Does Technology alone makes a Company?


While conversing with a VC analyst, she claimed that she had a team of 21 Ph.D.s to evaluate the merits of a technology. She seemed impressed but critical of their evaluations since they were extremely conservative.  I thought that a heavy reliance on their opinion should not be the right strategy to evaluate a startup’s business plan.  For starters, there are so many technologies within many industries that even 21 doctorates could not possibly cover every underlying technology.  That would be my first concern.

I did remark that technology is one component in evaluating a startup’s business plan. In my simplified format, I describe 5 “T”s, with technology being one T of the evaluation or 20% of the total picture.  The other Ts –Ten-fold, Team, Traction, and Terms – should be incorporated with equal weight. (Note that I discuss these terms in earlier blogs.)  One can allocate points to each criterium and then used a minimum scale to establish a screening process.  In other words, those startups that score over 75 points would be screened further.

I, of course, apply a more rigorous analysis that includes the multiple bullet points in defining “strategy” when closer introspection is demanded. When one views the details, then one can finally make some intelligent decision.  The “technology” is a factor but not the final determining factor in assessing the value of the startup.

Going back to my introduction, one can then realize that a heavy reliance on 21 Ph.D.s might sound impressive at first. But when compared to the other factors, it plays a smaller role. Let’s play some scenarios.

In Silicon Valley, I once interviewed a Ph.D. holding over 50 patents.  His problem?  As an academic, he had never managed a business.   The words, marketing, and finance have not been part of his lexicon.  His technology might be interesting, but to market, technology is another skill set. I remind many people that the best Silicon Valley company, Apple, had been run by a college dropout, Steve Jobs, who had a keen sense of marketing. Wozniak offered the technology but, without marketing and Jobs, there never would have been “Apple”.  In fact, I observed the terrible obsession with patents throughout Silicon Valley.  One such SV company, Theranos, raised over $800 mill. on such IP claims.  What that fiasco – the founders were indicted for fraud — proves is that patents do not mean that the actual patents do work.  Patents alone do no create companies.  Other factors do.

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Year 2017, Conferences, and the Competitive Environment





When sorting through the many badges from 2017 conferences and meetings I attended (and I have had just as many temp office passes as stickers not in this lot), I suddenly became aware how much time I invest to listen from experts in disparate fields from biotech to cybersecurity.  Or the many startup presentations that are soliciting funds. Yet, I don’t regret those many hours.  It is impossible to learn new and exciting trends by just going through websites or Googling.




Conferences, meetups, and exhibits present a broader perspective on trends.  And these events and meetings provide a lot of information in the competitive environment and hints to new technologies.  So this custom to attend the many conferences and meetings applies to potential investors and entrepreneurs. Even Steven Jobs drew his inspiration from such visits, including the Xerox PARC development of the computer mouse.


As the new year begins, I am noting the explosive proliferation of conferences on ICOs and cryptocurrencies.  Is this a bubble or the beginning of a new trend? I have witnessed portfolio approaches to these instruments, either investing the instruments or the companies.  I look forward to seeing what interests me the most.

VC firms sift through hundreds of business plans, sometimes exceeding 1,000.  Out of that many views, VCs only invest in a handful, about 6 or so.  It is a difficult process.  In contrast, the entrepreneur believes he/she is terribly unique – no competition.  That is far from the truth.


Just recently, I asked the co-founder of another company in his space – combining e-commerce and blockchain.  I was very familiar with the other player, and know directly the CEO.  That company has raised hundreds of millions, pieced together different acquisitions, to supply predictive information on the clients’ consumers.  Maybe I spend so much time on the many conferences that make me aware of the other companies out there.  But I also assume that the entrepreneur should be setting the same example of competitive analysis – a major component of drafting business strategy.  Maybe this startup might survive or succeed. Not knowing the potential opponents makes that less possible.

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The Pink Elephant in a Fund Raising Presentation

pink elephantsWhile reviewing the presentation from a U.S. company raising a Series B or C financing, I quickly jumped into the team description and spotted a mistake in the academic credentials of one member of the executive team – it stated that the team member acquired a J.D. (or law degree) from the very same college I attended. I identified this error since my alma mater, the last time I checked, does not grant law degrees, just B.A.’s (with some smaller population of M.A. degrees).

In earlier blogs, I do state that the average investor looks for mistakes. If the startup is looking for any funding, the startup team must review its materials no different from a company filing an S-1 registration. Any mistake, however small, in an S-1 registration could represent expensive, potential shareholder lawsuits.  Why?  Any potential shareholder would conclude that the company misrepresents its critical information to attract funding.  And, in the startup environment, the same sensibility arises from a potential investor.

I don’t see that any different from the level of detail should apply to even startup companies seeking capital.

What would be my initial concern? First, that the name of the team member was simply a “name,” inserted into the team package, who is not truly managing the day to day operations of the company. That individual never bothered to check his background C.V. in this investment package. And, if that is true, what about the other team members? And there is the possibility that the team member is not even aware of the insertion of his name within the investment package.

Another way to look at this mindset comes from a friend, who did considerable due diligence on early-stage investments in Moscow and his comments to me on his experience there.  He related to me that whenever a person visits his Moscow office for an interview for a potential investment, he can claim that he works at a company that may or may not exist, or has a position in a company that may or may not exist, and provides a name that may or may not exist. Again, as I have related before, fundraising is all about credibility.

The banker who invited me remarked that the error was corrected, but how will I forget a presentation that includes a “pink elephant”?

Another mistake or misrepresentation originated from an Indian e-commerce company seeking an expansion round of capital. One slide contained the logos of several well-known U.S. companies like Fedex, claiming a list of clients.  During the conference call with the CEO, I asked whether Fedex and other brand name companies were actual clients. (I became suspicious since its revenues did not reflect that customer base.) The CEO admitted that they were not clients.  I demanded that he remove those logos.

And I recalled my legal work with S-1 registrations on my responsibility to make sure that the information contained in the S-1 was true and correct.  My concern is the possible legal headache of shareholder lawsuits originating from any kind of misrepresentation.  In this case of this e-commerce company, any sophisticated investor can identify these errata. And then he/she would pass on the deal.

Whether the startup company is seeking $500k or $5 million.  The accuracy and veracity of the presentation materials do matter.  I have encountered companies facing frustrating months of reaching out to investors without looking into their own presentations.  One Silicon Valley company reached to over 80 VC firms with faulty materials in its analysis of market shares and growth potentials.  I asked the founder, did anyone reply?  He said “no”.  Now he wasted considerable time and resources that would have been better off by vetting the accuracy of the presentation materials.  He returned to work again for Apple.

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Teams to Attract Investors


A few days ago, a growing VC firm was pitching for additional capital from limited partners, where I was part of the audience.  In demonstrating the criteria for early-stage companies they invest in, and they emphasized this characteristic, the “team” is a major factor in determining a target. Details were not broached.  Nonetheless, I have observed the following qualities to consider within a startup team that can attract investors.

First, do the senior team members have direct experience with their marketing strategy?  Let me demonstrate the opposite example.  At a Palo Alto pitch, a Canadian team sought millions to expand internet services at remote geographic locations where the Canadian Telecom carrier did not service. I asked them a simple question: what was their prior entrepreneurial or business experience? Answer: founding and running grocery store chains!

Unfortunately for that team, I have had considerable experience in telecom infrastructure – from fiber optics to satellite dishes. And that experience has taught me that building any network warrants an experienced, telecom team, that is familiar with the engineering requirements and costs to build that infrastructure. A simple bi-directional satellite dish operation costs about $200k. Fiber optic deployment can cost $1 million a mile in Paris, but should be less — although material — in Canada.  Then there are the legal administrative headaches to obtain rights of way, tower permissions, etc.  Ask yourself, why does Verizon employ thousands of lawyers?  Then, I concluded easily that this was the wrong team.  Any money would go down the drain with this project.

Are there other ways to handle this experience problem?  Yes.  One approach is to hire senior operational executives who have that substantive experience. As an example, the Global Crossing founder, Gary Winnick, had zero experience in the submarine cable business. He worked with Mike Milken on Wall Street bonds. With a million-dollar signup fee as a carrot, he hired the former head of AT&T submarine as COO. And that worked.  The cable company raised millions, went public.

How about the opposite  – a team with no experience in the field that still raises money? That is a recipe for disaster. The best, recent example is the Theranos (Silicon Valley) fiasco.  Yes—Elizabeth Holmes raised plus $700 million for her hematology devices and she was even profiled in business trade magazines (  The strangest thing, clearly underscored by a major WSJ article, was that the senior members, including board members, had zero experience in healthcare. Guess what? Now this company —  after FDA revelations — is worthless.  That is the cost of not having the right senior team members!  Investors clearly learned from that poorly placed investment.

The second characteristic to look for in a team is the depth and breadth of management experience in the sector. Somehow or another, Silicon Valley believes that programmers are magicians who can write code, start a company, and manage it as well. Since the age of 14, I have met many programmers, and I don’t recall that their major interest, beyond looking at a computer screen, was to manage a company with all the subtle business issues faced every day – from financial to legal. If that were so, many would have attended business school. Yet, that seems to be the misleading perception in Northern California. Take a young programmer, place that person in charge of an operating tech company, and see what happens: Merissa Mayer lost over $1.5 billion for Yahoo.  Every decision she made definitely damaged the company.  She influenced the Yahoo Board members to keep her in charge, hired incompetent senior managers who were faithful to her.  She still was compensated with plus $200 million in salary and options, after Verizon acquired Yahoo.  And in spite of the extensive cybersecurity breach. I guess that Silicon Valley never penalizes technical people for incompetence.  But Wall Street does.  When she was considered as an Uber potential CEO, I was ready to short the stock.

One other quality I also noted in evaluating teams is the academic school attended. A quick review of the histograms reveal what teams raised capital and what schools they attended, there is no dispute as to the heavily weighed schools run from the top tiered Stanford U. to MIT. Given that there are over 2,500 colleges and universities, there is no doubt as to what attracts investors – less than 1% of the colleges and universities. I also suggest that startups look at the General Partners and what universities they attended.

And is there an interesting solution for this problem?  I once worked for a crafty and conniving CEO who needed to attract investors quickly for his constantly cash-short telecom company. He knew well that academic impressions mattered to investors. He discovered an unemployed Harvard grad desperately seeking any job in any industry.  His prior experience was financial. The strange thing was that he had zero experience in telecom, but that fault or defect did not concern the CEO or the investors.  In fact, during a due diligence meeting, I heard the investment analyst asking the Harvard grad why he left his major, publicly traded company (without admitting his involuntary departure) for this telecom startup – suggesting that this startup company was very valuable.  So, the Ivy League credential had a favorable impact on investors, even though it was a crappy company. Schools do matter.

So, in summary, what defines a stellar team to attract investors?  Subject matter expertise, management experience, and academics.

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Keys to Effective Powerpoint Presentations to Potential Investors

Woman Presenting

Last week, I observed various presentations to raise funding for software technologies to genome-data analytics.  Virtually all failed to deliver an effective message to attract experienced investors.  Ever since I.T. companies developed software applications that can facilitate putting together powerpoint presentations easily, anyone can stitch a slide presentation in a few days.  Yet many fail to deliver their message effectively since the slides don’t follow the key ingredients to an effective presentation.

Let’s take an extreme example on how precise and key are the design of the slides prepared by major investment or publicly traded companies. A former Wall Street investment banker related to me that her former employer, Blackrock, one of the world’s largest fund, required that she only concerned herself with the color of the background for the slides.  With hundreds of millions at stake, any error or defects on any slide could be a costly proposition, including the right shade of blue. I, myself, have witnessed many presentations from publicly traded company CEOs, who had to persuade institutional investors who had direct impact on the valuations of their stocks. They were well prepared with simple, great graphics, with legible and direct bullet points, and to the point. All were svelte and precise. Maybe neophyte presenters should take heed on how to put together such slide presentations that follow the same guidelines from publicly traded companies. Not doing so will not attract the attention from investors.

I need to highlight the major errors in the slides to young companies or startups. The most common error I noticed was a simple message – what does the company do? Some commentators prefer to ask what problem is being solved, but I prefer just to tell me what you are. And that should be done within the first 2 slides. Although a little wordy, I use as an example the first paragraph from S-1 registrations constructed by the company’s management team, its lawyers, and accountants that serve the same purpose.  Since these introductions influence the investments for millions, they must be carefully crafted:

Big Data Software: “Cloudera empowers organizations to become data‑driven enterprises in the newly hyperconnected world. We have developed the leading modern platform for data management, machine learning and advanced analytics. We have achieved this position through extensive collaboration with the global open source community, continuous innovation in data management technologies and by leveraging the latest advances in infrastructure including the public cloud for “big data” applications. Our pioneering hybrid open source software (HOSS) model incorporates the best of open source with our robust proprietary software to form an enterprise‑grade platform. This platform delivers an integrated suite of capabilities for data management, machine learning and advanced analytics, affording customers an agile, scalable and cost-effective solution for transforming their businesses. Our platform enables organizations to use vast amounts of data from a variety of sources, including the Internet of Things (IoT), to better serve and market to their customers, design connected products and services and reduce risk through greater insight from data. A vibrant ecosystem has developed around our platform, and a growing range of applications is being built on it. We believe that our solution is the most widely adopted big data platform.” (Cloudera S1)

Content: “Snap Inc. is a camera company. We believe that reinventing the camera represents our greatest opportunity to improve the way that people live and communicate. Our products empower people to express themselves, live in the moment, learn about the world, and have fun together.  In the way that the flashing cursor became the starting point for most products on desktop computers, we believe that the camera screen will be the starting point for most products on smartphones. This is because images created by smartphone cameras contain more context and richer information than other forms of input like text entered on a keyboard. This means that we are willing to take risks in an attempt to create innovative and different camera products that are better able to reflect and improve our life experiences.” (Snapchat S1)

OTT Hardware: “We pioneered streaming to the TV. Roku connects users to the streaming content they love, enables content publishers to build and monetize large audiences, and provides advertisers with unique capabilities to engage consumers. We do this at scale today. As of June 30, 2017, we had 15.1 million active accounts. By comparison, the fourth largest multichannel video programming video distributor in the United States had approximately 13.3 million subscribers as of June 30, 2017. Our users streamed more than 6.7 billion hours on the Roku platform in the six months ended June 30, 2017, 62% growth from the six months ended June 30, 2016. TV streaming’s disruptive content distribution model is shifting billions of dollars of economic value. Roku is capitalizing on this large economic opportunity as a leading TV streaming platform for users, content publishers and advertisers.” (Roku S1)

Note how carefully the company is described precisely in a few sentences. These sentences can be further summarized into bullet points and simple graphics.  Nonetheless, each punctuation and word need to be sparse and direct in each introduction.

The second common error is too many words or too many graphics on a single slide.  In the many powerpoints from publicly traded companies, I noted the large typeface, simple messages.  Why?  There are hundreds of analysts in the audience.  Any message can be distilled with carefully chosen words. And, if a multi-billion dollar company can achieve that, I cannot see why any startup cannot deliver the same message with the same spartan style.  Just last week, I saw a startup presentation from the founder of a company in the same space as Betterworks – an HR company.  Problem?  Too much information on each slide.  By the time the presentation was completed, I had no idea about the specific strategy that startup would be implementing to differentiate itself from Betterworks.

The third common error I noted is presenting the most fundamental points addressed by the 5-Ts and strategic outline described in my earlier blogs.  Every major information from the Team to Financials should be addressed in the slides.  That information is key to persuade the investor to be interested in the company, who needs to know the essential elements of the company.  And, if during the presentation any section is left out, the startup will fail to attract any investment. Again, a bunch of startup presentations never showed me any financials last week or how its strategy outperformed competitors.

And one must hit the most fundamental points in a ten minute to a 55-minute pitch.  This point is mandatory. I myself got interrupted with various questions during a pitch.  I still look at my watch and make sure I get to state the fundamentals.  In other pitches, I noticed that even one member of the audience would make comments, sometimes not germane, but I never let that deter the completion of the presentation.  To achieve that, one makes sure one has practiced for a 20-minute window, even in a one-hour time frame.

Again, the presentation is the best selling point for the company to show to potential investors why it is an attractive investment. Not placing enough focus on the quality of that presentation will be costly.

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OPM – Other People’s Money


Other People’s Money (“OPM”) was the movie title about a fictional Wall Street raider, using capital from others to benefit financially. Why am I skeptical about the new fund-raising techniques revolving on virtual currencies from bitcoins to ICOs?  Or even investment funds that focus on tech companies, yet extolling some peculiar strategies to monetization from investments. Simply because of my personal experience of what a tech founder did within a NYC startup in which I was a senior executive and he successfully OPM’d to the distress of investors.

When I read about recent WSJ articles highlighting the aggressive, business behaviors of young executives like Martin Shkreli or Travis Talanick , as the personality traits of rebels/entrepreneurs, I see something else: good old-fashioned, personal financial greed.  Over a year ago, I read about a controversial San Francisco tech startup whose founder purchased a Ferrari immediately after raising millions of dollars for his startup that had yet to develop a product and had no cash flow. Now, in contrast, I have witnessed well-managed tech companies, but I have seen numerous others where I question the motivations for their existence and which practice obvious financial mismanagement for personal gain wi9th the classic OPM strategy.

Years ago, I worked in a telecom startup led by a “revolutionary” tech founder.  Like any startup, it operated in a large empty loft space in Lower Manhattan.  It had the hallmarks of a startup – young, enthusiastic team, many angles to reach its sales.  The founder also expected everyone to take a large cut in average pay with stock options to come (which he awarded only a fraction as promised.) The company claimed to implement a proprietary telecom technology and be the first in the marketplace. The founder also advertised to be a visionary entrepreneur.  Those 2 years as counsel told me so much about the startup world and how financing works.  And has made me circumspect and suspicious of any startup financial claim.

Within 2 months, I discovered that the company had 299 other competitors nationwide in same space. The founder had questionable expertise in telecom. The founder’s first entrepreneurship had nothing to do with telecom, just real estate.  He attracted other investors from his birthplace, Argentina, to invest in office real estate in New York.  (3 years later those same Argentine investors sued him in the federal courts for embezzlement and fraud.) Of course, New York real estate is never a bad investment.  So, how did he fail? But even that avenue seemed to be not enough cash for this entrepreneur.  He also, during his telecom and biotech dabbling, kept selling real estate as far south as Florida’s Fisher Island.  As my office was next to his, I would overhear his telephonic conversations attempting to sell Florida real estate.  He never seemed to be discussing the day to day operations of the telecom company.  Just his other strategies to reach his net worth for millions.

Soon after real estate venture beginnings, he joined forces with a medical researcher with a putative cure for AIDs.  Although NIH, under Dr. Fauci – the World’s expert, never had acknowledged the existence of this miracle cure, the founder was able to raise funding through the Canadian public securities markets.

The telecom company, a Colorado corporation, was funded through a loan by the founder for $250k, and shared ownership between himself and his father in law. (The in-law was critical in selling his shares to third parties whenever a notable investor closed.) That loan was paid back after being funded by a couple of investors within a year.  Yet, the company burnt through so much cash that the company needed constant monthly funding during my tenure. There were times that the company could not cover salaries the next month. In the meantime, the founder paid himself $500k, traveled extensively under the corporate tab, and had the company pay for the rental of an expensive townhouse.  Even adding more to the cash burning, he had the company pay for his 2 nannies as salaried employees. (Under IRS rules, that would be treated as income to the founder.) And, he bragged about not paying federal income taxes as he considered himself to be a citizen of the world, not of the U.S.  (To own any substantive equity in a registered, telecom company, the majority shareholder must be a U.S. citizen!)

Another substantive cash flow problem stemmed from the product pricing. The company burnt so much cash that it was profiled in Fortune magazine, as a symptom of too much froth in investments. Sales did grow dramatically, but that was fueled by a pricing that was far below its transmission costs, outdistancing the competitors.  In other words, the faster it grew, the sooner it burned through cash.  Profitability was not the focus.  Investors just witnessed customer growth.

In spite of these observable defects, the company was able to go public.  2 years later and $2+ billion in debt and equity funding, it never reached profitability and filed for bankruptcy. Another way of saying it, investors lost over $2 billion. The remnants of this company were sold for $25 million. Meanwhile, the telecom founder used this “successful” company to fund other companies, some even funded, in part, by Google, and hit the same stone wall of lack of profitability. Zebras don’t change their stripes and never will with this founder. Recently, he has OPM’d a biotech company dealing with frozen human eggs.   From real estate to AIDs, to telecom, to Internet, and now, to commercialization of “frozen” eggs. Somehow or another, he presents himself to be a visionary genius in many disciplines, something I find hard to swallow.

OPM is a fairly common strategy for these companies.  Bernie Madoff, one of the worst, leeched billions. Common stock was the only currency for OPM.  Today I see alternative funding mechanisms — ICOs and bitcoins —  new approaches to OPM fundraising.  Blue Sky laws and SEC were promulgated to protect individuals and institutions from fraud and misrepresentation. It only works when the individuals are caught. Nonetheless, the subject matter of my experience has never been indicted, and that suggests that only a fraction of these vapor company founders get caught. Interestingly, I have observed the identical strategies by founders in similar companies like Theranos where someone with not even a college degree claims to know more about hematology than medical experts with decades of experience and that company raised over $740 million and was even valued at $9 bill.  When the FDA proved ineffectiveness of its science, it is now worthless. Just recently, I observed software engineers forming an investment fund without one iota of Wall Street experience. The fund manager gets a management six-digit fee for OPM management, regardless of his performance. So, there are many variations to the same practice. Caveat emptor.


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Profitable Internet Business Models


Once, San Francisco was the home of a startup that, well-funded initially, employed a bunch of engineers to realize designs of products submitted on-line.  Besides the ubiquitous, well-designed website, it staffed itself with an army of personnel to realize its plan. A couple of years later, it shut down without much fanfare.  When the founder was asked about why this startup failed in comparison to other website startups, albeit successful, that simply hooked up the engineers with designers, he made a memorable reply: “that is only a website!”  A true and succinct observation of what kind of Internet business models truly prosper in Silicon Valley.

Let’s pick the current juggernaut, Uber.  It is a ecommerce “website” that processes credit cards and other payment options (e.g. Paypal) from clients and pays them the balance, after taking about 20% (Wow!) fees for every dollar charged.  This basic, successful Internet transportation model becomes a virtual, ecommerce conduit between guests and hosts on a website and process payments. There is some programming: simple data processing that calculates arrival time by taking distance between two points, divided by average speed.  No complicated algorithms.  We know that Uber’s geolocation services are generated from its API with the cellphone companies – freeing it from building radio towers and satellite services and hiring countless of engineers to manage the infrastructure. We also know that its mapping system is a license from Google or other geographic mapping system.  Everything is digital, its API with the telephones carriers is free, and the website skims a cut to facilitate information between users and the drivers by the design and management of a functioning ecommerce website.  In simple terms, that is Uber. Not a technological marvel.

Another ecommerce model relies on the peer-to-peer model, in this case, for content creation.  The more content created, the more eyeballs are looking at the websites.  In the case of Yelp, we observed that peer-to-peer reviewers added content without Yelp paying not one dime to peer-to-peer contributors.  In many cases the advertised businesses pay a small fee to be inserted in the website’s database. Had Yelp followed the traditional example of employing experienced and knowledgeable critics, much like cuisine or travel magazines, then Yelp would not be anywhere as successful as an ecommerce website.  Yelp is a simple ecommerce model that becomes an oft visited site for people to view services assisted with the free geolocation information from telecommunication carriers. Yelp becomes today’s substitute for the Yellow Pages (for the younger generation, telco carriers once published a fat book listing businesses by services with ads, addresses and phone numbers), articles authored by restaurant critics, and the GPS.

When did this peer-to-peer contribution model being managed by a website begin? Youtube comes to mind. Users uploaded digital videos, of whatever quality, unto a simple ecommerce website.  Videos would be stored in a data center, which, in today’s dollars, costs somewhere about several hundred dollars per Terabyte. Billions of video minutes accumulated every hour. Then viewers would selectively choose the content. And here is where the “programming” skills would apply, however simple.  The viewers could be informed of the content, viewers could be screened by the contributor, and the site would keep count of the volume of viewers. What a great business model! Youtube founders never created any Content.  Youtube just designed the website that funneled content between contributors and viewers. The Youtube founders did not pay a dime for the video production from the likes of any Hollywood entertainment company, which normally hires video editors, writers, audio experts, directors, union production personnel, and so forth. Google bought this simple website model for billions even though Youtube never charged a dime to viewers or contributors to this peer to peer content accumulation website.  Google bought Youtube with the belief that with so many eyeballs viewing the website, it could build an advertising model based on viewer profiles – Google’s forte.

And this example leads to the other juggernaut, Google.   But let’s look at AOL first.  AOL created a portal to get into the Worldwide Web and added a “community of interest” component for monthly fee.  Simple but imperfect. Simple since AOL charged a monthly fee for access to the Internet.  AOL had a good idea, but failed to perfect it.  Youtube revealed that people are attracted by “free” access to the Internet.  But how to make money from free services?  Google answered that. Google came in with this new approach: search for information for free with whatever tool to access the Internet, profile the users searching, target them for advertising, and charge the advertisers pennies on the dollar.  With huge economy of scale, Google creates huge revenues by accumulating billions of users on its search engine with pennies. ($26.01 bill. Gross Revenues by Q2 2017.)

The other juggernaut, Facebook, is a hybrid of Youtube and Google: Users contribute content for free (peer-to-peer model).  FB uses the content exchanges to profile the users and then target advertisers on the computer screen or smartphones. With over 1.5 billion FB users, it also charges minimal fees to advertisers to generate very profitable revenues.

Why am I addressing these models?  In strategic analysis, the strategist must compare successful companies vs. failures.  I previously worked with a startup that attempted to distribute self produced videos throughout the Internet to inform users about tools to repair products or play guitars or sail a boat. The founder suggested to hire professional videographers to produce the content. I objected vehemently.  Why? Youtube doesn’t spend a penny and has such videos already, whatever quality.  Yet, Youtube was bought for billions. Users are not willing to pay a dime for that content at this level. Moreover, to produce quality content would cost a fortune and would make the whole venture unprofitable. The company would need to hire talent managers, editors, and more – essentially becoming Hollywood studio such as Paramount.  Did Youtube do that?

Not one successful Internet company undertook that strategy to employ an army of personnel to produce content.  That is not a profitable venture for Silicon Valley models. Instead, they invest in data centers to produce reliable websites and transactions, and programmers. Jack Dorsey, the Twitter co-founder, once commented that SV internet models know how to build successful companies by understanding the Internet ecosystem.  He was right. Free and Freemium models generate eyeballs. And then the website charges advertisers or businesses for accessing those eyeballs. Brick and mortar approach doesn’t work.

Food delivery companies, which require huge staffs, are funded alright but then fall flat on their faces whenever they scale rapidly. Look at the recent Blue Apron.  A lot of network advertising, but not enough economy of scale to be a profitable model. Note that when Google and FB did grow, their economies of scale improved.  Not so for labor intensive businesses such as food delivery.  It was worse since the founders did not realize the extensive infrastructure and operations to invest and manage when scaling up.  And so followed that San Francisco company that hired those engineers I described in my introduction.  Truly successful internet companies are simply “websites” with some bells and whistles attached.

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