit business. Having said that, lots of people do it. But they invariably take a portfolio approach and invest only in areas they feel like they can understand. Because usually they are guess wrong.

Everybody knows it. The best one can really hope for is to understand if the business might be interesting to you.

Josh Kopelman has probably made as many early stage investments as anyone in the country over the last couple of years and he passed on Twitter.

I probably talk to an entrepreneur or two every week, so I hear a fair amount of ideas. Here is the trick: most ideas, your average idea, it is hard for me to tell if it is a good or bad idea. All I can really tell is if it is an idea that I could, if time were invested, come to a conclusion regarding whether it is good or bad. The answer to most of these is no: I can probably never tell if your consumer Internet app is a good idea. I can usually never tell if your enterprise software app is a good idea. In fact, the closest I can probably come is that most online advertising start-ups, given time, I could probably determine if they are good or bad ideas.

Unless they are in the affiliate space. Then I wish I would be able to figure it out, but I probably won’t be able to.

The good news for founders is that most people think most ideas are terrible. That means nothing.

If Ev had taken JoshKopelman’s rejection personally, no more Twitter.

Josh passed on Deconstruct Media, which I subsequently grew and sold!

Josh is a better judge than anyone else that is going to look at your start-up and he is wrong all the time.

The only judgements that matter are the yes’s that lead to people writing checks – and the best kind of checks are customers.

The last place team after 54 hours could easily be the most financially lucrative. Don’t trust outside opinions. Unless they are right!

http://www.flickr.com/photos/tyrian123/479220075/

I scraped this answer, but I thought it was so interesting, I am reblogging it:

Fresh water fish absorb water through their skin and gills, saltwater fish actually do drink water.

In saltwater fish, they have to drink because their body’s concentration of salt is lower than the surrounding water. Therefore, they have to drink huge amounts of water every day to stay hydrated.

In freshwater fish, their salt concentration is higher than that of the surrounding water, and, as osmosis dictates, they absorb water through their highly permeable skin. To keep from bursting, freshwater fish actually have to excrete water, up to 10 times their body weight daily, unlike saltwater fish.

UPDATE: I love blogging because from time to time someone corrects my ignorance and I become smarter. I just received a lovely email indicating that AdMeld is now selling directly to agencies. While my source KNOWS STUFF, I am emailing Ben Barokas for comment. Shit, when did I turn into a reporter?

I am amazed at how many companies – ad networks, DSPs, and others, are considering getting into the mediation business these days.

The lure of mediation is obvious: If you see 100% of a sites inventory, you are seeing a much higher frequency of impressions, giving you more opportunities to monetize, you are potentially seeing some users that didn’t have the frequency to reach you in the daisy chain (super profitable), and you have more information about the absolute frequency of users (how many ads they have seen on the site).

This leads to a number of great monetization improvements:

• You can front-run inventory
• You have insight into the aggregate value of users
• You can front-run inventory
• You can front-run inventory
• You can front-run inventory
• You can front-run inventory

The terrible thing about mediation is that with great power comes great responsibility.

I feel like a proper mediation platform offers a few things to publishers:

• A responsibility to maximize yield for the publisher – i.e. not front-running inventory
• A responsibilty to offer transparent reporting

Many of the best known mediation platforms – AdMeld, Pubmatic, etc. – explicitly do not sell to non-ad networks. This allows them to report transparently on ad network performance with no risk of conflict and desire to front-run inventory. This also means that there is no difference between maximizing yield for them vs. maximizing yield for the publisher.

If I were an ad network, I would love to offer a mediation platform, because I want to front-run inventory, but the offering is so disingenous to customers, it is hard to imagine that it is a sustainable business.

I am reading more and more stories about DSPs raising large piles of money:

Lotame: $34m

MediaMath: $24m

DataXu: $19m

TradeDesk: $2.5m

TradeDesk appears to have a nice, sane strategy. If Invite Media was the industry leader and they were worth ~$80m, then all the rest of these companies are a long, long way away from justifying their valuations.

I am hearing more and more stories about how much of the revenue flowing through these platforms is essentially ad network business where the DSPs are taking on risk to run performance campaigns for agencies. While that is really interesting, is that revenue valuable? While it seems like the IPO market is opening, acquisition should still seem like a viable way out. If you build a $200m top-line ad network, I am unsure if anyone will acquire you today.

I wish I had more to say here, but why don’t people comment and we can go from there.