I had the pleasure of hearing Kevin Weil, VP of Product Revenue discuss Twitter’s monetization strategy at Ad Age Digital. His presentation gave me insight into the question that everyone wants to know: How much am I worth to Twitter?
By now, we all had a chance to look at Twitter’s historical revenue and metrics. We learned that in 2012, the company saw $316.9 million in revenue, with $269 million derived from ad services and the balance, $47.5 million, derived from licensing data to third parties.
With 500 million registered users, we could extrapolate an average revenue per user (ARPU) of $.63 ($316.9/500). However, that wouldn’t be accurate, as this number includes an estimated 20 million faux Twitter accounts. When we take this into consideration, our number would be closer to 480 million users. Yet, 480 million doesn’t account for inactive accounts. We know from the S-1 that there were 218 million monthly active users (MAUs) and 100 million daily active users (DAUs). We could estimate that each user is worth $1.45 based on MAUs or $3.16 based on DAUs. However, we are still missing valuable data regarding the true value of a user. We need to understand the percentage of users who click ads and make purchases. Twitter is full of users who use it for entertainment, but we want to know who is driving revenue.
From the Twitter blog, we learn:
The average Twitter user follows five or more brands. Users who primarily access Twitter on mobile are 60 percent more likely to follow 11 or more brands. They are also 53 percent more likely to recall seeing an ad on Twitter than the average Twitter user.
Advertiser Tip: Create Tweets that align with what mobile users need: real-time information that helps them make decisions as they go about their daily lives. They may be shopping near your store and a Tweet about your current promotion might get them in the door. They may be waiting in a line at your bank and looking for information that will make the transaction easier. Think about creating campaigns centered around useful information or special offers that someone can act on immediately.
Bottom line: As consumers continue to shift their time to mobile, a big opportunity arises for brands. Mobile is in our DNA at Twitter, which means our platform can connect your brand to users in real time, wherever they are. Because mobile ads on Twitter are part of the organic content experience, they create a particularly powerful vehicle for brands to create reach, build frequency and drive engagement.
Your value to Twitter is tied to the likelihood that you use a mobile phone and have the tendency to make compulsive purchases. If you are using Twitter for entertainment, your value to Twitter is on the lower range ($.63) as they can still extract value from your data whether you click the links and/or make a purchase. If you’re a power user, who is glued to your phone in search of deals, your value is probably on the higher range ($3.16).
Today, Kevin reported that one recent study showed 10 percent of users who engaged with a certain brand’s ad converted to paid customers. Naturally, the more you engage the higher the probability of conversion and hence the higher your value to Twitter.
What type of Twitter user are you? Have you clicked Twitter ads in the past? Did it compel you to make a purchase? Let me know in the comments!
About 50 percent of all startups will not make it to year five and approximately 67 percent won’t make it to year 10, according to historical data gathered by the Bureau of Labor Statistics over the past 18 years. The good news is I’ve documented why the average company fails.
You Don’t Test Your Product or Service
The last time you hosted a BBQ, I’m sure you surveyed your guests to determine the type and quantity of food they were interested in consuming. You didn’t buy 10 pounds of kale patties with the hopes that they were vegans. Yet, you are building a company without ever asking your target audience what it wants.
You could have utilized free resources that teach you how to read your target audience, but you were too busy frantically building a product that nobody wants.
Tip: Don’t build it until you have sufficient evidence that points to the fact that they are coming. Build it and they will come only works in the movies.
You Ignore Metrics
You make it a point to check into MyFitnessPal each morning to analyze your caloric intake, yet you have no meaningful data on your startup’s fat, sugar, and carb intake.
You could have put together a basic Excel spreadsheet or used the various free and inexpensive tools to measure your performance, but you were too busy chasing high maintenance customers who never converted to profitable clients.
You could have built a monthly financial model, with relevant metrics to measure your progress and understand which customers to chase.
Tip: Different revenue models focus on different metrics. Focus on what matters.
A subscription-based model should focus on churn (% of users who leave) and retention (percentage of users who stay). It is normal to have a 1 percent monthly churn rate while you are getting started. The goal is to decrease the churn rate by ascertaining the reasons users are leaving the service.
An ad-based model should focus on user retention by tracking the percentage of daily active users (DAU) over monthly active users (MAU). The DAU/MAU ratio, which illustrates the percentage of users who log in each day, should stabilize at 50 percent, which implies that half of your users are daily users. Popular sites, such as Facebook, achieve 85 percent daily activation. Ad-based models should also focus average revenue per user (ARPU), by dividing revenue over number of users. ARPU ranges from $4 (Facebook) to $189 (Amazon).
A retail (or pop-up store) model should focus on sales per square foot (SPSF). Warby Parker’s showroom achieves $3,659 SPSF, which is far beyond what most retail stores achieve. Startups should target between $500 to $1,500, depending on the price point of their goods.
To balance the analysis, it is important to look at customer acquisition cost (CAC) and lifetime value of customers (LTV). With a subscription-based model, you hope to earn back your CAC in one year. With an ad-based or retail-based model, this period will be longer as startups will spend money attracting users and foot traffic prior to monetizing.
You Don’t Manage Your Talent
You have an Excel spreadsheet to manage your love life, but you treat your employees like interns.
You could have focused on creating goals pegged to an equity roadmap to motivate and retain key talent.
Tip: Let your founding team understand what is expected of them at the onset. When things go south, you’ll have a benchmark to measure upon.
Most founders issue equity and stock options on a vesting schedule. This typically serves as a motivator and a benchmark. Founders can discuss what is required for continuous employment and vesting.
The employment and vesting criteria should be tied to a base number of hours of performance each week and specific milestones. I wrote about constructing an option pool for employees here.
Below is a basic, high-level example:
Kyle and Kara each own 50 percent of their company, which is contingent on each of them dedicating 70 hours per work to a set group of initiatives.
Kyle and Kara are ready to build a team and use their own employment and vesting guideline for new hires. They carefully create a list of expectations for each new C-level employee and director in order to communicate what is needed for continued employment and vesting. This in turn provides guidance for all future hires.
Did I miss anything? Let me know what you’ve learned from your failures in the comment section below. Remember: There is always a lesson in each failure.
Whether or not it is wise to invest time and money to apply for a patent, trademark or copyright on your startup’s core intellectual property (IP) assets depends on the nature of the IP itself, your industry and its competitive dynamicsand the contribution IP is expected to make towards your startup’s ultimate success.
For instance, in certain industries (biotech or semiconductors), having a patent around the core IP can be crucial to even getting the first set of investors tothe table. In some other industries, such as consumer Internet or software, I believe patents are typically an afterthought and a nice-to-have luxury as insurance against future lawsuits.
In yet other industries such as fashion and creative arts, patents are rarely mentioned and instead trademarks and copyrights take center stage.
It is critical to have a realistic picture of the true costs of obtaining IP protection in terms of time, money, team distraction and public disclosure. Only an experienced IP attorney in your field can truly assess these costs.
To give a general picture, patents tend to be the most expensive and difficult form of IP protection to obtain, and can easily cost well over $10,000 and involve two to four years of back and forth with the US Patent Office. Trademark and copyright work can be registered a lot quicker and typically costs $1,000 or less.
It’s also important to consider the cost of patent trolls.
Every entrepreneur has read at least one horror story about patent infringement lawsuits brought on by non-practicing entities aka patent trolls. A recent survey estimated that in 2011 alone, companies spent $29 billion defending themselves against these suits.
So, if you are planning for success, you may need to create defensive patent strategies that would make it less likely for your startup to be entangled in expensive litigation with patent trolls.
To avoid the expensive costs, you can consult with competent patent counsel and devise a strategy that would both minimize the upfront cost to you and provide you with sufficient downstream protection as your company grows and raises its profile.
The good news is that the legal marketplace in the US is currently undergoing a renaissance and you have several options to consider:
Law Firms – Large, established firms will often have an IP department with highly trained and experienced practitioners. The typical fee deferment that some law firms offer promising startups may or may not apply to patent work because of the high demand patent practitioners face at law firms. But it is definitely worth talking to some firms to get a sense for style and points you need to consider as you evaluate your options.
Tip: Create a list of the top 20 law firms in your area and contact attorneys who specialize in patent work.
Online Legal Marketplaces – The recent trend of online legal marketplaces makes it easier for entrepreneurs to quickly find legal help. These online platforms typically enable you to tap into an experienced legal workforce that has a much lower overhead than law firms and can offer you better pricing and service, as practitioners on these platforms highly value their public client ratings. If you want the flexibility of working with a sole practitioner, and want to potentially save money on your hourly rate, search online.
Tip: It takes only a minute to post a request on a legal marketplace such as UpCounsel and receive free quotes from attorneys. A quick search for patent attorneys located in California or New York alone delivers dozens of highly skilled patent legal professionals.
Many entrepreneurs fear asking for legal advice because they don’t believe they can afford it. It is best to ask for help and determine a budget (deferred fees or hourly practitioners) that works for you, rather than to risk making costly legal mistakes.
I don’t believe that there is a gender bias, but rather a personality bias in the startup community. The startup world favors individuals who are focused on winning and are willing to go to any lengths to succeed. Unfortunately, women are typically raised in a manner that doesn’t develop these personality traits.
In my opinion, boys and girls receive entirely different messages about purpose and meaning in their formative years. Boys are typically raised to compete in aggressive activities; where winning is the main goal, and they play games where the smartest person is the winner.
Read what other mentors say on whether there’s gender bias in the startup world.
Most girls spend their formative years making sure they are well-liked and popular. Girls are socially conditioned to believe that their purpose and meaning in life is derived from their physical appearance and popularity. Most young girls spend very little time playing aggressive sports or intellectually challenging games. Naturally, they grow up to be women who don’t care about being the winner or being the smartest kid in the room.
We need to create a world where females feel comfortable exploring competitive, and historically male-dominated fields. It is critical that young girls view intelligence and hard work as feminine, not masculine, personality traits.
The foundation for change has begun. Debbie Sterling, a Stanford educated engineer, created GoldieBlox to show young girls that they can enjoy engineering, and still enjoy their feminine side. Kimberly Bryant, a seasoned engineer and project manager, created Black Girls Code to introduce young girls to the fun side of tech. These are only a few ways that women are actively engaged in the solution, and not the problem.
At Boxworks 2013, Box CFO Dylan Smith led a lively discussion with a panel of Silicon Valley investors, from newcomers The Social Capital Partnership to blue chip General Atlantic.
The Future of Venture Capital
With so many VCs entering the full-service arena, the question was poised: Is VC now a platform offering a multitude of services to entrepreneurs?
The panel chimed in that the role of a VC is to impart knowledge, instill confidence in the market, and dole out capital. If VCs can assist in PR, marketing, and recruiting its additive, but it is definitely not their core expertise. Entrepreneurs should be manage their expectations.
As the IPO market is beginning to firm up, many entrepreneurs wonder if an IPO is the right path for their company. Former Verisign CFO and seasoned board member (Omniture, acquired by Adobe; MySQL, acquired by Sun, Box, Survey Monkey, Criteo, Everyday Health, Linden Labs, Fusion-io and Proofpoint) Dana Evan pointed out that it took Verisign $5 million in capital to get to their IPO. Today, more capital would be needed before a company could reach IPO status. Let’s not forget it took over $300 million before Facebook was ready to make its public debut. Dana also points out that an IPO is not the end game some entrepreneurs believe it to be. She cautions that once a company goes public, they lose flexibility. To some degree, Wall Street Analysts become big brother. Companies are not able to execute on creative ideas that may interfere with profitability as Wall Street Analysts are closely watching EPS and ready to stamp a ‘sell’ recommendation on any company that doesn’t perform to expectations. If you are thinking that an IPO is the only exit strategy, you may want to cast a wider net.
It’s true that the cost of building a company has never been lower, however the cost to exit has never been higher. Entrepreneurs need to be mindful of the Series A crunch, which evolved when the market was flooded with seed capital without a corresponding increase in Series A capital. If it is increasingly difficult to secure a Series A round, you may not make it to a Series B or C. Hence, your long winded exit strategy may be cut short.
Now more than ever, entrepreneurs need to focus on a broad exit strategy. If an IPO is not feasible, they should be open to a merger or acquisition. And they should understand this strategy early.
Go Big or Stay Home
The panel underscored the need for companies to think big and go global. “Silicon Valley is limited and companies need a global market to scale,” noted Brett Rochkind of General Atlantic. As Rory O’Driscoll of Scale Ventures pointed out, “Playing safe is the riskiest part of building a tech company.” Entrepreneurs need to think big to get people motivated. Dana Evan points out that the culture at Box in the early days is one of the things that got her to join on as a board member. When teams are working on big ideas there is a distinct excitement in the air that others can feel. It’s contagious.
If you are building a company today, be sure to shoot for the moon, but be flexible in your exit. It’s critical to look at your competitive landscape, macro capital markets, and internal goals to determine the optimal exit strategy for your company.
Do you agree or disagree? Leave a comment below and let me know.
1) They don’t create a capitalization table (commonly referred to as a cap table).
A cap table provides clarity around ownership. It will assist entrepreneurs in understanding the effects of issuing too much equity too soon. Too often, I see entrepreneurs freely giving away equity as compensation without realizing the extent of dilution they are causing.
It is normal to provide 1 percent to 2 percent of your company’s equity to an advisor who is willing to vest over a set time period of 6 to 12 months in exchange. The rationale behind vesting the shares is that you want to make sure this individual is performing activities that will enhance your company’s growth. As an advisor, I take equity in companies and specify that it will vest on a monthly basis as long as the contract is active, which is typically four to six months.
The problem I see often is when entrepreneurs dole out 5 percent or more to each person who provides ancillary services. If you give an accountant 5 percent of your company’s equity in exchange for an audit, you are diluting the company in exchange for a service that does not enhance your company’s growth.
Tip: Create a cap table and barter or pay cash for services that do not provide ongoing value to your company.
2) They don’t integrate their option pool with their hiring plan.
An option pool sets aside equity for future hires. Once the cap table is in place, the entrepreneur can start to develop their option pool. Of course, all smart entrepreneurs know to develop a financial model that details their hiring needs on a monthly basis for the next 24 months. This, in turn, provides guidance for the option pool.
The entrepreneur will look to the hiring needs of the company for the next 24 months. If they are raising outside capital, they will structure their option pool around the next funding event. In other words, they will create an option pool that will last up until their next funding round. Each subsequent round will have an adjusted option pool.
Here’s an example:
Six months ago, I seeded my company through a crowd funding campaign. Today, I want to raise $3 million, which will take me through to the next financing round, which I anticipate will occur in 18 months. Therefore, I create an option pool that covers all applicable hires within the 18-month time frame.
I use the following schedule for guidance:
C Level (CEO/CTO/CMO) 2% to 10%
Vice President 1% to 2%
Director .5% to 1%
Executive .5% to 1%
Your option plan will vary depending on the characteristics of your company. If you have a non-tech company that is highly focused on selling a non-tech product or service to your target audience, your CMO may warrant a higher percentage of options than your CTO. In other words, ask yourself how critical each role is and award the role accordingly. The more critical the hire, the higher the percentage of the option pool.
Tip: Create an option pool based on your company’s hiring and fundraising needs.
3) They don’t get legal guidance when negotiating the equity in their term sheet.
One common point of contention is an investor who inserts the option pool into the pre-money valuation. This may seem like a minor issue, but it dilutes the valuation of the company.
Here’s an example:
A company has a pre money valuation of $15,000,000.
An investor agrees to invest $5,000,000, which creates a post money valuation of $20,000,000 (pre money valuation + investment = post money valuation). However, the investor stipulates that 10 percent of the fully diluted shares will be set aside for the option pool. This 10 percent option pool represents $2,000,000 (10 percent x $20,000,000). Your valuation has gone from $15,000,000 to $13,000,000, as the $2,000,000 worth of stock has been set aside for future hires.
This can be remedied by asking for an increase in valuation. Most investors are amenable to the increase in valuation as they know that the option pool is a sensitive issue.
Tip: Always seek legal advice when negotiating a term sheet. Understand how each term in your term sheet affects your company.
In summary, entrepreneurs should pay close attention to the equity in their company. It is a finite source and should be distributed with the utmost care. Your option pool will be critical in attracting top talent, so you will want those working with you incentivized accordingly. Last, but not least, an ounce of prevention is worth a pound of cure. Always seek legal advice before signing off on any investment.
Still have questions about equity? Join me on August 16, 2013 at 11:00 am PST for a free, online Spreecast. You can RSVP and ask questions here — http://www.spreecast.com/events/finance-for-startups-5–2
If you can’t view it live, save the link and watch the replay at your leisure.