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Metrics
We like to make our initial investment sometime between the formation of a business and the first dollar of revenue coming in the door. Sometimes that time period lasts a while. In the interim, how do you monitor how an investment is doing? Even after revenue starts rolling in, its helpful to have alternative metrics to monitor the growth and health of a business.
What we do is develop metrics for each investment, usually jointly with the management team, that we will use to monitor progress.
I know that this smacks of the bubble era when public companies were being valued on the basis of page views. But absent revenues, earnings, and cash flows, you need something to work with.
Page views are one metric that we look at. Another is unique visitors per day, week, month. With the advent of RSS, its important to monitor how much consumption happens via that channel.
Most of our companies do something that is more than just content on a website. So we like to identify a company specific metric and monitor that.
In the case of Indeed, we like to watch the number of searches per month.
In the case of Delicious, we like to watch the number of postings per month.
In the case of Tacoda, we like to watch the amount of behavioral data being captured in the TAN network.
We do not attempt to turn these numbers into a valuation. That kind of thinking is foreign to us. I read recently that the Weblogs/AOL deal values blogs at $600 to $900 per inbound link. That would make this blog worth $2.3 million. I am not a seller at that price or any price, but that still seems like a crazy way to value something.
What we do is use these numbers to monitor our investment thesis and make sure the opportunity is playing out the way we think it will. And we use them to find places where we need to work harder on the service to make it better. And we use them to show new hires, new partners, and new investors that the business is on a solid trajectory.
I was emailing with my friend Tom Evslin yesterday about some data he was looking for. I called him a "data junkie". It was a compliment. He wrote back that:
We gotta know whether we’re making this stuff up or it’s real
Exactly.
Web based businesses have incredible amounts of data that they spit out. It is critical that the management team and investors monitor that data closely to keep a handle on the business and its progress. It's a skill we work on every day.
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Posted October 15, 2005 in Venture Capital and TechnologyComments
We love *secondary* drivers of the business... we found these to be the number of bloggers, blog posts, comments, page views, and somewhere way at the bottom of the list was inbound links. They really don't mean much.
However, we came up with this crazy metric... it really became the killer driver of the business.
I stumbled upon it... like just on the treadmill one day rocking out to some Greenday and Killers and I was like "what if we add up all of our costs--like everything from the servers to the bloggers--then we *subtracted* those costs from the total amount of revenue that came in that month. Then you would be left with this number... this wonderful number. We haven't come up with a name for it yet, but we try to grow it each month.
For now we call it "extra money."
I sort of don't even want to bring the metric up in a public forum... but it's just powerful to keep all to myself. So, if you can track these "costs" and "money in" numbers I suggest you do it... because if you have those two numbers the third number --the extra money number--is right at your finger tips!
Posted by: Jason | Oct 15, 2005 12:12:24 PM
Nice, Jason. Kind of interesting, though--what's really new and "exciting" about Web 2.0 isn't really what you can do with it, whatever it is, it's that the venture world returned to their willingness to invest in pure potential and not direct paths to revenue. A lot of bad stuff gets funded that way, as does a lot of good stuff, but I doubt the path to revenue is what a lot of investors are looking for. When scalability is mentioned, I suspect it's a valuation reference and not a revenue model reference.
It seems we're back to quick flips--create great-looking potential, measured by links, page views, clicks, eyeballs--and sell that off to a public company looking for an early competitive edge who will justify it in some way so the markets will continue to hold onto their stock for such speculative buys. We're back to selling eyeballs and clicks, which Google has helped substantiate as a reasonable model, which will last as long as the ad buyers make money from the clickthroughs at a rate on par with or better than direct mail or other DM tactics.
By the way, Jason, I really like extra money too. We have all kinds of charts and graphs and analysis and my favorite is the extra money graph. Funny, though, how that's so closely tied to the page view, visitors, downloads, and links graphs.
Posted by: Charlie Crystle | Oct 15, 2005 3:07:49 PM
Do you consider Alexa Rank as a good metric too? I use del.icio.us and really like it and constantly follow its progress. It has been making a very nice and steady climb in its Alexa Rank every day/week/month now. I wont be surprised if it gets into top 100 or so in the next 6-8 months or so.
Another thing I noticed was that del.icio.us is now being pushed by a couple of other channels e.g. Attensa and Flock. Attensa and Flock only tag to del.icio.us so it is probably seeing a nice bump as well.
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