I’ll assert that market is the most important factor in a startup’s success or failure.

Why?

In a great market — a market with lots of real potential customers — the market pulls product out of the startup. The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along. The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product. – Marc Andreessen, The Only Thing That Matters

Changing consumer’s behavior is a hard thing to do. If the behavior is completely new (a new market), it’s even harder to do. Diving deep into a startup idea that requires a new behavior from users without the proper funding, resources, and timing will most likely result in failure.

Venture capitalists needs to be alligned/in agreement with the behavior change and be willing to commit a ton of capital into the change. Marketers, journalists, and bloggers will then have to pick up the trend and excitedly write about it on highly trafficked sites. Then, it’s green light for entrepreneurs to dive deep into their ideas, look for funding, and build great products.

In late 2007 (August), my startup worked on a micro-transaction gifting Facebook application for a client. We felt providing Facebook users with a way to micro-transact on a real gifts would be a fun way to give tangable gifts to our circle of friends. We felt so confident that we decided to charge a discounted consulting/development fee for a small stake in the business venture. Although popular Facebook apps at the time still consisted of simple user actions — pokes, virtual gifting, answer quizzes — we believed the value in giving real gifts would be a hit. We assumed leveraging a social networking site like Facebook would give us the distribution (users) and trust (social graph) that would make this the perfect application where all parties benefit.

While there weren’t any social network specific payment providers like ZONG, Spare Change, Boku, and Paymo available, we had experience with traditional payment providers like Authorize.net, Paypal, and Google Checkout — and we were confident with the big brands behind those methods that transactions wouldn’t be big friction feature.

We spent roughly four weeks, mostly 10-14 hour workdays, getting an alpha version out for our clients/business partners — three developers and me, working on gathering requirements, user flow, and QA. We spent the next two weeks revising the user flow, copy, inserting more gift items, and making sure out simple dashboard to log all the data worked properly. Our adrenaline were sky high when we launched! We were going to be the first (based on our research) Facebook app that can do real transactions!

Then, four weeks later, a merely 500 total users on the application. Two “real” transactions. The application bombed. No one wanted to spend money on a Facebook app. Afterall, the Facebook apps dominating the Facebook platform at the time were apps named “Superpoke,” “(fluff)Friends,” “Quizzes” but none of those apps direct transactions. The application topped out at 700 users w/ no additional transactions. We moved on to work on other application projects knowing we’ll need to keep the money coming in.

More than a year later RealGifts and GroupCard were funded by fb Fund that acted in a similiar way — real transactions in a Facebook app. That funding was miniscule compared to the other Facebook app companies like Zynga, SGN, Playfish (acquired by Electronic Arts), Playdom, Serious Business, and Slide. Heavily funded by heavyweight venture capital funding, they all implemented ways to buy virtual good and become (really) profitable for their social games.

People have become more comfortable with the idea of paying for games on Facebook, and we’re working to get as close to 100% in direct payments as we can. The reason why we still have offers is that a large portion of our international users don’t have credit cards or don’t have the capability to pay us directly, so offers are a way for them to be able to still buy virtual currency. — Jeremy Liew, LSVP Blog, Interview with Serious Business CEO

So what happened? How did social games change the behavior of users that were relundant to pay for anything to pay a ton for money for virtual goods? How did the real gifting applications convince fb Fund to fund their business idea? Why did our application fail? Why talk about it now — nearly two years since the project?

You’ll have to wait for my next post.

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• Focus on Virtual Goods Instead of Ads (techstartups.com)
• Send a real gift to your valentine on Facebook (downloadsquad.com)
• Announcing Inside Social Apps 2010 – Coming April 20th in San Francisco (insidefacebook.com)
• Mobile payments firm Boku gets $25M in spending money (mobile.venturebeat.com)
• The money engine behind social games (vator.tv)

This is about winning enough market share and a pay wall hasn’t helped with their apps selection. Run contests to entice developers (Paypal, Amazon) and offer awesome prizes for the best apps. Solicit feedback and iteriate on the feedback you get from developers on how to make your tools and development kit better. Win the time, wallets, and more importantly the trust of developers and your audience. Without them, you have nothing but a soon-to-be-obsolete brick and lines of code — a device and technology capable for so much, yet no magic key to unlock that power.

I spoke to a person at Palm recently on the phone. He gave me a synopsis about Palm and their modile device/webOS strategy. He even bragged about how great their platform is and how it’ll be great for the future of modile devices. He mentioned how awesome their newest phone is (Pixi). But, I think Palm has it all wrong. Even if they believe their technology makes the most sense, it doesn’t mean the mass audience cares. Sure, I took a look at their website to learn more, but the problem is, I have an iPhone and there hasn’t been enough rave, mass adoption, or reason to even consider going to the store to check it out.

The mass audience doesn’t give a crap that uses webOS uses web technology such as HTML 5, JavaScript, or CSS. Nor do they care that the web browser uses WebKit layout engine. Those are things developers care about. The mass audience care about what cool apps they can download, what games they can play, what their friends are up to on Facebook, how reliable the network/phone is in their area, and so forth. Oh wait. That’s what Apple promotes on their advertisements.

Time is ticking. Elevation Partners already put in $325M for 25% stake in Palm (current market cap: 1.56B @ price: $10.96) in the beginning of 2007 plus another $100M in late 2008. And what do they have to show for that? Another straight quarterly loss (10th) and a decline of 5% in # of units in its fiscal second quarter. This past quarter, S&M expenses rose 64% and operating cost rose 21%. The stock price has increased 3x since the beginning of this year because of the hype and anticipation that Palm will become relevant again. But, that’s all it is. Hype and anticiptation. Time is running out — In the AM many shares will be sold because of poor execution and results. Will they ever get the equation of success, right? Before they burn through all their money? Before reality kicks in and investors realize Palm is nothing more than a technology company that can’t figure out how to turn a profitable business?

Here’s the presentation below:

Startup Building 101 –

I also noticed it came in handy when I talked to some of my Farmville buddies:

“My artichokes are choking my profits ” – Farmville buddy

“Yeah, I know. That’s the third worse ROI crop!” – Me

I’m only on level 11 right now so wanted to develop the spreadsheet a little more before putting it out for my friends to use it. But, I promised that I’d get it out, so here it is (Farmville ROI Analysis — Google Spreadsheet)! (It’s in its very rough stages as you can see, but it gets the job done for me.) Some more analysis that I have not done, but would like to add to the spreadsheet are:

• Trees & Animals have one fixed cost whereas plots of land is linear.
• Trees take up less space than plots of land.
• Space taken up by animals vary. Must be factored in to value the true ROI.

Hopefully, it’ll be helpful to all you Farmville fans! And if you find new discoveries or have any comments, feel free to share!

Update: Per the comment below, a much more comprehensive and complete Farmville spreadsheet is located here: http://spreadsheets.google.com/pub?key=rrFQP5AOGa4yUZCL-1VLUyg&gid=9

Now that I’m up and running on my domain and have some free time, I should be blogging. Yet, I haven’t. No excuses.

So with that prefacing this post, I’ve been “social gaming” on Facebook. Partly because it’s FUN! and partly because I’ve been highly interested in this space lately. I want to share this conversation regarding the game, FarmVille:

Joshua: i don’t think it rots on trees If you read the help file, you can leave them on trees for as long as you want.

Me: Thanks for the tip! awesome.

Me: How sad, I’m not buying a tree until I figure out the NPV on the tree investments.

Yeah, we’re big FarmVille fans (and apparently, we’re not alone. Over 20M monthly active users on this Facebook game!) Is what is FarmVille? Well, it’s a SIM-type game where you build out your own farm. Planting crops, raising farm animals, harvesting crops to earn coins, getting your friends to play with you and be neighbors. We think this is pretty awesome game — great concept, attractive game design, fun icons, friends, achievements, and yes, math. I’ll explain the math part in my next post. Stay tuned!

Quick/Interesting Notes

B2C players very search heavy because of cost effectiveness (overstock.com, sketchers.com)

Companies work with B2C companies on better strategy in display

Retargetting (display) very effective and proving very healthy margins used the right way — over search.

AudienceScience (formerly RevenueScience) used to optimize Sketcher display adv.

Own thought: Display will continue to get better and match/better search performance, but effectiveness probably depend on vertical.

More later…

Nearly two weeks ago, at the very last minute, I made a trip to Las Vegas to attend LeadsCon, a highly successful conference held by founder and CEO, Jay Weintraub. It’s a conference dedicated to those operating in the lead generation industry. This is my narrative of the knowledge I picked up in the various sessions I attended. I will try to write on a few sessions, one post at a time.

Background on me: I work in the lead generation/online advertising space as a product manager focused on helping my company expand in its product offerings. I have been fortunate enough to also learn the media buying side (distribution) which allows me to further understand the root issues in building out our product offerings.

Ad Networks and Display

Moderator – Rob Leathern (CEO, CPM Advisors)
Panel – Rob Deichert (SVP Publisher Operations & Yield Management, Platform A — AOL), Dilip Dasilva (CEO, Exponential aka Tribal Fusion), Dave Zinman (VP of Network Management, Yahoo!), Murthy Nukala (CEO, Adchemy)

I was particularly interested in this topic. The purpose of this discussion is a simple. Displayed advertising is really hard to make it consistently work. So, some of the biggest display buyers came to share their knowledge. When you’re in the directing marketing & lead generation space where the only thing that matters is backing out the CPM buy to a CPA/CPL (100% performance, 0% brand), the difficulty of making display advertising work consistently is no exception. Some of the many external factors include:

Traffic quality (who you’re buying), traffic segmentation (who you’re targetting), banner performance (banner creative/design), landing page performance (website destination for clicks from the banner), banner to landing page flow (user expectations), conversions/CPA/CPL (clients stay happy with you). On top of that, a media buyer sometimes face resistance from a large network to complete their requests (ie. pausing campaigns) in a timely/immediate manner. This is the case when the buyer does not have an approved 3rd party ad server (extreme inefficiencies).

In the display space, varying and competing eCPM rates rule and very widly from vertical to vertical and suffice to say, “Display is a heavily operational problem.”

Dilip mentioned that for his company to take on a new advertiser, the minimum price/budget would have to do $10K-$20K month tests at a minimum and goal is to reach $100K/month. He emphasized a shared risk approach. While I don’t disagree with him, most ad networks is seemingly always “testing” new placements and with each new tests run, it could take just one bad test to ruin your margin for the month. The next challenge becomes that even if a media buyer do crack the right combination of banner and landing page effectiveness, it’s only a matter of time where you repeat the process of creating the next new banner design — and the routine of testing and managing the success/margin of the campaign happens all over again.

Murthy gave some great pointers (and was aggressive in stating his systematic approach is the way to crack the display advertising problem): he repeatedly mentioned that an ad network consist of four points: inventory, data, algorithms, and sales. He insists it’s extremely difficult for an ad network to be great at more than one or two items and considers no one much superior than the other. Knowing this, he strongly suggests:

1. Strategy in buying display media must include buying a portion in exchanges (where it’s based on a competitive bidding system and price points are at the buyer’s control ie. Yahoo!’s Right Media).
2. Understand and must consider the end-to-end economics before buying.
3. Develop your conversion funnel
4. Segment your inventory, understand the price points you are paying, determine what segmentation converts and what doesn’t, and quickly pull what doesn’t work.

Take Away:

Display advertising is extremely difficult and heavily operational. There are plenty of varying factors, so as a media buyer (or product manager), the first step is eliminate any of the varying factors that can be automated. The obvious first step is to used an approved 3rd party display ad server so that it gives the media buyer control the stats in real time and ability to swap out poor performing display creative. In the day to day operations, a conversion funnel must be developed where data needs to be as close to real time as possible is accessable. This helps measure user experience satisfaction. At the higher level, in order to have a chance at longer term success, a reporting system needs to be able to bucket data (behaviorial — segmentation) and display in a meainingful way to the vertical you are buying in. By being able to collect and analyze this data, a media buyer will be able to continually get smarter with the traffic they buy.