We are very pleased to announce that Digg and Promote My Site will be partnering to provide Digg's next generation of power user tools. This intiative represents a change in direction for Digg and will be a significiant benefit to the internet marketing community.

Kevin Rose may have said "If you can't beat 'em, join 'em. In the past we've taken the postion that power users and marketers tend to harm the Digg community, so we've taken steps to make sure that their efforts are not successful. But given the economic times, it only makes sense to explore as many revenue opportunities as we can find. Beer is expensive and we can't just rely upon a bunch of teenagers to keep clicking those snorg tee ads to keep the lights on around here. It's time to let the professionals get to work and start generating some real revenue."

Terms of the deal were not disclosed, but insider sources hinted that it was an all cash deal. Under the agreement, Digg will license Promote My Site's previously discontinued suite of power user digging scripts and integrate them into the site in a new product christened the Digg/PMS Suite. For a monthly subscription fee of $99.95, power users will be able to promote their stories on Digg without interference from system administrators or that pesky "Whoa Cowboy" message. Buries, while they will still appear to register on the site, will be ineffective against users of the Digg/PMS Suite and the users will be notified of who is buring their stories. Digg/PMS Suite users will also receive an allowance of 10 "zaps" a month. These "zaps" can be used to ban members of the Digg mafia that only comment and do not submit any useful content to the site. This feature is expected to greatly improve the user experience for all concerned. Futhermore, any previously banned user will be able to have their account reinstated by purchasing a subscription to the Digg/PMS Suite.

A release date for the enhanced Digg/PMS Suite was not disclosed, but it is expected to be in the vicinity of April 1, 2010. In the meantime, users purchasing a subscription to Promote My Site's PMS Social Suite will be in line for a discount on the Digg product if and when it is released.

One of our beta testers is in Oz and sent me this story about Comcast putting a 250G limit on monthly downloads and added this comment:

Here in Sydney we pay $89.95AUD/month for 768K DSL with a 2G limit on combined uploads and downloads. Every 10M over that limit costs $0.25AUD. What in the world are Americans doing on the internet?

Wow. Bandwidth limiting.  And, no, I don't know how you could need 250G/month unless you were watching live streaming moves.  At one/night at 9G per movie, that would about do it, I guess.

25 years ago there were no video stores near me, 15 years ago there were a dozen, and now there are none again. 20 years ago I signed up for AOL (CompuServer was for noobs), 15 years ago they put in volume pricing plans by the minute, 5 years ago they took 'em off, now it is free.

How are ever gonna explain the recent past to our kids?

I was reading a very sad, frank, and wise notice from Russell Beattie about the death of Mowser, his mobile browser project. I know, and you know, that most startups die young, the ones that don't mostly become zombies living on consulting, and the small remaining percentage are bought for peanuts by larger companies lusting after their IP and management team.

But it is still sad.

And before anyone misconstrues anything I am about to say, I've been there, so I am very sympathetic.

The Aftermath

I think Russell can say it better than I can:

Seriously... A salary will be a good thing to have again. I'm *thousands* of dollars in debt to my family and friends, maxed out on every credit card (all of which are in collections), on my last chance for my apartment (if I bounce one more check...), had my car repossessed *twice*, electricity turned off, cellphones switched off, landline canceled outright, and on more than one occasion (this weekend in particular) eaten little more than buttered macaroni as I waited for an overdue PayPal deposit to arrive (3-4 days? Come on!). Having a steady income will be a welcome mental break, believe me.

So, here's the thing, did he make a mistake or, even in hindsight, was this the right way to fund his company?

VC or Credit Card Debt

Well, that's the question, unless you're Guy and have been rich and famous for so long you forget why.

There is no answer. I know that's all very Yoda, but there it is.

The Third Way

Jeff Bezos is supposed to have sat down and gone through all the different items that could plausibly be purchased via the internet (pet food: no) and settled on books.

My last startup we went though a host of things we could startup that had serious FY money potential and that could be started while we were still consulting and earning our basic dough.

You see, we'd both done it the VC way and the credit card way and, since we didn't like the outcome of either, we went for the third way.

India

If I wanted to start a company without going into debt and without selling my soul to a VC, I'd go live in India and insource my project. 

A good mid-level manager who was willing to move to India could easily make $50K USD, which is the equivalent of $400K in SFO.

Take your partner with you, share an inexpensive room. You now have $70K to play with to hire technical people.

Which, in the good old US of A might get you a semi-palatable Flash programmer, but in India one can get a very good technical programmer for $15K.

Bootstrap four or five good programmers and be there to supervise them.

Plus, should things go badly, as they likely will, you now have an impressive resume to take home to the US.

You can rinse and repeat this process in China or Vietnam if you like, but I prefer curry to eel.

Keep A Stiff Upper Lip

Personal advice to Russell and everyone else swimming in the dead pool - it's all very survivable, and likely you'll take another run at the brass ring. I did, and I believe you can catch it if you work hard enough.

Look, this is not something you can write on 1-Apr and have anyone believe it:

Li Ka-shing, Hong Kong billionaire and CEO of telecommunications conglomerate Hutchison Whampoa, has increased his investment in Facebook in excess of $100 million.

Man, that is some walking-around money to throw around. Or away. I know this cat is several billion dollars smarter than I am, but look at the numbers:

• Facebook: 60M subscribers
• QQ: 300M subscribers

What is QQ? Well, I'd say it was the facebook of China, but there is a major difference - it is profitable.

Profitable?

Yep , they had around a 40% operating margin - $224M bottom line off $523 million.

Facebook? Uh, not so much. I've heard estimates that Facebook lost $200M last year on revenue of, well, diddly.

What is kind of interesting to me about QQ is that <15% of their revenue comes from advertising and the rest is ringtones and krep like that.

So there is some real upside left there.

Why Invest In Facebook

I have no idea. Perhaps it gives him some leverage to be a dealmaker, maybe the later investors are getting crazy mad warrants.  Or maybe there is so much money and so few good deals that people are spreading their bets around the margins.

Why is QQ Profitable?

I suspect that the QQ guys went into this thing from day one with plans to make money.

I know the Facebook guys were just "gaining marketshare" (of what?) and "getting momentum" (towards what?) and "achieving critical mass" (I know of what!).

Beware The Bubble

Remember the Time Warner / AOL merger?   Remember what happened six months later?

Well, if you see QQ and Facebook merge to get "synergies" or "global market" then you should probably go long on cash equivalencies. 

I was over on Mixed Martial Arts and saw the best google ad in a long time:

It'd take a long time to make a million bucks at $20K/month! 

But, for some reason, it seemed very apropos given that the topic was Entrecard taking $112K on a pre-money valuation of $998K. It wasn't the odd numbers that caught my attention because that sort of thing is always negotiated and you get some strange round-offs.

It was the odd deal.

First, What is Entrecard?

It takes a bit of time to tease out what is going on since there are no fees, etc. It turns out that their business plan is to get footprint (they are on 6,500+ blogs) through cooperative advertising.

Imagine if instead of getting paid when someone clicked an adsense link on your blog you got a google credit to buy a keyword. Also then you'd have to imagine that you could click on the ads on your site and get paid for that too, but put that aside for a moment.

Short Term Revenue

To bring in short term cash:

Once per day we will allow a larger company to drop their card into the inbox across the entire network. This will not appear on your website anywhere, but rather only in your inbox when you log into entrecard. You will also receive 5 bonus credits for visiting these sponsors. We will also allow for sponsorship opportunities for our system emails and all of our RSS feeds.

Longer Term Revenue

Once the network is very very large:

When the [Entrecard] economy is in great shape, we will roll out a credit exchange for bloggers to sell their credits to advertisers, and we will take a commission.

So you can sell advertising slots (and thus traffic) like, well, like you do today for lots of other people.

A Revenue Model

Since Entrecard has 6,500 blogs in their network and can place an ad a day on each of them, that means they can serve up 2.3M ad/days/year. If every ad/day gets 10 views and they get a CPM of a quarter that is $6K/year in revenue across your revenue.

Which is not bad to start off with, because if you can scale up your blog network to fifteen or twenty million you have some serious dough rolling in.

I'm not dissing 6,500 blogs, but there are probably a million or more created every single day and these guys are getting naught point diddly percent of them. I looked through their "featured" page and didn't see any biggies.

I reckon that this model is pretty much stuck to the bottom end of the market. This is not stupid because that is the biggest part of the market, and if you can serve it right and with low costs, then you can get very very big - see WalMart.

And this "traffic for an ad-a-day" model really works in the bottom end of the market where people live on their sitemeter stats and are excited when they break a 100 for a week in a row.

Why do I say low volume blogs only? Because a big traffic blog doesn't want marginal traffic from other blogs, it wants placed ads (at best) or expensive adsense ads (at least).

Also, as a side note, this is why google bought blogger and why it has always amazed me that adsense isn't a default on all blogs. (Yes, I understand why, but they barely push it.)

You can also see that they aren't exactly ramping crazy revenue or traffic - look at the valuation.

Clearly these guys are not getting valuation based on hype. Facebook is losing money hand over fist and is "worth" billions pre-money to Microsoft (who are not stupid).

So they are getting their valuation based on revenue.

As a side note: this is why I would NEVER have released the details of this deal. Your competitors and the general public can find out a lot from a little.

Valuation Information

Ignore the $112K number because it's really three numbers: $34K in three tranches. So the revenue valuation ends up with the end-of-period revenue of the company - or in a year. Differently put, Andrew Te paid $112K for 15% of a company based on it's valuation at the end of a year.

Nice trick, and that tells us that the Entrecard guys really needed that money.

I know $34K can sound like a lot of money, and if you've hooked yourself up into Amazon's Web Services (like I said you shouldn't), then you've got to write that check every month. I know they're there because their model spreadsheet showed hundreds of thousands of bloggers signing on every month and they (thought they) needed the capacity - and I might have done the same.

For example, if your last 12 months revenue was $50K, then the investor will say: "Five times trailing is a pre-money of $250K."

But if the last month was $8K and this month was $10K, then you'd say "At a growth rate of $2K/month over the next 12 months our revenue will be $252K so our five times leading valuation is $1.26M!"

And if you're hot hot hot then you say, "Our growth rate is 25%/month so our yearly revenue will be $670K and our five times leading valuation is $3.3M."

So, yeah, if you're trying to figure out how strong someone is you can kind of look at their valuation and see what they managed to pull off.

The Devil Is In The Details

One of the things you often see with tranche based investment is some really tough conditions for the seller. Looking at the valuation options you can see that the Entrecard guys fell towards the bottom.

How can I say that? Well, remember that they're really only getting $34K, which is what percent of $250K? Right.

If they use the money to keep paying Amazon and to, say, quadruple their blog base, then, hey-ho, they get the next $34K. And so on.

And if they miss their numbers, I am betting that there is some ugly change of control stuff in there.

Conclusion

Look, I'm not saying they shouldn't have taken the money, and I'm not dissing their business plan. I hope to never be in the position of having to take VC money again, and if I do, I hope it's a big big pile for a teeny tiny piece of the pie.

Earlier this week I had a perfect storm of things go wrong at work, any one of which would have been likely to infuriate me on a normal day. Combine them all together in a row, thrown in a quick round trip flight on United Airline (motto: You Think K-Mart Has Lousy Service?) and then add in several off-diet expensive-but-yucky airport food meals that made me gain three pounds. Result: One Ready To Explode Guy.

Bad Temper = Bad Decisions

I'm about as old as a dinosaur and one of the things I've learned is that I make bad decisions when I'm mad. Really really bad decisions. It's not that I haven't made good decisions when I was tee'd off, I have. It's that the ration of good:bad decreases. (Or increases, if that is what I meant, I have never properly understood how to say ratios.)

Worse Ever Bad Decision Made When Mad

At an earlier startup we negotiated a $12M round with a fund-of-funds that wanted to get some exposure to the boom in tech. As this was right before the bust, you may assume that they got more exposure than they really wanted. But at the time everyone and their grandmother's bond fund was buying into tech startup.

So we negotiated a deal with these cats, and while they were not VC's per se, they were very very smart and tough people, who checked us out from top to bottom, inside and out. Like seeing the doctor after 40, but with a spreadsheet instead of a glove. At the end of several months of work, and tens of thousands of dollars of legal bills (on my side alone, who knows what they spent) we had a rough draft of a contract and were just fiddling with valuation and board seats ($20M or $18.5M, 3 seats or 4.) I must admit that I was negotiating pro-forma and really was already getting a better valuation than I'd hoped and losing fewer board seats.

Then, after it was all settled, I got the final copy of the contract and they'd slipped in warrants for 15% of the company.

What you can't see is what signs he's making with his paws.

I even slept on my answer, thinking that would help me be more reasonable and let me re-enter negotiations.

Not As Smart As I Thought I Was

Because, you see, I'd confused letting some time lapse to letting my temper subside. So the next day, feeling deceived, I called them up and read them the riot act and, basically, told them where they could stick 12 million one dollar bills folded up into tiny little points. Not that you could have fit them all in there, but the piledriver I suggested they rent might have packed a few more in.

Now, this is a very human response to being systematically deceived, but it was foolish on many levels.

Wait, Deceived?

Yes, well, someone doesn't come up with a perfectly worded 4 page section in a contract overnight, with full references to other sections special provisions. So they'd always been planning on putting this section into the document right before signing. And, thus, I was deceived and duped into spending the things that are most scarce in a startup:

• Money
• Time
• Attention
• Energy

Why It Was Foolish

Well, turning down the money because they would be bad business partners would have been fine, assuming one had other options (we suddenly didn't) but turning it down mad was foolish because:

• I burned bridges. I have those guys in my contacts list so I can avoid them because I can only imagine how stupid they thought I was.
• We needed the money. Knowing what I know today, I would have taken the money. Could I have come to that conclusion if I was calm and focused? Maybe.
• Their plan was to manipulate me. They weren't making a mistake in slipping that stuff in. The only reaction where I could have still been in control was if I'd remained calm. So they won as soon as I got mad and started reacting without calm, deep, and mature thought.

Getting Smarter

Now I know that time does not equal calm, and I have learned to recognize when I'm stomping around mad, or even just sitting working on strategy stuff in a rapid simmer. So today I have restricted myself to working on the administrative items that I hate but have to be done: review of next year's health care plan, lease renewal review, reading all the inbound customer comments for the week (yes, I still do that), etc, etc. All things where I might take a to-do, or have to get something done, but all transactional and places where even a bad decision is not disastrous.

And if I'm not better by Monday, I'll know to keep myself out of the game until my head is ready to go there and do a good job.

I enjoyed Don's article on firefighting and it reminded me of something so true we forget it all the time: be careful what you ask for. Or, put differently, people will do what they're incented to do.

Y2K

Back in the days when Cobol breathing dinosaurs roamed the earth there was this problem we were trying to fix and verify all the issues. I had a fat juicy consulting contract to ensure that not only was everything inside a company remediated but that they had failover plans.

One day I was in a plant and I was going through their operations manuals when the plant manager bragged that they'd thought of everything, written it down (early ISO-itis, clearly) and that there was nothing I or an "act of god" could do to shut down the plant.

As I was gazing at this pompous combed over windbag I could see the emergency cutoff swtich for the computer room power. So I walked over, opened the cover, and pushed it.

The entire plant shut down, idling 200+ workers for hours. But in all our planning we'd never thought to test that particular item. I went to eight more factories to test their failover - by the second one they'd all tested and it worked.

I got in exactly no trouble whatsoever because I was being paid to find problems that'd been over looked.

Sales

Sales people may fail to make sales no matter how you try to pay them, but they'll always focus on the shortest line between them and a paycheck.

You want to pay a guy more on new customers? Perpare to lose sales nto your install base.

Pay them to have face-to-face meetings? Watch out for those expense reports because your guys will stack up so-called qualified prospects from morning until night.

You want deals closed? Be sure to specify margin.

So when you tell a sales guy he'll get paid for X, make sure you really want X because you'll get a lot of it.

It's that time of year - tax time for business.  March 15, or, as I refer to it: the day when all that expensive record keeping culminates in an expensive session with your accountant.

Record Keeping

We are pretty careful to keep good records so that we don't have any problem breaking an invoice down, six months later, between $235K in billable work and $95K in reimbursed expenses. Likewise, meals and entertainment are separate from other travel expenses.

We don't spend a fortune on software, and you don't need something super fancy.  A thousand years ago when SAP roamed the earth, destroying everything in its path, I worked for a 250 person consultancy.  We managed a $30M/year organization on Quickbooks plus some custom reporting in Access.  Amazing.

I know a guy who owns a 200 person manufacturing company and he keeps his books 100% on paper.  The only time his information goes digital is when his accountant files his taxes.

I think the trick is to capture everything that happens, as soon as it happens, and then file the source materials away with sufficient notes. 

Planning Ahead

Once there are more than one or two people in the company you need operationally managed finances.  Are you going into a new line of business, such as moving from custom development to selling semi-custom software?  When you were doing your operational planning, did you consider the revenue and tax implications?

Are you taking on a remote employee?  Do you then luck into filing taxes in a different locale?  Are there different record keeping requirements?

The Cost of Lazy

You simply have to keep track of the details as they occur or you will absolutely pay a penalty at tax time.  The penalty may be confusion, or panic, or worse, but there will be a penalty.  Like forgetting your anniversary - you'll certainly pay for it.

It's a cliche imaged image - a guy shows up at the accountant with a shoebox full of receipts.  What is not funny is what happens when you play the game that way.  If you just figure that you'll figure it out this is what is going to happen:

• You will pay your accountant more.  A whole lot more.
• You will pay the wrong taxable amount.  If you have a good accountant, you'll pay more taxes.  Otherwise you'll just owe taxes ... until the IRS figures it out.  Then you get penalties.

Let's say you do $2.5M in revenue and pay $400K in various taxes.  If you accountant has to make a 10% mistake on the upside to protect you that is $40K in extra taxes.  If your operating margin is 25% that means you  need an extra $200K in sales to cover the cost of sloppy book keeping.  Oh, wait, you have to pay taxe on that, so call it $250K.

$250K in extra sales, not to mention the $40K that doesn't go into the bonus pool, is enough to make me plan ahead, keep good records, and have a good accountant.

Don’t they? Good golly, are you telling me you don’t click ads? I click ALL sorts of ads on SEO sites. So maybe I should just say: SEO type folks click ads on SEO sites.

Honestly, that is what I thought this article about 6% of Users Click 50% of Ads was all about. Actually, it turn out that fifty rednecks in TN clicked 2.45M ads last month.

Do YOU Click Ads?

Do you? I was not kidding that I do. When I hit an SEO site (calm down, John Chow!) they have usually done a great job with ad placement and have brought stuff to a place where my eye can actually see it. And so I think: Yes, actually, I am interested in looking at a shared Windows server for that project, hmm, click.

$2.25 right into someone’s pocket.

I can’t help it, the placement is awesome, the focus is good – practically perfect. Ads to the left of me, ads to the right. Even peel-away-ads:

Gadzooks. How awesome is that?

A Lesson Learned

But there is a lesson in there, because I am the most blind guy on the internet. I cannot remember the last time I clicked an ad of ANY type on a non-SEO site. I am talking three or four years back I cannot recall clicking an ad. Buying: fuggidaboudit.

But I do have to wonder: do an of us BUY anything after click-through? I haven’t gotten any windows hosting, thought I have bookmarked some good sites. So am I just transferring money from the advertiser to Joe SEO?

Conversion Rate Explained?

And is that why click-through-to-conversion rates are so strangely low? To me, anyway. There is no way that 6% of internet users are driving so many bazillion dollars of spending. So are these few (and very active!) Lookie Loo’s masking the other ready-to-buy people?

Final thought: what the heck is Google charging us all this money for is most of our traffic is people who will never ever buy anything. Look at us, optimizing landing pages for poorly orthodonted backwoods dialup users and ignoring the soccer mom with a Plum card.

It’s enough to make you nostalgic for banner ads!

I was on the plane coming home and the cat next to me in first got to talking. It seems his son (11th grade) had put up a website extolling the virtues of his plumbing business and they'd actually gotten a customer from a google search the day before.

Needless to say, he thought this was pretty trick. Over the last 20 years he'd spent hundreds of thousands of dollars on yellow pages, bus signs, bench-backs, high-school yearbooks, little-league teams, etc, etc. He said that he reckoned that the average customer cost around $100 to acquire, the average bill was around $115, and costs were around $75. So each customer basically lost $25.

But return business was 60% and around 30% of customers stayed around, basically, forever. And their kids, when they stayed in the area, used his company too.

But he was really excited by the idea of getting a customer for FREE from the internet.

So we discussed the cost of professional website, getting someone to do the needful with directories, google local search, ranking on organic SERPS, buying keywords, etc. He was ready to whip out his checkbook and hire us, except for the minor problem that we don't do that sort of work, but I was able to give him some names.

It's pretty amazing to think about how many other small business people are ready to drop $20K on the table to the first person who gets to them to help them get "free" customers from google search.

Imagine what the Yahoo Store or eBay Store owner would pay - especially since they already write a check for online presence.  And they already know what google search means, but just can't get the pieces worked our or have other things to do.

Amazing - there is a LOT of running room out there.