Henrik Torstensson's Weblog

Facebook IPO notes

noreply@blogger.com (Henrik Torstensson) — Thu, 02 Feb 2012 05:07:00 +0000

Some quick notes on the company and the IPO: * Overall: Facebook is an amazing company with some very nice numbers, even if most of them seem to have leaked previously. MAU, DAU, DAU/MAU numbers are amazing. * FB had $1.1 billion in Q4 2011 revenue, compared to $1.3 billion for Yahoo and $10.5 billion for Google * Nice margins and economies of scale with 25-30 % net margin (pre-RSU charges), but if I read the S1 correctly FB will incur $1 billion per year in charges related to restricted stock units over the next two years, likely leading to a net profit of about $1 billion 2012 (essentially flat from 2011), i.e. 10-15 % profit instead of 25-30 % next year. * Mobile is obviously under-monetized. Ads will probably be ok, but a big issue with the Apple Tax as FB's payments business could be stopped on iOS. * It is Mark Zuckerberg's company. The Class A and B shares with 1 and 10 votes make it Mark's and the insiders' company. Probably good for the Facebook service, not necessarily so for new shareholders. * From an investment perspective interesting data but not useful without a price, if the total valuation is $75-100 billion common stock investors don't have an attractive risk/reward profile IMO at 19-25x P/S and at least 75 P/E. Even if one assumes about 100 % growth in 2012. Probably not priced to perfection, but not far from. * I'd give Facebook the benefit of a doubt to build a $20 billion in annual revenue with 30 % margin business, i.e. $6.7 billion in profits. To me that is ca $130 billion in valuation.

SoundCloud raises money from KPCB and GGV

noreply@blogger.com (Henrik Torstensson) — Tue, 03 Jan 2012 02:16:00 +0000

SoundCloud has raised money from Kleiner Perkins Caufield & Byers and GGV Capital. The company raised $50 million on a pre-money valuation of $200 million, according to TechCrunch Europe. Regardless of the exact valuation and financing terms, big congratulations to Eric, Alex & the rest of the team at SoundCloud!

Specialized consumption devices connected to the Internet

noreply@blogger.com (Henrik Torstensson) — Sun, 01 Jan 2012 21:18:00 +0000

Over the Christmas holiday I've gotten a Kindle and an Apple TV. These purpose-built content-over-Internet Protocol devices are interesting as they change usage behavior (and changed usage behavior, mainly mobile, is a major reason why we're entering a post-PC world in terms of Internet connections).

The Kindle hardware seems to be built and optimized to compete with a paperback for reading experience rather than to compete with the iPad or iPhone, but the ability to store multiple books and the connection to a large store with digital distribution makes it so much better than a paperback. I've just had it a couple of days, but I'm pretty sure I'll read more as it is a convenient and cheap reading device.

My favorite new blog of the year: SplatF

noreply@blogger.com (Henrik Torstensson) — Thu, 03 Nov 2011 20:56:00 +0000

My favorite new blog of the year is ex-Business Insider blogger Dan Frommer's SplatF. I think the following things make SplatF great:

- Reader-friendly tempo with 1-2 strong, original blog posts per day
- Charts and graphs to visualize data
- Voice and a smart point-of-view
- Great overall feel to the site made up by its design, text and visuals

Take a look at some of the recent posts:

Priced to perfection

noreply@blogger.com (Henrik Torstensson) — Thu, 03 Nov 2011 08:25:00 +0000

With both Netflix and OpenTable stock prices down around 75 % since the beginning of the year, one could expect both companies to be doing badly. When both are actually doing quite ok operationally (even if the Qwikster detour wasn't Netflix's best moment).

The main reason behind the companies' lower stock prices is that both stocks were priced to perfection with magical valuations of around 100 times earnings. And when the companies didn't turn out to be perfect, the magical valuations vanished.

When shares are priced to perfection, the margin of error becomes really thin. Results not meeting expectations? Valuations can go down 20-30 % in no-time. In addition, public market investors are not getting the same downside protection as late-stage private market investors get. Rather the opposite as free floats are small and insiders control the companies with supervoting shares.

It's worth remembering that Microsoft went public in 1985 with revenues of $172.5 million and 34 % pre-tax profit margins and ended up with a valuation shy of 800 million dollars on its first day of trading.

Having been CEO might be good for a VC, but is not a requirement

noreply@blogger.com (Henrik Torstensson) — Tue, 01 Nov 2011 22:48:00 +0000

Steve Blank makes the case that partners in venture capital firms should have been CEOs for at least a year before becoming partners. In general it seems like good advice for a partnership, but I'm not convinced. Planning to be CEO for only a year, with close backup from the partnership, seems like a bit of a built to flip approach. Given how the history of a startup plays out, a year is not a long time (except if you're YouTube). And it's worth noting that neither John Doerr nor Mike Moritz were CEOs before becoming two of the arguably most successful venture capitalists of the last 25 years.

Microsoft to acquire Skype for $8.5 billion

noreply@blogger.com (Henrik Torstensson) — Tue, 10 May 2011 21:10:00 +0000

I haven't blogged in a long time, but Skype has been a part of this blog for a long time so the announcement that Microsoft will acquire Skype for $8.5 billion warranted a post. From a first mention back in 2003, to comments around eBay's acquisition of the firm, to a note about eBay's sale to a consortium of investors.

As usual, it seems, Skype is fetching a high price, and as usual Niklas Zennström and Janus Friis make a few bucks (a billion dollars or so). On the other hand, at 10x revenue and ca 25x operating profit, the valuation is not as aggressive as some other Internet companies.

Some comments on the deal from Ben Horowitz.

Question: Is Quora a great site? Answer: Yes.

noreply@blogger.com (Henrik Torstensson) — Wed, 12 Jan 2011 22:25:00 +0000

In the last two weeks I've started to use questions and answer site Quora more or less everyday. Both from my desktop and mobile phone, i.e. the site is quite addictive. It's also one of few new web sites that I feel is raising the bar for all online services (not surprising given the founders Facebook heritage).

Quora might only be Yahoo! Answers for the Silicon Valley (and wannabe Silicon Valley) crowd, but for this crowd the company has created something very interesting. If Facebook is about the social graph, Quora is more like a Facebook application in the sense that it uses the social graph and real identities to create something interesting.

Examples of questions on the site:

Which Nordic Internet startups are doing more than $10m in revenue?
How does Spotify split its contribution to artists?
How did AOL make the decision to go to an all-you-can-eat pricing strategy?

As interesting as the questions are, I find the answers and the people who are answering to be the main driver of value. The site really has managed to get a lot of startup people to be active on the site.

You can check out my Quora profile to get a sense of what a profile looks like and what a user can end up doing on the site.

Nordic startup jobs

noreply@blogger.com (Henrik Torstensson) — Sun, 12 Dec 2010 20:42:00 +0000

If you're considering a new job, take some time and review available positions at the following companies. Disclosure, it's companies where I work, have invested or have friends running the companies and not a exhaustive list of all the cool places to work in the Nordics. Feel free to add links to other Nordic tech startups in the comments.

Spotify. Music service. This is where I work. Stockholm, London and more.
Videoplaza. Online video ad serving. I'm on the board. Stockholm and London.
Stardoll. Online game/community. This is where I spent 4.5 years. Stockholm.
This is not our name. Online consumer services, still in stealth. Good friend with founders/management. Gothenburg.
Burt. Online advertising techology. Good friend with founders/management. Gothenburg.
Grey Area Labs. Develops Shadow Cities location based MMORPG for iPhone. Good friend with CEO. Helsinki.

IPOs and company building

noreply@blogger.com (Henrik Torstensson) — Sat, 04 Dec 2010 12:40:00 +0000

Bill Gurley has written a good post on the perceived (and possibly) actual value of IPOs for technology companies.

I think entrepreneurs, early employees and investors create better companies if they have the ambition to build companies that will go public as opposed to being acquired by a larger company. A focus on going public (in 5, 6, 10 years time from founding) creates the need to build a strong company (as opposed to a great product) for the long-term. I also believe it creates and reinforces a predator instead of prey mentality. And that's a very good thing.

Obviously there are opportunities that warrant building a VC-backed company around a product with a trade sale in mind, but in the online services space one should be wary of raising too much money (likely not more than a Series A) if a trade sale is the goal. A strong company that could go public would also become an acquisition target for large technology companies and it can make sense to sell rather than go public, but that should be an effect of and not reason for building a strong company.

In the online industry a bad economy doesn't hold back big deals

noreply@blogger.com (Henrik Torstensson) — Sun, 07 Nov 2010 10:37:00 +0000

While the the health of the overall economy is still uncertain, the health of the online industry seems healthy when looked at through the prism of mergers and acquisitions.

* Mail.ru had a successful IPO in London selling $912 million worth of shares and the share increasing 30 % on day one. Behind Mail.ru is a who's who of international Internet investors (DST, Naspers, Tencent) and the company operates the largest Russian and several of the largest Eastern European online services in addition to holding stakes in Facebook, Zynga and GroupOn.

* Amazon is supposedly going to acquire Diapers.com for $540 million tomorrow Monday. That is its largest acquisition since the acquisition of Zappos for more than $900 million in the summer of 2009.

* Google's head of mergers and acquisitions says Google is open to doing more billion dollar acquisitions like YouTube and Doubleclick.

Small UI changes can make big opportunities become reality

noreply@blogger.com (Henrik Torstensson) — Sat, 06 Nov 2010 18:51:00 +0000

Often it is the seemingly small changes at major online services that catch my attention. Like Facebook's small change of the photo, status update and check-in buttons from the previous use of icons for photos and check-ins and a text field for status updates in its iPhone application.

It likely is a test, but I would be highly surprised if this version doesn't drive significantly more check-ins. The combination of Facebook's massive reach, targeting based on check-in data (among other things) and Facebook's self-service system could make the local online advertising sales billion dollar market opportunity become reality.

The combination of great reach and a self-service system could allow Facebook to sell to small and medium-size local businesses in a cost-efficient way, which historically has been a problem for Yelp, Citysearch and other new local advertising companies (Groupon seemingly an exception to that rule).

The problem for local online ad sales (in addition to high sales costs) has been the lack of great products that a lot of people use. With check-ins and maps there are now (or at least soon) two strong products that allows for local advertising at scale.

Disney, earn-outs and social games

noreply@blogger.com (Henrik Torstensson) — Sun, 19 Sep 2010 16:26:00 +0000

Disney acquired Playdom, maker of Facebook and MySpace games, for $563.2 million (with an additional earn-out of $200 million) in the end of July. Playdom had taken $76 million in venture capital, making it a seemingly very good investment for everyone involved.

Given that Disney's 2007 acquisition of Club Penguin seems to have done quite well and still no earn-out has been paid, the goals for the earn-out are likely pretty aggressive. Late last year Playdom had an annual revenue run-rate of $50 million and assuming good growth this year, it seems like Disney paid 6-7x revenue (excluding the earn-out).

Out of the four largest games publishers on Facebbok, two are now independent (Zynga and Crowdstar) and two are part of companies with other games/media assets (Playfish/EA and Playdom/Disney).

3 data points on online distribution of media

noreply@blogger.com (Henrik Torstensson) — Mon, 30 Aug 2010 17:54:00 +0000

Some additional data points on my post on the shift to online distribution of media. Activision Blizzard, the world's second largest games publisher, reported that more than 50 % of it sales during Q2 2010 came from online channels. Amazon executive Steve Kassel thinks that the company will sell more Kindle books than paperbacks in 2011. Netflix's cost for streaming content rights went from $31 million (first six months of 2009) to $116 million (first six months of 2010).

The Internet is not Western and White

noreply@blogger.com (Henrik Torstensson) — Sat, 21 Aug 2010 12:20:00 +0000

Royal Pingdom has collected data on the top 20 countries in terms of Internet users, including how much potential growth each country (looking at the percentage of population using the Internet) has. The country that surprised me the most was Nigeria, which has 44 million Internet users (slightly less than France, but more than South Korea).

In addition to the raw number of Internet users, it is helpful to look at the number of broadband users, users with mobile Internet access and purchasing power to rank the commercial opportunities in different countries. The list also shine some light on why the investments done by Naspers into China, Brazil and Russia among other countries has been so canny.

Skype prepares for IPO

noreply@blogger.com (Henrik Torstensson) — Wed, 11 Aug 2010 21:19:00 +0000

Skype, like Demand Media, is preparing for an IPO by filing an S1 with the SEC. Unlike Demand Media, Skype is not highly dependent on Google.

Booming ad sales for Facebook from massive user growth and time in market

noreply@blogger.com (Henrik Torstensson) — Mon, 09 Aug 2010 23:56:00 +0000

Facebook's massive user growth in combination with the fact that its advertising sales teams have been in the market for another year or two, has led to a massive increase in spend by advertisers, according to Facebook's COO Sheryl Sandberg.

This is a central aspect when trying to understand the growth of an advertising-driven startup: it takes time to build an advertising sales businesses.

First the company needs to have a site with a fair number of visitors. The absolute number required depends on country, vertical and other factors.

Then the company needs to hire good salespeople, have them meet with advertisers (at the right time in the advertisers' planning/buying cycles), get some initial test orders, prove that the specific online media performs and get the first repeat orders. At the same time, the company needs to hire more salespeople to increase the number of agencies and clients it meets to get more test orders and start more customer relationships.

While the sales team is really getting up to speed, the site is hopefully growing and is still being considered hot among media buyers. When everything fall into place, massive growth a'la Facebook is possible.

Google acquires Slide, invests in Zynga, building game-oriented (?) Facebook challenger

noreply@blogger.com (Henrik Torstensson) — Sun, 08 Aug 2010 14:25:00 +0000

Google has acquired Slide, maker of entertainment apps for Facebook and other social networks, for $182 million. TechCrunch breaks down how the money was split between founders and investors. It is worth to remember that Slide raised $50 million on a $500 million valuation in early 2008. Google's acquisition of Slide becomes a good example of how liquidation preferences make sure later stage investors get their money back when a company sells for less than the valuation at the time of a Series C or D investment.

The acquisition is said to be a part of a larger push by Google into social networking, likely with social games as a primary driver. Using games as the the killer app for a social network is smart, as games can have a single/few player mode that don't require millions of users to be fun. According to reports, Google has also invested more than $100 million in Zynga, maker of Farmville and many other of the most popular games on Facebook.

Demand Media takes first step towards an IPO

noreply@blogger.com (Henrik Torstensson) — Sat, 07 Aug 2010 15:53:00 +0000

Demand Media, the search-driven publisher of eHow and other sites
and domain registrar, has filed a S1 to do an initial public offering. The company has revenues of about $250 million per year and is looking to raise up to $125 million on a $1-1.5 billion valuation.

Search Engine Land goes into some of Demand Media's Google-related risks (the article even mentions the Geosign debacle). The industry often talk about the Facebook platform, but for most online companies, including Demand Media, the Google ecosystem is still much more important as it provides both traffic and monetization.

Why Microsoft didn't get it right until version 3

noreply@blogger.com (Henrik Torstensson) — Sun, 25 Jul 2010 23:26:00 +0000

People used to say that Microsoft didn't get it right until version 3.0 (or 3.11 for that matter). I've had a line of thought that goes something like this on the subject (not entirely polished, so please give feedback).

When a new type of hardware and software combination arrives, a firm that offers vertically integrated solutions (i.e. develops both hardware and software) can initially offer smoother integration and a better user experience than firms in a horizontal ecosystem (i.e. different makers of hardware and software) can. In the 90's and early 00's, that advantage seemed to hold until the horizontal ecosystem came up with a version 3.0 of its software.

In our ever more online world, firms have also been able to connect online services to hardware and software combinations. The best example is probably how Apple combines hardware (Mac, iPhone, iPad), software (iTunes, Quicktime, Safari) and services (iTunes Music Store, App Store) to create a better overall experience.

Another example is how Research In Motion has combined the Blackberry phones with the BBM chat service to create something special that competitors don't offer. One of Nokia's issues seem to be the inability to create a hardware, software and services combination that can compete with the iPhone.

It might be even harder for a horizontal ecosystem to replicate the ease-of-use of a vertically integrated system when it also needs to get the online services right (see Android Market). Especially as major players in the different layers don't fully trust each other, as they've seen how the majority of profits often flow to a few firms (an example being Microsoft and Intel in the PC ecosystem) and few firms want to "take on for the team" to make sure the ecosystem grows strong.

Facebook has passed 500 million active members

noreply@blogger.com (Henrik Torstensson) — Sun, 25 Jul 2010 10:09:00 +0000

This Wedensday Facebook announced that it has passed 500 million active members. That's massive, especially considering that about 50 % is said to log in every day. A nice infographic on Facebook members in different countries can be found at Mashable.

U.S. tech companies Q2 report card

noreply@blogger.com (Henrik Torstensson) — Sat, 24 Jul 2010 10:23:00 +0000

All numbers are in billions of U.S. dollars.

Jobs at Spotify

noreply@blogger.com (Henrik Torstensson) — Thu, 22 Jul 2010 11:55:00 +0000

We're looking for some great people to join Spotify's Premium Sales Team in London. If you know great people or are interested yourself, please have a look the following openings:

* Premium Manager - Campaigns
* Premium Manager - Retention
* Web Designer

I'm also always interested in meeting great and interesting people, regardless of if they're currently planning to change jobs.

The digital media future is (almost) here

noreply@blogger.com (Henrik Torstensson) — Wed, 21 Jul 2010 22:56:00 +0000

In the late 1990's, almost everyone in the media industry went gaga over the promise of digital distribution of media products and services. As consumer behavior change slower than most visionaries want, it's taken almost 15 years to (almost) reach the promised future. Some very interesting data points reflecting the shift to digital distribution of media products:

* Amazon is selling more Kindle e-books than hardcover books. Obviously this doesn't take into account paperbacks, which in my opinion is probably the best reading experience, but it shows a massive shift. In the last four weeks Amazon has sold 1.8 e-books for every hardcover book. With the Kindle going down in price and the iPad and smartphones driving e-books sales, this is a market that should have a lot of room to grow.

* Digital make up 35.5 % of U.S. music sales, with iTunes being the by far largest retailer with 26.7 % of the total market. Wal-Mart had 12.5 % (mostly physical) and Amazon had 7.1 % (5.8 % being physical and 1.3 % being digital).

* Digital downloads were 48 % of U.S. PC games unit volume and 36 % of revenue. The major retailers for traditional PC games were Steam, Direct2Drive, Blizzard.com, EA.com and WorldofWarcraft.com. Major casual game retailers were Bigfishgames, Pogo, Gamehouse, iWin and Realarcade. That is obviously not taking Facebook games like Farmville into account.

With a combination of digital growing (driven by changed consumer behavior, products that take advantage of the medium and better online retailing) and physical having slower growth or even declines, expcting more than 50 % of media to be delivered digitally in 5-10 years seems like a quite reasonable assumption.

Removing friction to increase sales (Amazon Prime example)

noreply@blogger.com (Henrik Torstensson) — Mon, 12 Jul 2010 22:25:00 +0000

Making any part of the buying process easier, i.e. removing friction from the process, will drive sales.

The first version of an e-commerce web site or a media site with a paywall in-front will always have a lot of friction. But with active work a site often double its sales by communicating unique selling points better, making sign-up and payment pages easier to understand and adding additional payment options.

Often most of the work to remove friction is done on the web site, but just having moved to the U.K., I've been able to try Amazon Prime, a way to remove friction from the final stages of the buying process by doing away with delivery costs for individual orders.

By paying Amazon an annual fee of £49, a customer gets next day delivery of the things she buys from Amazon.co.uk without a per item delivery charge. It combines quick delivery and no variable cost.

While Prime is only useful for customers making about 10 purchases or more a year, to those customers Prime takes away the need to even consider delivery costs. The price you see is the price you pay. No extra attention required. Less friction in the buying process after you've found a product you like. For a repeat customer, the process becomes as simple as buying an iPhone app and that must be a good thing for sales.