3 Things Foursquare Should Learn from Trulia (TRLA) and Yelp To Get to $100M in Revenue

Today was an incredible day. I had the extraordinary pleasure of being on the New York Stock Exchange floor this morning for the IPO of Trulia (#TRLA).  It was the most exciting day of my career to date (that’s me below).  I was on the founding team at Trulia and was responsible for building the sales organization between 2005 and 2010. The Trulia sales team now accounts for half the Trulia’s 500+ brilliant employees and most of its revenue. I left in 2010 to start Crunched on a mission to help other companies build large sales organizations with technology.

So what does Foursquare have to do with Trulia and Yelp?  A great deal, actually. For starters, all three are essentially media companies. All three drive massive engagement from mobile devices, Foursquare exclusively. All three cater to consumers on one side and small to mid-sized businesses (SMBs) on the other. All three have “listings” search, discovery, check-in, and some type of rating and reviews at the very heart of their core service and value proposition. Foursquare and Yelp both help consumers discover, rate and review local businesses, like restaurants.  Trulia helps consumers find homes and make smarter home buying decisions in the process. It gets those home listings from real estate brokers and agents, which are basically small and mid-sized business. All three companies make money almost exclusively from advertising from two basic groups of advertisers: large brands and SMBs. All three companies sell a mix of brand advertising like banner ads, as well as integrations and sponsorships to large brands like American Express and the advertising agencies that represent them. They also sell advertising to small businesses in the form of banners, featured listings and local promotions.

 

That leads to the 3 things Foursquare should learn from Trulia and Yelp:

  1. Brand Advertising Doesn’t Scale Online – The best thing about brand advertising is that big brands have large advertising budgets that they spend every year without fail.  The three worst things about brand advertising:
    1. Lumpy & Unpredictable Most brands buy on a campaign and/or seasonal basis.  For example, Home Depot advertises mostly in the summer to promote barbecues and gardening tools and in the winter to sell snow blowers and shovels. American Express spends like crazy when it launches a new card, and then pulls back. This means you can run a multi-million dollar campaign for a brand one-quarter and then not hear from them again for six months to a year. You cannot build a scalable, repeatable business on that kind of revenue stream, especially if you want to be a public company. Only the top three or four largest media properties get guaranteed revenue a year in advance for their ad inventory, known as “up-fronts.” More on that in #3 directly below.
    2. Category Exclusivity – For most vertical web properties, the number of national brand categories that make sense for your site are limited. In other words, it only make sense for certain types of companies to advertise around real estate or restaurants.  Foursquare has a huge deal with American Express right now, which seems like a great partnership for both sides. I’m sure AMEX is writing Foursquare nice big checks to get access to consumers using their credit cards to buy from local businesses all day, as those SMBs pay AMEX 3-5% of each transaction.  What’s wrong with that deal? Well, most likely American Express has exclusivity and Foursquare cannot sell to Visa or MasterCard while the relationship is ongoing.  Oh, well. There goes an entire category of advertisers that make sense for Foursquare wrapped up in a single partnership.  Not only does that limit your revenue opportunities, but also when you have category exclusivity, the loss of that one brand advertiser is a big hit to your top and bottom line unless you can replace it immediately.  Remember what Mom told you, don’t put all your eggs in one basket.
    3. Massive Scale Required – Advertising for national brands is still all about reach and frequency. As popular as the Internet is today, the vast majority of advertising dollars still go to TV. Why? Because that is still the easiest, most efficient place to reach hundreds of millions of consumers. Brands advertise the same way online. Brands spend something like 80% of their online budget with a handful of sites that have the biggest audience, which is almost always Google, Facebook, Yahoo and Microsoft (Bing).  The remaining 20% of the budget gets allocated to thousands and thousands of sites and mobile applications.  Ouch!  Since supply outstrips demand, it is a big race to the bottom in terms of the price advertisers will pay and websites can charge.  A very significant percent of online brand ads are sold for low single digits ($1-$5) per thousand views or impressions, known as a cost-per-thousand or CPM. Thus, you need a massive number of users and traffic to make money at that game.  Google, Facebook, Microsoft and even Twitter have the kind of scale to make this work, but most other media properties don’t.  Sure, Foursquare has 20 million registered users, but only a fraction of them are active.

2.    Small Business Advertising Scales - Selling to small businesses has at least three major advantages over large brands:

  1. Recurring – Yelp sells local businesses 3, 6, and 12 month advertising plan commitments at a cost of $300 to $1000 per month, according to pricing on its website.  Trulia sells featured listings and local ads to real estate professionals for similar monthly amounts, according to pricing on its website.  Everyone wins.  Local businesses get a constant flow of new leads and customers and Trulia and Yelp get predictable monthly revenue that is very, very sticky. It is a symbiotic relationship.
  2. Diversified – Yelp reported 19,000 local businesses buying advertising last September in its S-1 filing.  Similarly, Trulia reported 21,544 real estate professionals buying advertising in its recent S-1 filing.  Diversification of customers is a very, very good thing.  You will never notice when Yelp or Trulia lose a paying customers, because they have tens of thousands more and add hundreds of new ones each day.
  3. Premium – Small businesses usually advertise on a hyper local level, and in advertising the more targeted your ads the more effective and the more expensive. The brand advertising inventory of most websites goes for low single digit CPMs, as mentioned above. However, the highly geographically targeted ads bought by small businesses often drive transactions and go for premium effective CPMs in the hundreds of dollars.

3.    Selling to SMBs Requires A Massive Sales Organization – The challenge and opportunity to selling advertising to small and mid-sized business at $300-$1000 month is that you need thousands of them paying to scale.  That means you need hundreds if not thousands of salespeople calling on them. If you search Yelp on LinkedIn, you will find 600+ salespeople working at Yelp, which generated $33M in revenue in the most recent quarter, for a $130M annual run rate.  If you search Trulia on LinkedIn, you will find ~250 salespeople working at Trulia, which generated $29M in the first half of 2012, for a $60M annual run rate.  Do you see the correlation here? Its a numbers game.  The contingent of these sales teams selling to SMBs is probably making 50-80 calls per day, connecting to 6-10 SMBs per day to close a hand full of subscriptions each per day.  This is a high volume, transactional business and it requires lots of humans making lots of calls, doing lots of presentations and demos and charging lots of credit cards.

If you search Foursquare on LinkedIn, you find only 2 or 3 of its 80 employees are salespeople. The rest are product and engineering.  I’m pretty confident those few salespeople are calling on large brands like American Express, which means Foursquare is putting very little to no effort into monetizing the only scalable customer base that will get it to $100M and beyond.  It is easy to get sucked into the allure of large checks written by sexy brands instead of paying attention to thousands of little checks from the SMBs that will ultimately represent the majority of revenue needed survive and thrive.

The longer Foursquare waits to build this sales organization the harder it is going to get.  I love product and engineering centric cultures in the beginning of an Internet company’s life while you are trying to nail the end-user experience, but the longer you wait to bring in the sales team the harder it will be to integrate them into the culture.  Adding salespeople to a large, engineering centric company culture is like trying to put a baboon’s heart into Christian Slater (he dies). I could write an entire series of posts on the challenges associated with bringing sales, product and engineering together harmoniously under one roof, so I will not go into that here.  More importantly, the longer Foursquare waits to build its inside sales organization the longer it is going to take to build a scalable, repeatable revenue source that will take it from a cool app to a viable, sustainable company.  The longer it takes, the higher the risk that someone else beats them to it or passes them by.

Maybe there’s really only one thing that Foursquare should learn from Trulia and Yelp; that it needs to build a massive sales organization as soon as possible and focus the majority of its resources on small to mid-sized business to get to $100M in revenue and beyond.  Go Foursquare, check-in to that!

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Top 10 Tech Sites I Read Every Day

  1. TechCrunch – still the heavy weight champion when it comes to covering early stage Internet startups with an attitude. Still the best way to keep a pulse on what’s trending and what’s getting funded.
  2. Venture Beat – A slightly more grow up version of TechCrunch with a focus on venture backed companies and a lot less attitude.
  3. AllThingsD – True to its name, All Things Digital is the Wall Street Journal’s technology rag that covers a wide spectrum of technology news from early stage startups to the big guys like Microsoft.
  4. HackerNews – Y Combinator’s hard core startup up technology version of Digg, where articles from across the web are submitted and voted up.
  5. Pando Daily – Started by former TechCrunch writer Sarah Lacy, Pando Daily aims to be the new TechCrunch, attitude and all.  Investors include Marc Andreessen, Peter Thiel, Tony Hsieh, Zach Nelson, Andrew Anker, Chris Dixon, Saul Klein, Josh Kopelman, Jeff Jordan and Matt Cohler, all investing as individuals. Also investing are a handful of seed funds including the CrunchFund (aka Michael Arrington), Greylock Discovery Fund, Accel’s Seed Fund, Menlo Ventures Talent Fund, Lerer Ventures, SV Angels (aka Ron Conway) and Ooga Labs.
  6. Mashable – all things social and technology news.
  7. Wired – an oldie, but a goodie, Wired still has some solid old school commentary on technology trends.
  8. FastCompany – This Web 1.0 darling has reinvented itself in the last few years. It is high on technology design and lifestyles. I particularly enjoy the co.design section.
  9. AVC – Fred Wilson of Union Square Ventures, investors in Twitter, Foursquare, Etsy, and Zinga,has written over 5,000 posts over the last 10 years on his observations as a technology investor.
  10. BothSidesofTheTable - blog of two time entrepreneur and GRP Partners venture partner Mark Suster. Mark has some pretty strong opinions and likes to write long form, but his posts are always as insightful as they are throughout.

Bonus:

Bits - The Business of Technology by the New York Times.

Now you see what I see!

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How Much Equity to Give Employees

I am surrounded by hundreds of amazing technology startup companies of all sizes and stages, including all the fellow portfolio companies of our equally amazing investors.  I am surprised how many recreate the wheel when it comes to employee equity. It seems there are almost as many ways of doling it out as there are companies. If there is one popular “method”, it’s go with the gut.

We use Fred Wilson’s employee equity model as a benchmark for all positions. It comes very close to what we were doing before and its a nice, objective third party source you can point candidates to for validation. We don’t exactly have a statistically relevant sample set, but we have never had anyone object after pointing to that as our methodology.  We have added on top of it when someone is exceptional in someway, which only makes them happer when they do the math and our offer comes out ahead of the model.

We vary the amount a little based on a candidate’s level of experience, expertise and/or appetite for risk.  So, if a candidate wants more upside we are more than happy to offer more equity in exchange for less monetary compensation. It helps us conserve precious capital while providing employee more skin in the game and, therefore, more incentive to work smarter to help us achieve our full potential.  If a candidate is more risk adverse, we are willing to offer a little more salary and a little less equity, to a point. It’s a pretty straight forward quid pro quo scenario and helps everyone find their optimal situation.

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The Spaghetti Strategy

In a startups, you are constantly trying new things across every aspect of your business, from product to marketing.   You throw a lot of proverbial spaghetti against the wall to see what sticks.  Far more stuff lands flat on the floor than sticks to the wall.   This type of “failure” is not only expected, but encouraged.  In fact, if you are not failing a lot, you are not doing enough.  The keys are to only try things rooted in your core mission and to fail fast.  It’s easy to feel like you are desperately trying everything and anything to find something that works and it’s easy to wander off in a different direction.  But if everything you try is deeply rooted in your core values and/or mission, you never wonder astray.

Google is a great example.  Its core mission is in life is to “organize the World’s information.”  If you think about all the services that Google provides from search to Gmail, Google Docs, Google Checkout, etc they all tie back nicely to organizing the World’s information. Google has tried and failed at many other services along the way, but never lost sight of the mission.  Our mission at SalesCrunch is to apply science to the art of selling.  We are bound to make a little bit of a mess along the way, but this mission gives us the confidence and conviction to fail on the way to success.  What’s your mission?

Point of no return: 15 more posts to go in my 30 posts in 30 days challenge.

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The Opposite of Network Effects And Viral Loops

A few days ago, I wrote about network effects and viral loops.  Yesterday, I read about new private social network Pair on TechCrunch.  I work a lot and travel a fair bit, so I actually think the idea of a two-person private network to stay connected to your significant other is a great idea. I even downloaded the iPhone app and invited my wife to join. She was touched.

But the more I thought about Pair the more I realized it is a great opposite example of network effects and viral loops. Let’s start with network effects.  In most social networks, the value of the service increases as more people join.  As more of your friends joined Facebook, for example, you could keep up and in touch with increasingly more of them in one place, so stickiness increased. The opposite is true with Pair. Inviting a third person kills the intimacy factor.  Now what about viral loops?  As far as I can tell, Pair only has one.  Every time your significant other posts a picture, video or cute message it’s going to bring you back. But the problem is that as soon as you experience fatigue with the service there is no other hook.  I am an extremist on Facebook. I use it heavily for weeks or months and then not at all for a while.  Something one of my ~300 friends posts is always the catalyst that brings me back for a period of heavy usage.  But Pair doesn’t have this luxury.  Sure, it has some old-school off line word-of-mouth potential where you hear about other friends using it, but that is not a mechanized viral loop that will scale.  Path is another private social network that suffers some of these symptoms, but at least Path is for your whole family and closest friends, so there are network effects, even if they are within a smaller pool of people, and there are more than two people to count on to bring you back.  So what does all this mean? Well, unless Pair figures out a way to add network effects and viral loops without breaking the intimacy factor it was founded on, is not going to have the kind of insane growth trajectory that Facebook and Twitter enjoyed to make them huge over night.  More likely, it will grow very linearly using old-school marketing techniques like PR and advertising.  What’s wrong with that you ask? Well,  the most likely business model for Pair is advertising.  I can tell you from experience that buying advertising to bring to people to you service so you can sell more advertising to monetize them is called arbitrage and it is extremely hard and the margins are very slim. To make real money at the advertising game you need reach and frequency, which means you need scale.  Let’s see how fast Pair can scale without network effects or more than one viral loop. 

17 more posts to go in my 30 posts in 30 days challenge.

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Mission Critical Apps Are Hard

When considering what kind of company to start or app to build, think twice before building something that is mission critical to your customers. Building software is hard and nothing works perfectly all of the time. In fact, as soon you get your app to work perfectly you will add new features and functionality, which inevitably causes regression.  Regression is software speak for you will likely break something that previous worked just fine.  It’s frustrating if Evernote doesn’t work when you want to take a note in a meeting, but its catastrophic if Dropbox loses your presentation 15 minutes before meeting with your single largest client.

I mentioned in this previous post that we never intended to get into the online meeting space at SalesCrunch. We did it because we could not think of a better way to literally get into customer facing conversations and measure what works. In fact, it’s not about the meetings themselves, but the wealth of knowledge shared in meetings that has never before been captured or analyzed that we care about. Unfortunately, we needed to build a better, smarter, mission critical meeting application that our customers use with their customers in order to give them valuable intelligence in return.   The good news is that every day we build a pretty defensible wall behind us to keep the competition out. The challenge is that we have very little room for mistakes.  If we had it to do over again, we might think twice before building something with so little forgiveness.

18 more posts to go in my 30 posts in 30 days challenge.

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How to Never Work a Day in Your Life Again

Perhaps the best reason of all to start a company is that you get to do what you want to do, how you want to do it.  If you love what you do, you will never work a day in your life again.

Photo courtesy of Ananabanana

19 more posts to go in my 30 posts in 30 days challenge.

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Network Effects And Viral Loops

Network effects and viral loops are the holy grail of growing the user base of an internet service rapidly and cheaply.  I talked a little about network effects in my previous post about using radically reduced pricing to disrupt a market. But in case you missed it, when network effects are present, the value of a product or service increases as more people use it.  Online social networks are a great example; sites like Facebook, Twitter and Google+ become more useful as more users join.  Groupon is an amazing case study of leveraging network effects to get new users to invite everyone they know your website, as the more people they invite, the cheaper the products and services on Groupon become for them and everyone else. The businesses that list their services on Groupon get access to massive amounts of new customers in exchange for offering them volume discounts. In other words, the value of Groupon increases for everyone involved the more people use it.  At SalesCrunch, we tap into network effects by capturing and measuring all the knowledge that is transferred in business meetings across your company.  The more people that have meetings, the more statistically relevant, actionable intelligence we can give them in return.  The graphic below is a perfect example. Because we measure when people are paying attention in meetings that happen on our platform vs. when they are off checking email, for example, we can look at thousands of meetings and tell you the optimal length of a meeting based on how long people tend to pay attention and at which point they tend to drift off.

Viral loops are the self-perpetuating mechanisms that constantly bring new people to your service.  The first well know example is hotmail.  Every hotmail email had “get your free hotmail account” in the signature, which drove millions of new users in a matter of months. Facebook’s photo tagging feature is also a great example.   You upload photos of you and your friends and tag everyone in those photos. Your friends and your friends’ friends get an automatic email from Facebook letting them know they and/or someone they know have been tagged in one of your photos.  That brings them to Facebook too see the photos, which increases the likelihood they will upload their own photos and tag their own friends, which brings those people to Facebook to see photos of themselves and people they know, and so forth and so on.

As you can see from the below diagram, the way this plays out at SalesCrunch is that our users bring lots of attendees to our platform for meetings. Some percentage of those attendees become users and bring even more attendees.  More attendees drives more users, and more users drives more attendees, etc.  Per the above, the more users using the platform the more interesting and statistically relevant the information we can provide you about the effectiveness of your meetings.  That intelligence spurs more enterprises to have more employees host more meetings with more attendees to get better insights and so forth and so on.

In a nut shell, network effects and viral loops can drive massive amounts of users significantly faster and cheaper than any traditional marketing.  The key is to build them into your service from the very beginning, not try to bolt them on after your product is built.

20 more posts to go in my 30 posts in 30 days challenge. It is actually getting easier and more enjoyable to write a post every day.

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A Word of Caution Before Starting a Company

I received my MBA from Babson College, ranked #1 in Entrepreneurship for 19 consecutive years by U.S. News & World Report.  One of my two favorite professors, Les Charm (his real name), bestowed on me many memorable pieces of advice about starting and running companies. My favorite by far “It’s a lot easier to get into something than it is to get out it.”  Think hard on this advice before you start a company, as you will likely be in it with no sign of escape for ~10 years.

21 more posts to go in my 30 posts in 30 days challenge.

Photo courtesy of JasonEscape

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The Air in the Room at a Startup

You are in a constant race against the clock at a startup.  The amount of money you have in the bank divided by your monthly expenses is the number of months you have until you run out of cash, otherwise known as “the air in the room.”    You are always just a matter of days, weeks or months from certain death by asphyxiation. This remains true in any business until the cash coming in is greater than the cash going out.  The more money you raise from outside investors the more air in the room, but rest assured you are on life support until you can breath on your own.   Most companies in technology chose to put growth before profits to reinvest as much as possible back into the business, stay ahead of competition and become the dominant player in their space. Amazon wasn’t profitable until years after it when public.  Many of the technology companies that have gone public recently, including Groupon, Jive, Yelp and Pandora are not yet profitable, but continue to grow rapidly and are the leaders in their respective spaces.

I have heard it said many times that most startups fail not because they didn’t have a great idea, but because the air in the room ran out before they could realize their full potential.  How much air is left in your room?

22 more posts to go in my 30 posts in 30 days challenge.

Photo courtesy of TripsGeek

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