Brandon Mullins

Niche Social Network Growth, Vote of Confidence

On August 4th, 2008, WePlay announced it’s second round of venture funding of $8.6M, from repeating investors Deep Fork Capital, FirstMark Capital (Pequot Ventures), and high-profile sports stars Derek Jeter, LeBron James, and Peyton Manning. This is excellent news, and an obvious vote of confidence that niche social media and network sites will continue to succeed in the long-tail theory of the broader social media market.

WePlay is a youth-focused sports social network site founded by the late GeoCities’ COO, Steve Hansen. The market for this service is quite large, with approximately 52 million kids participating in organized sports leagues on an annual basis. WePlay is entering a seemingly saturated (or at least, many competitive entities) space, but may be able to differentiate themselves with a slightly varying position in the market via its feature focus and a backing and support of very high-clout sports icons and its partnership with MLB.

As I’ve stated continously, as well has Marc Andreessen, more and more internet users all over the world are continously flocking to social networking services — the broad, top-level sites that people first use in order to get accustomed to the technology and service (and because the large sites have the market awareness to allow this). But as these users poke around in the MySpaces and Facebooks, they begin to realize that this unabashed free-for-all is not quite tailored enough to their individual interests, and these users will and are seeking out social platforms which focus solely on their individual hobbies and preferences. Thus the successes of Flickr, FanNation, Takkle, CafeMom, BallHype, and shortly, WePlay.

From the interested investors, partners, and employees of BookMesh that we’ve been in discussions with, the vast majority of these individuals are still very bullish on the social network market, and even more so on the verticalized ones. Niche social platforms are one of the fastest growing sectors in the general online social media market, with ad spending projected to grow by 75 percent next year. There are now approximately 300 million worldwide users of social networking sites, and growing. eMarketer estimates that by 2011, $2.5B will be spent on social network advertisement, with $900M to be spent on the niches.

The Washington Post has a great article on the niche social network market here, and the New York Times has a great article on WePlay here.

This is definitely a space to keep your eye on.

Xobni Turns Down Acquisition Offer (supposedly): Smart Move

This is slightly old news, but has been bothering me as I read more and more about it in the blogosphere. Here’s my view.

A few months ago, Techcrunch broke the news that Microsoft had placed an acquisition offer of $20 million on the table (in the form of a Letter of Intent) for Xobni, Inc., the email organizer, analytics, and social network tool currently designed as a plug-in for Microsoft Outlook. Xobni turned down the offer (or so the rumors go).

Many bloggers and commenters are heavily debating whether or not this was a sound decision, to essentially walk away from, what seems at first glance, a relatively large amount of money for a relatively short amount of development time. Another argument is that Xobni is simply an extension of Outlook, a mere add-on that Microsoft itself could now design, develop, and deploy with their next version release, essentially “squashing” Xobni’s product, model, and future. In fact, in a Techcrunch poll, 53% of readers voted that Xobni was crazy for walking away from that sum of money, especially since it’s Matt’s and Adam’s first venture.

But not so fast. How can anyone on the outside of this deal accurately assess whether this was a viable decision, with no where near enough inside knowledge to form an opinion? There are a host of reasons why turning down this offer may have occurred:

• not wanting to have Xobni become lost in the Redmond machine of bureaucracy
• Xobni has a much greater vision up their sleeves
• liquidation preference and ROI for everyone involved.
  

Sure, Xobni currently functions solely as as nice value-add to Outlook, but I highly doubt that Outlook is the only email application that Xobni aims to integrate its software into. This is way too short-sighted of a goal for such an intelligent team run by Matt Brezina and Adam Smith (have you read Adam’s blog posts? Incredible). Thus, if Xobni can successfully integrate into Yahoo!, gMail, and Thunderbird, then turning down this current offer may not look quite so terrible of a decision. In fact, it could play out to be a brilliant decision.

Also, look at this from a purely financially viable standpoint: Xobni had raised somewhere in the neighborhood of $5M from prominent VC firms, including Kohsla Ventures, Atomico, First Round Capital. They also raised a round of Angel funding prior, and preceding that, was a part of Paul Graham’s Y Combinator. Each of these funding events took sizable chunks out of the founders’ equity share. If we can safely assume that the institutional investors had included a 1x Liquidity Preference on the $5M investment, and we can safely assume that they invested on a $15M pre-money valuation (completely an estimate), then 25% went to the VCs alone. Of a $20M exit, the VCs would exercise their liquidity preference, taking $5M off of the top. They would then get 25% of the remaining $15M in the common pool, or $3.75M, leaving $11.25M for the remaining angels, founders, etc. Take out Y Combinators’s share, the Angels’ share, and misc. equity share (lawyers, advisors, board), and their really isn’t a whole lot of monetary value left for the original founding team. And if we look at this from a VC’s ROI perspective, an $8.75M payout ($5M from liquidation preference, $3.75M from particpation) on a $5M investment is only a 1.75x return, hardly a successful deal, or at least relative to what was expected when term sheets were signed.

Of course, this scenario could have been the result of the board’s resistance to see the exit opportunity through due to a thirst for much larger returns, even if the founding team was in favor of taking it. If so, it could serve as a lesson learned for entrepreneurs: with VC funding comes a “go big or go home” mentality, one in which acquisition opportunities that would result in satisfactory wealth for the founders are passed by because of the need for large returns by investors.

What Xobni is up to, we can’t be for certain. But given the intelligence of both Matt and Adam, all of their new hires, and the investors behind them, I trust that they have an intelligent strategy backing their decisions, and can reach the $100M+ company they originally set out to be.

Brandon Mullins

Underwater Subway Cars & Sculptures: New business model?

After living in “the city” for one month, I’ve come to appreciate the vast and ubiquitous transportation that shuttles a total of 1.5 billion riders per year to and from their destinations. The means of transportation I’m referring to is, of course, the Subway system. As of 2006, there are 6,200 Subway cars in NYC running across 660 miles of rat-infested track. (Metropolitan Transit Authority)

But as the NYC Transit decides to upgrade and replace these cars, many of which look as though they’ve been gliding down the tracks since 1836, a question begs to be asked: what does the city do with these hunks of rectangular homeless mobile housings? They ship them out to Delaware via container ships to be dumped to the bottom of the Atlantic. That’s what.

As of today, 700 of these 80k lbs. cars have already been nestled deep below the watery surface of the Redbird Reef in Delaware. Why? These abandoned Subway cars double as underwater luxury condominiums for fish, generating fish habitat and coral growth near the shore of the coast. Fish and coral are attaching themselves and moving in so fast that the program is trying to provide more cars. Interestingly enough, other states now want in on the action — currently, NYC provides the cars for free to solely Slaughter Beach, Delaware. Should demand from states rise for these discarded cars, perhaps NYC could begin a bid program which would help subsidize the cost of the new cars. Although, I would imagine a state would have a difficult time justifying the expenditure of its tax-payers’ money towards an old A train from New York.

Could providing habitation platforms for sub-aqua life form be a new trend? Take for instance the Neptune Memorial Reef, the first and largest underwater cemetery, as well as man-made reef. Modeled after “Atlantis: The Lost City,” this reef memorial is home to large, statue-like sculptures 50 feet underwater, 3.25 miles off of the coast of Miami. Within it, relatives can purchase “openings” in certain sculptures which can house jars of cremated remains as a safe keep for deceased loved-ones. Prices range from $1500 - $6000, and the reef is free for anyone to scuba dive through.

I’m not sure as to how many “openings” in this reef there are, but the same value proposition resonates through this concept as the dumping of Subway cars: restore fish habitat and replenish coral growth in what was a barren, sandy area. Through basic research, I’ve found that the Neptunes Memorial Reef has invested just under $1M towards the project, including the sculptures being created, the staff to install them underwater, the boats to get the sculptures out to sea, etc. At an average of say, $3000 per “opening” for an ash jar, that’s quite a bit of dead people to break even on the investment (~ 335). An additional revenue model idea: Neptunes Memorial Scuba Diving, a service which caters to allowing the loved-ones to easily visit the ashes. You watch, it’s coming.

With 70% of the earth’s surface made up by water, perhaps these new underwater landfills and cemeteries are on to something big.

Business Baseball Season Opener

Update: We won. 11 - 6.

Tonight is the season opener for the LE Spartans baseball team. Beginning at 7pm and ending under the overly-bright field lights, our team of startup business talent goes head to head with some Wall Street schmucks at Grand Field in Manhattan. This is not an extended networking event; there will be no business card exchanges, but there’s a good chance there will be a few crying stock brokers sent home with a lowered self-esteem of their athletic abilties.

As you can clearly see, I get involved with company team-building activities for the right reasons.

Angel Investing 101

This past Thursday night I had the opportunity to attend a very informative lecture on Angel Investing, put on by David Rose, at the newly located 92nd Street Y on Hudson Street in lower Manhattan. David Rose has his hands in many various ventures, all streaming through the hub of Rose Tech Ventures. He serves as Chairman of the Board at New York Angels, the leading investment consortium in the New York region. He is CEO & Founder at Angelsoft, a software tool that allows Angel investors to collaborate and discuss together potential investment opportunities for improved deal flow efficiency (now powering 200+ Angel groups throughout the United States).

Okay, enough plugging of David.

While the lecture served mainly as a refresher course for me (I’ve been reading about the process of Angel Investing since I was about 5), it was definitely worth the one hour of my life it consumed. And the free alcohol didn’t hurt, either.

I recommend the book Angel Investing if this Angel investment shinanogins interests you.

Here are some interesting notes:

1. 600,000 new small businesses are formed every year in the United States

2. Where does funding come from?

• 350k get funding from themselves (58.3%)
• 200k get funding from friends & family (33.3%)
• 50k get funding from Angel investors (8.3%)
• 1200 get funding from VC firms (0.2%)

3. Typical Angel investor profile:

• 57 years of age
• Masters Degree
• 15 year entrepreneur
• 2.7 ventures funded
• 9 years of active investing
• 10 angel investments
• 2 exits or closures
• 10% of their wealth resides in Angel investments

4. The Startup Funding Food Chain

• You —> up to $25k (possible bootstrap)
• F&F —> $25k to $100k (pre-seed)
• Angels —> $100k to $250k (seed / start-up)
• Angel groups —> $250k to $2M
• VC funds —> $2M +

5. Angel group stats (per year):

• 7.3 investments per group
• 4.5 new investments
• $1.9M total invested
• $265,926 per round (average)
• $386,963 per company
• $33, 236 invested per angel investor / per deal
• view 30 to 40 business plans per month

6. What do Angels look for? (1% of companies looking for funding get it)

• Great entrepreneur (“betting the jockey, not the horse”)
  • integrity, passion, experience & skills, domain expertise, committment, leadership, vision, “change the world” attitude, realistic, coachable & able to listen
• Scalable business models
• an unfair advantage
• external validation
• low investment requirements ($750 to $1.5M)
• reasonable valuation ($750 to $3M pre-money)

7. Secret Economics of Angels (example scenario)

• $1M spread out over 10 deals
• Investor wants a 3.8x total return on those 10 deals (25% annual return)
• typical 5 to 7 year hold on the deals (until successful exit)
• 5 deals = 0x return
• 2 deals = 1x return
• 2 deals = 3x return
  • lost money on 9 out of the 10 deals in total
• the last 1 deal must return a 30x ROI to make up for the other lossed deals for a combined 3.8x return for investor
• always shoot for making Angels a 30x ROI on your dea

If you’re still awake after reading the above, or even if you just scrolled down to this portion of the post, I again recommend picking up the book “Angel Investing” (no I am not getting paid for this endorsement) for much more detailed info on the topic.