FSBO in NYC?

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Starting a business in a recession

Having recently started a business in one of the worst economies in several generations, I am often reminded that many great companies launched in tough times. Microsoft, Apple, etc. - you have probably heard the list as well. And now that I am knee deep in my latest start-up, I wholeheartedly agree there is no better time to start a company. Here's why:

1. Self vetting - If you can raise capital and get clients in a bad market, the idea/product/team must be pretty good.

2. Bad economies accelerate disruption - typically, if an old model business was declining during good times because the trend was towards a new way of operating that business (think newspapers, radio, etc.), the combination of the cyclical decline (from the bad economy) and the organic decline (from new competition) will hit those businesses particularly hard - and force many of them to fail. This creates more opportunity for the disruptors.

3. Real Estate - its much easier to get offices and or industrial space in a down economy. This is obvious, but it also gets you things like a better location (marketing), desks (lower cap ex), and a nice build out that works for the type of business you have - which means greater long term efficiency for your company. In addition to the lower rents, business owners are often more focused on getting a better deal in a down economy - so the impact is amplified.

4. Government - even though banks tend to pull back in down markets, often the government steps up. Yesterday I heard of 2 start-ups getting significant capital from the government for their projects. And this money doesn't have a 4x liquidation preference...

5. People - This is probably the most important factor. Good people are easier to find in a down economy. They often are less attached to their prior business because a) their stock options are not worth as much; b) their current job is less fun because business isn't as good as it once was; c) they are worried about getting fired; or d) they were fired. Great people want to be in an exciting, dynamic environment where what they do matters, and where the upside potential is huge. And when the alternative is misery or worse, it's much easier to attract strong talent.

6. Valuations - This one is somewhat counter intuitive, but after talking to a bunch of entrepreneurs over the past few months - as well as from my own experience - I believe that starting with a sane valuation is crucial to the success of your business. In boom years, valuations are high, and due to the cyclical nature of business, the odds are good that your next round (or the one after that) will be in a bad economy, and the economy will have a negative impact on your business. When that happens, it doesn't just mean more dilution. It can often wipe out a management team - or at least significantly decrease their equity. While not all teams are motivated by their equity and upside - and not all boards react negatively to a business that is impacted by a negative economy - many do. When this happens, board meetings get ugly and teams often fall apart. Sometimes companies get through this - and sometimes they don't. And when valuations are too high, it usually means more capital is raised than is needed - which often has the impact of creating a less capital efficient culture of spending. And that is a hard to change down the road. Having fair valuations at each round helps mitigate these problems - and down economies seem to favor fair "A" round valuations.

The future of "sales"

There were a few news items recently about self serve platforms (Yahoo, Outside.in) for online advertising and publishing, and I thought I would share my pov on this subject. I have been building self serve ad platforms for the past several years, and here are some of my thoughts:

1. It's hard to change user behavior.

If an advertiser is accustomed to buying ads (or anything) in a certain way, there needs to be something compelling to get them to change their behavior. And convenience isn't enough. Google (and GoTo/Overture/Yahoo) was able to pull it off with their search product because the utlity was so great, the ad creation was so easy, and the effect on revenue was so obvious. I doubt there will ever be another self serve ad product that does this - so no other self serve ad product should ever expect this sort of adoption. For everyone else, it will be MUCH slower.

2. Customer service is key.

Just because you have a self serve user interface doesn't mean you can turn off the lights and grab a beer. Client support is crucial when rolling out a self serve platform. And client support means everything from a detailed FAQ and searchable db of help topics - to account managers that work directly with your clients and even do the work for them. For everyone other than Google (and I am just talking about Google's search product), there will be a long adoption curve, and expecting most of your clients (especially the ones who are used to having things done for them - which are usually the ones who spend the most) to utilize your self serve product without any assistance is a mistake.

3. Just because it's hard, doesnt mean it isn't worth doing.

Creating a self serve product accomplishes a lot. It requires a detailed workflow of how someone buys and uses your product, and also requires that you boil down the process in the most efficient way. Making the product easy to buy is important to self serve clients as well as to your account managers, customer support, etc. who provide full service. And it creates a transparency in the sales process that ultimately every customer of every industry will require.

So embrace the future of "sales" and build a "self serve" product. But recognize that it isn't going to be easy...

Positive signs for radio industry

Buried in another depressing report on the decline in revenue for the radio industry is an upbeat statistic regarding online. While revenue is down 24%, online revenue is up 13%. And the numbers are getting more interesting. Online revenue has broken $100M, and I suspect that this growth will accelerate as the economy comes out of the recession in the next few quarters.

This is a good sign. It is essential for the radio industry to ensure that the dollars they are losing during this recession can come back when the economy improves. And if there is not a viable, measurable, interactive medium within the radio industry, advertisers that are demanding this will move to another medium. And it is clear by these numbers that advertisers are finding this in online radio.

Radio is actually in a unique place when it comes to "digital". The buyers of traditional media in television and print are typically not the buyers of the digital version of this media. For example, the traditional print buyers are not buying NYTimes.com banners. Nor are TV buyers buying YouTube. But internet radio buys still originate from the traditional side of the business, and that is good for radio, since they are not competing against other media for these dollars. Again by way of example, the NYTimes is competing against other newspaper websites, local websites as well as bloggers and portals like Yahoo. But that is not the case for radio who still for the most part compete against other radio properties for these digital dollars.

My point is that as long as radio can offer an effective digital medium for the audio ad - one that has real time accurate reporting, granular targeting and interactivity - it should be better suited for holding onto their share of advertising dollars, rather than bleeding it to other non-radio interactive media, than other traditional forms of media.

While I am not sure the growth in the RAB report is attributable to this phenomena at this stage in the game - long term I believe that the growth of digital radio will outpace other forms of old media/new media migration by sector. And it is important for radio groups to recognize this and focus on this growth opportunity, or they will miss the boat.

NY Times

One of the biggest topics in media and technology these days is the demise of newspapers as a result of the web. Yesterday, the NYTimes had a story about how hyperlocal web sites deliver news without newspapers. And several newspapers have shut down operations due to their cost structure no longer being viable, or in the NYTimes situation, threatening to shut down their Boston paper amidst serious issues at NYT Corp. However, as I entered the subway this morning and was accosted by 2 people trying to hand me a free Metro and AM New York paper, it dawned on me that the NY Times' problem is probably just as much competition from the freebies as it is from the web. Turns out that two of the three Metro's US outposts are in NYC and Boston. Combine the free option with a down economy - and the proliferation of mobile devices that allow for a paperless news distribution - and you have the perfect storm for disruption.

But, for me at least - and I know this is not much of a case study - I find that while I am reading the NYTimes paper less than I used to (the elimination of Sports and Metro sections really killed it for me), I am reading it more online. Not just because it is more easily available to me on the web, but because my mobile devices are formatting it better, and because with so much news available now from a million sources, I want one source I can trust, and I want it through a lens that is consistent with how I see things.

This post isn't one that is offering a solution - other blogs can do that. I am merely pointing out that the impending demise of the local paper may be exaggerated due to the free dailies and current economy, and that the web may in fact make them more relevant than ever. Of course, there will need to be some changes in cost structure, etc. But, at least for me, the Times is as important a read as ever.

The Next Big Thing - Autos

I was recently out to dinner with several of my entrepreneur friends, and we drifted into one of our favorite discussions - what is the "next big thing" and how to be a part of it. We all agreed that what differentiated this conversation from ones we may have had in the past is the speed in which the world has changed in the past 6 months. We boiled it down to several areas of opportunity, where an experienced entrepreneur could gain some traction without fear that the space was too crowded or entrenched as to stifle the opportunity. With that, I decided to do a "series post" of where I think the next big opportunities are for entrepreneurs. The first area is the automobile industry...

The auto industry is in disarray. While gas prices have dropped precipitously, I think everyone agrees that the days of cheap oil are numbered. It may take a while for us to break out of this recession, but when it happens, oil will be the first commodity to recover. What will that do to the US auto industry? Probably seal it's fate. While I suspect the government will keep the Big 3 on life support through the next year or so, when the economy bounces back a bit, it is my opinion that at least one of them will die - and most likely, all of them will change dramatically.

With destruction comes opportunity. And opportunity comes in many varieties. Even without a the loss of the Big 3, many car lines will be axed. And thousands of dealerships will close. And what will those very attractive pieces of real estate be used for? Who knows, but these attractive pieces of real estate will be ripe for redevelopment and will be picked up at fire sale prices. The person that comes up with a good use of these spaces will have a huge opportunity.

But I believe the bigger opportunity will come in producing the vehicles themselves - i.e. the opportunity to mass produce the next Model T, Beetle or Civic. Not the trophy car Tesla Motors is producing, but a cool, practical, economical vehicle built by an American company without any of the baggage of the current automotive industry. This will happen in the next 5 years - I guarantee it.

An auto industry with a lower fixed cost structure will be able to innovate again. While there have been great advances in safety - stability control, anti-lock brakes, airbags, etc., the pace of innovation is slow in this industry because it is so entrenched in the past. Cars have the same look and functionality that they have had for the past 50 years. Sure they are faster, safer and more comfortable than ever, but there has not been any radical innovation for some time. I think this is going to change. Imagine a head up display that has GPS overlaid on the road you're driving on with directions and alternate routes superimposed on the actual road. And rather than C pillars creating a blind spot, they become invisible with full 360 degree vision no matter where you look through an innovative external camera system.

And maybe the next great entrepreneur will determine that cars are outdated gas guzzlers altogether, and what we should be moving towards are personal transporters like the Segway - which was probably 10-15 years ahead of it's time. I think there is a real possibility that these vehicles break into the mainstream very shortly. While they will never replace the minivan for as a family mover, they could easily provide efficient transportation for hundreds of millions of people around the world.

As an auto enthusiast, I suspect that we will see a dearth of interesting cars for the next few years. High performance vehicles carry high price tags, and with most individuals discretionary wealth disappearing over the past 6 months, the market for these cars has dried up. Some pundits think we will look back at the last 5 years as the golden age for autos, and that we will not see the likes of these high performance vehicles for many years to come. While I agree that we are at the end of an era, I think the new era will prove to be just as exciting - if not as an auto enthusiast, then as an entrepreneur.

Radio Performance Royalties

I have been getting a bunch of calls lately from reporters on my take on radio royalty issues, so figured I would put them out here for all to see. For those that are not familiar with the issue, there are 2 main debates raging right now. The first refers to the performance royalty for digital audio - i.e. streaming, playlists, internet radio, etc. Terrestrial radio does not pay a performance royalty because of a long standing "agreement" that radio offers promotion for the artists, so therefore should get a break on this royalty. However, with the record industry suffering from illegal file sharing, they decided several years ago not to extend this break to digital transmission of music. The thought being that it is this digital medium that got them into this problem, so it should be what gets them out of it. Ironically, these days, internet radio is probably a better vehicle for music discovery than traditional radio, yet it's viability is being put in jeopardy by this royalty. And streaming audio is not the problem for the record industry. It's peer to peer file sharing - which is very different than internet radio. Have you ever heard of anyone stealing music off of an internet radio station? There are a million other places you can do it more easily...

The second debate is related, but potentially has a much bigger impact. I am referring to the recent discussions about lifting the performance royalty exemption on terrestrial radio. There has been some debate as to why this is happening - especially when the radio business is apparently under so much financial pressure. Some people think it is to blunt the digital broadcaster argument that applying a performance royalty on digital is unfair because there isn't one on terrestrial radio. Other's believe that terrestrial radio was the target of the record industry all along - and that digital was just the first step in taking back this exemption.

Ultimately, it doesn't matter. Performance royalties make sense. I find it hard to believe that someone in good conscience can argue that the performer isn't entitled to a royalty for the airing of their performance. However, it of course, isn't that simple. Because this is regulated by congress, and because the record industry is a wounded dog backed into a corner, there are all kinds of political and economic games happening.

In most situations like these, I would support the market working this out. If the record industry doesn't want radio - terrestrial or digital - to play their songs without paying a big "tax", then the radio industry can negotiate directly with artists, cut deals on a label by label basis, or enact a pay to play scheme where they only pay music from artists that pay them to play their music. However, since these two industries are mature and have hundreds of thousands of jobs and billions of investor's capital in them (pensions, IRAs, mutual funds), there is a political interest in keeping them stable. If I had my way, I would broker a compromise that put a small ($.0003 per song) royalty on performance. Something that recognizes radio's impact on record and concert ticket sales, but also pays for the right to use the content. Unfortunately, (or fortunately, depending on your pov), I don't decide what happens here.

But here are my predictions on what I think does happen:

1. Internet radio suffers through a painful royalty rate. It may improve a bit from where it is now, but this will happen.

2. Internet radio will start to look a bit more like terrestrial radio. By this, I mean that Internet radio will have more ads and more royalty free content. The good news is the personalized and niche programmed radio everyone loves will still be available. The bad news is you will probably be hearing about 4-5 minutes of audio ads per hour of programming to pay the bills. This is still less than half the ads heard on terrestrial stations, but a far cry from the commercial free experience found on Pandora and imeem.

3. Internet radio will get serious about ad targeting. In order to generate the most $ from the ads they run, internet radio will tap into all the targeting tools of internet advertising and ultimately create an ad that is much more valuable than a terrestrial radio ad. If they have less than half the # of ads running, they will need to create 2x the value to make the same $. I think this is possible. (I know this is self serving because I run TargetSpot, but I REALLY believe it!)

4. Terrestrial radio will win the current royalty battle with the record labels. This will happen because of politics. Quite simply, big radio is more powerful than the big labels. Not only does the radio industry employ more people than the music industry, but radio execs are much more politically savvy. Their business has always been in partnership with government - the FCC, local zoning laws, political advertising, issue oriented talk, etc., so they know the players and are in a better position to influence the decision makers. And government, correctly in my opinion, won't let the record industry drag down the radio industry - especially in an economy that is teetering on the brink of collapse. The record industry has already imploded, but the radio industry, despite the much publicized decline in ad spend, over leveraging, etc. is actually a healthy, profitable business.

But, if I am a radio group, I would continue to fight this royalty tooth and nail while at the same time begin to prepare for the demise of the royalty exemption. Eventually the labels will win this war. If not through legislation, through streaming radio becoming a larger and larger part of radio's distribution.