Editor’s note: More and more mobile app developers are deciding to make apps for Android, even though it still doesn’t have the same reach as the iPhone. In this guest post Kevin Nakao, the VP of Mobile for Whitepages, makes the argument for taking the Android plunge now (as he is preparing to with a new Whitepages Android app launching next week). Follow him on Twitter @knakao

Mobile games publisher Gameloft might have thrown in the towel on Android, but that is a mistake. I certainly understand why they gave up on Android. Since launching in February of this year, our own Whitepages Caller ID app has become a top ten grossing Android application, and yet we’ve seen less than $54,000 in revenue. While our iPhone app download counts are in the millions, our Android app downloads are a mere 17 percent of this volume.

Despite our meager return on investment this year, I believe that the real potential for Android app developers lies in the New Year. Here’s why:

End-To-End Goodness

In addition to being an open platform that facilitates device innovation, Android offers choice and progress when it comes to the marketplace where consumers discover and download applications. While iTunes and The Official App Store are the only places consumers can download apps for their iPhone, Android’s open platform allows merchants like MobiHand and HanDango to set up storefronts, ultimately providing more purchasing options for consumers. Google’s focus on improving its the user experience in its own Android market will also continue to boost revenues for app developers. For example, when the recent 1.6 OS (Cupcake) upgrade provided a much needed facelift for the market, we saw an immediate 18 percent lift in sales for our paid Caller ID application.

Billing Options Get Greener

While Google still has a long way to go in terms of reaching as many consumers as iTunes does, with the power of “what’s hot” and capabilities like in-app purchases, they have begun to enlist an armada of players—including carriers with deep experience in integrated billing—to create better markets for the merchandising and sale of applications. In early November, T-Mobile announced that they will launch their own Android market with integrated carrier billing, giving consumers the ability to charge applications to their phone bill. Also on the Google market roadmap is the ability for publishers to offer subscription purchases.

The low friction of bill-to-phone capabilities for consumers and the recurring revenue benefits of subscription services have the potential to drive significant revenue into the hands of developers. For example, we recently launched a service that allows consumers to text any number to 566587 (LOOKUP) to identify unknown callers and the bill-to-phone conversion rates have been two times what we have seen with the application market conversion rates. Thirty-four percent of our customers selected the unlimited subscription option over a single-use fee.

“Always With Me” Needs to be “Always On”

With the influx of more applications that require persistence—streaming music, Facebook, Skype, IM, & Caller ID—Android’s ability to run more than one application at a time is becoming more important. The “always with you, always on” benefits of mobile will be a key advertising opportunity especially for location-based offerings. Publishers will be able to use Android to generate more revenue by staying in front of users to produce more ad impressions. Advertisers also will be able to reach consumers closer to the point of sale, and take advantage of geo-triggered offers. Higher frequency of usage should also reduce churn for subscription-based services.

T-Mobile Got It Started Right, Verizon Will Unleash the Beast

T-Mobile launched the first Android phone in the U.S., and embraced the open platform. Any other U.S. carrier might have been tempted to meddle, but T-Mobile proved that an open platform would not be riddled with malware and abuse. With Verizon now going big on Android, we will start to see significant uptake. Verizon has 89 million customers with an average Data Revenue Per User of $15.69 to T-Mobile’s 33.5 million customers and $10 in Data Revenue Per User. Sprint has the highest data revenue per user of $19 and 48.3 million customers. In short, Verizon and Sprint will attract many more customers willing to spend more money on Android applications.

Android Needs To Be A Player, Not An iPhone Killer

For the same reason developers support multiple game platforms, browsers, and operating systems, Android just needs to achieve enough consumer scale to justify the investment. As long as Google stays focused on providing freedom in an open and competitive ecosystem, app developers will be rewarded. In just six months, we handily recouped our investment from launching an Android application and expect a significant return next year as Google leverages the reach and power of players like Verizon, T-Mobile, Sprint, Motorola, HTC, Dell, and Samsung to grow its platform.

Think Different

Future app developers should approach Android with more than a simple port of an existing iPhone application. Our initial interest in Android was motivated by innovation and new product features that required integration with core device functionality offered by Android but firewalled on the iPhone. Android’s absence of an approval process facilitates rapid product development and the open platform provides the opportunity to innovate, giving every developer the freedom to compete and earn a place in the consumer’s pocket.

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Editor’s note: Today, being a news junkie requires not just the ability to keep up with hundreds of breaking stories a day, but the ability to redistribute those stories to your followers and news sites. To get some insight into the modern news junkie, we asked Mrinal Desai to share with us how he screens the news in the guest post below. Desai is the co-founder of CrossLoop, but some of you may recognize him more from Twitter or Techmeme, where he tips stories every day—580 of those tips have appeared as headlines since the beginning of this year. You can read his last guest post here.

Like many out there, I have been, am and always will be a news addict. For many news junkies, it is the fleeting, current fix of information about a breaking topic that interests them, only to be replaced by the next headline. They jump from headline to headline, forgetting the one they just read as they move on to the next one.

For me personally, news is not only timely information on the current state of affairs but also a way to take a deep dive, to connect analysis and information together and learn through application.  I am looking for insight.  It could be patterns, it could be knowledge about an industry or it could be an opportunity to become introspective and ask questions.

Keeping this in mind, here is a snapshot of my consumption and distribution of news both offline and online.  I’ll divide the way I screen the news by the screens on which it comes to me.

No Screen:

• I don’t start a day without reading The Wall Street Journal in print
• Currently, I get 4 magazines and I go through them on the weekend: The Economist, The Atlantic, Wired and Fortune. Before they stopped, I used to also get Business 2.0 and MIT’s Technology Review.

Screen 1 – MacBook Pro:

Apps: Twitter, Google Reader, Techmeme and a little bit of Facebook

Twitter: I’ve been a user since January 2007.  Its always on for me. I invest a significant amount of time in figuring out who/what to follow based on my interests.  Today this ‘list’ stands at 489. Building this list is a continuous process and it typically consists of people who can teach or inform me of something, news sources and people I respect and with whom I want to build a long term relationship with independent of business. Of this, I have a column/list/group called “Pigeons” (birdie, early days of communication—you get it, right?).  I read each and every tweet of this group. I have about 75 in this group. 15 of my personal favorites, apart from @techcrunch and all those who write for it @techcrunch/team, are:

@bxchen – Technology Reporter, Wired
@148apps – iPhone App Reviews
@msuster – General Partner, GRP Partners
@jennydeluxe – Technology Reporter, The New York Times
@scobleizer – everything social media
@Learmonth – Reporter at Adage
@jasonhiner – Executive Editor at TechRepublic (CBS Interactive)
@leplaporte – Technology Journalist and Broadcaster
@appadvice – Editor, Webware (CBS Interactive)
@taylorbuley – Technology Reporter, Forbes
@sarahintampa – Writer, ReadWriteWeb
@reckless – Nilay Patel, Engadget
@gizmodo – Everything gadgets blog
@dmac1 – Technology reporter, Business Week
@joshk – General Partner, First Round Capital

You can follow them all in one click on the Twitter List I created called “Fifteen”

Screen 2 – iPhone: I have played with a few iPhone news apps, both paid and free.  These include the mobile apps from the Wall Street Journal and the New York Times , Byline, Fluent News, News Fuse, BBCReader, NPR News, ReadItLater, ZenNews, and News Pro. I also visit mobile news sites. Being a little glued to Techmeme, I was very excited to see its new mobile version for smartphones—the icon took a spot right away on my home screen:

After experimenting and trying them all out, though, my current favorite native iPhone app is Newsstand (iTunes Link) which stays on my dock. Its a $4.99 app but it does the following extremely well for me:

1. Synchs beautifully with Google Reader and is fast.  It allows me to organize my folders, move them up and down and importantly very easily “Mark all as Read”

Below is a snapshot of my Feeds and a folder creatively named ‘Top News” that I keep a close watch on every day.

2) Newsstand has a lot of social goodness to share through Twitter, Delicious, ReadItLater and Instapaper

What’s Missing:
—bit.ly so that I can track data on the links I share as I do on Tweetie 2 with my API key.
—Sharing on Facebook
—Ability to RT or @respond to my twitter stream that I subscribe to as an RSS feed from within Google Reader.

Before social media, I always shared news via email to specific people. Now I have replaced email with these easy tools:
—Twitthat bookmarklet. One click.
—Twitterbar a Firefox Add-on customized with a prefix. One click.

—Google Reader’s Share is connected to my Twitter account. One click.
—Facebook Share bookmarklet or if I want it all on one place, I recommend Shareaholic.

Screen 3 – TV. I do not get my news here since I watch very little TV.

Screen 4 – eReader
I have a Kindle that I use to read books and have not switched from print to this one yet for news. As you can imagine, I get enough news on my other screens all day and like some time away from it.

Below is a visual of how I personally share news and the tools I use. Everything goes through Twitterfeed as my central hub for news going in and out.  Note that lately I stand undecided between Seesmic and Tweetdeck. (Image courtesy: Zurb, click to enlarge).

I spend a significant amount of money on news—4 print magazines, 2 newspapers with one online and iPhone apps.

The only screen I care about:

• well written analysis
• Unique and timely content/information
• Thought provoking story telling
• “Connection” with the writer—literally or figuratively from a style perspective
• Delivery channel. Find me—the “paperboy route” has changed

How do you screen the news?

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For startups, Christmas comes in November. Partners come back from vacation in September and deals start closing a few months later; since the credit crisis deferred fund-raising for most of the past year, November 2009 will probably end up being especially busy.

Redfin is one of the companies that just closed a round. Already the process has resulted in a huge shift in our mindset: from just surviving to building a juggernaut. That shift is one every startup can try on for size, whether it needs capital or not, by asking itself the same basic questions that VCs asked us.

VCs are good at asking questions. They are unimplicated in your dumb decisions, unmoved by your original sense of mission and far less concerned than you that a blunder could bankrupt you. They re-imagine your business in terms of all the other businesses they’ve seen, pulling the arms off one doll and the head off another to create a perfect money-making Frankenstein. And since the stakes are high, the whole philosophical exercise tends to result in action.

Here are the questions VCs asked Redfin that changed how we think about our business.

1. What’s your deadly sin?
Sequoia’s Roelof Botha said he only invests in companies that let consumers indulge in one of the seven deadly sins. He rattled them off with alarming familiarity. “You don’t want to be the site that people should use,” Roelof said. “You want to be the site they can’t stop using.”

2. Where’s the real money?
Venture capitalists’ focus on the size of our company’s addressable market made us realize that half of our potential revenues lay in the eight markets we’ve already opened. “What’s the rush to open Orlando,” a VC asked us, “when you still haven’t cracked 1% share here in Silicon Valley?”

Good question. A startup with 18 months of cash is like Val Kilmer in the opening stick-up scene of Heat, with only 80 seconds to get the bearer-bonds from an armored car; as a detective on the scene later marvels, “they ignored the loose cash.” That’s the way to be about your addressable market: not just greedy, but disciplined. Time is short.

3. What are your unit economics?
The financial statements we look at every month don’t tell us what a small business will look like when it grows up: sure we need to account for all sorts of fixed costs like how much we spend on engineers or maps, but what really matters is whether we make more money from a customer than it costs us to get and serve that customer. So to see if a business works on a large scale, VCs first want to understand it on the smallest scale.

For us, this meant explaining what Redfin made this summer on a single home purchase, with a per-transaction account of what we spent on marketing to get customers ($27), on local data ($153), on customer service ($2,906) and so on. We also calculated how much annual revenue we got for every monthly unique visitor.

We knew our margin before, but hadn’t broken the numbers down into their most easily handled form. This is important. Numbers are just numbers if they aren’t simple enough to act on; a linebacker with a simple playbook can react rather than think during the game. Knowing that the big number is how much we spend on our customer-service team refocused us on making sure we hired the right team and invested in its happiness.

4. What are the explanatory events?
A money-raising deck mostly consists of graphs with lines going up and to the right, scrunched two to a page to make the lines look steeper. The only reaction we expected to our version of these slides was awe. But Roelof asked us to annotate each graph with what statisticians call an explanatory event. What change in our business had caused revenues to shoot up? We claimed that publishing agent reviews had sent conversion through the roof. But when we dug into the numbers, we found the real explanatory event was a change in our service a month before – unlimited home tours. Making a simple picture of a business trend and then correlating that with a big decision helps you understand what levers really move your business. When there are no explanatory events, you’re just getting lucky.

5. Why can’t you grow faster?
The most important question venture capitalists ask is what prevents your company from growing faster. At first, I thought it was a demand disguised as a rhetorical question, asking Redfin to raise projections beyond what we could deliver. But when I got testy, Greylock’s David Sze said, “We’re not asking you to lie.” He just really wanted to know what the rate-limiting factor was.

We cycled through a few lame answers: “We prioritized margins over growth.” “We wanted to be realistic.” Then Redfin’s Sasha Aickin quietly pointed at the headcount line of our projections and said our rate-limiting factor is probably how quickly we can hire top-notch real estate agents. Everyone nodded. We got back from that meeting and began thinking about scaling agent hiring.

6. What are the accelerating effects?
It’s easy to grow 300% in your first year or two, when you’re starting with nothing, and people first hear about your service. What separates a potential colossus from other businesses is the capacity to keep growing at that rate in years four, five and beyond. When Reid Hoffman looked at Redfin, his primary question was whether there were “accelerating effects,” where growth begets more growth. For Amazon, the product reviews and personalization history it captured from its first users accelerated its second stage of growth. For Facebook and Twitter, the community itself constantly recruits new users. For companies like Zappos and hopefully Redfin, it’s word-of-mouth about our customer service. This line of thinking made Redfin focus on our most sustainable competitive advantages: not the usability of the site itself, but the data we gather from visitors to that site, and the rave reviews we get from those visitors who become clients.

7. What’s your secret sauce?
One of the godfathers of venture capital is, we were told, obsessed with secret sauce; the man apparently hasn’t put mayo on a ham sandwich in 20 years. So in preparing for a meeting with him, we tried to think of technology that only we could build. Previously I’d always thought this challenge was silly. Grinders like me believe in the lunch-meat not the sauce; we just try to focus on the right problems, and run faster than our competitors. In this view even Google, if it stopped coding for a year or two, would be caught. But while Redfin has gotten far by being relentlessly incremental—letting users filter property searches by pools or parking spaces—the pressure on us to do something proprietary helped us prioritize game-changing features that we’d put off in the past. We hope to come up with Something Big in 2010.

8. How do you win?
Thinking constantly about world domination can give you a little vertigo. The way I usually get through my day is by limiting my horizon to serving the next few customers, or increasing revenues in the next few months. Which means that even though the story of how we win should be etched on the inside of my eyelids, it’s more often at the back of my mind, as a nagging doubt that I’m focused on the wrong thing.

But the essential job of a CEO is to tell that story, to everyone who will listen, making it better all the time. If you are raising venture capital, that story is by definition highly improbable, involving such an absurd overthrow of the order of things that it’s almost embarrassing to say out loud. Rehearsing the whole narrative naturally focuses you on the holes in the plot.

Just try, for example, to say with a straight face how Redfin wins: we get the best data, and build the best real estate website (maybe). We hire our own real estate agents and pay them to focus on customer satisfaction, not sales (that’s a little weird but sure, why not?). Customers appreciate the difference, and en masse fire the traditional agent who has been sending them a bottle of wine every Christmas for 10 years, giving us 20% of all high-value real estate transactions (no way!).

Way.

*~*~*~*~*~*~*~*~*

It’s hard to express just how much settling those questions has galvanized Redfin to attack the monsters under our bed. Sure, we were dimly aware of those problems before, but we existed in a state of seething, unacknowledged tentativeness. Weeks of contemplating what it will take for us to win prepared Redfin to swallow the red pill, stuff the TaunTaun, hack the Kobayashi Maru. At very few moments in a company’s history does it makes its way so deliberately. Like the recovered patient who saw while sick everything she had always meant to do, we want to make the most of our new lease on life.

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The rapid development of  interesting web services can be attributed to the ability of each successive builder to create a layer upon what others have built.  The existence of APIs and callable web services means that each builder can add value on top.  When you combine this with crowd-sourcing, you effectively pour lighter fluid (in a good way) on this layering process.  The only remaining element required is a taxonomy to insure that the crowd-sourcing creates content that is structured enough to make sense despite coming from many hands.

PublicEarth, a Polaris portfolio company that is launching today, takes the power of API layering, crowd-sourcing, and taxonomy and focuses it on maps. PublicEarth describes itself as a wiki of places, specializing in collecting all those “long tail” places that most other databases tend to overlook.

Maps is an area where I think there has been relative underdevelopment relative to importance, especially in light of all the emerging mobile, social, local platforms.  Everyone I talk to working in this space needs more local data and detail to power their services, as well as, an open crowd-approach to keeping it up to date and granular as possible.

PublicEarth pulls in Google maps, and then applies a customized categorization and set of data fields to each entry.  For example, I went to Collegiate School in Manhattan for high school.  Rather than just having a one size fits all entry structure that allows for simply “reviews,” PublicEarth applies the fields: colors, grade levels, mascot, and size.

Similarly, for Dog Parks, the site lists whether or not there are benches, pick up bags, and areas for small dogs.  Multiply this type of field customization by the seemingly unending quantity of place categories provided by PublicEarth and you have a “wiki for the world.” Notice, also, how on the right side of each place entry is a running log of the changes made by editor users.  The site is open and democratic; everything is open for editing and customization by users.

And then these highly customized places can be grouped into sets that you can share across the web.  For example, here’s a widget featuring elementary, primary, and extracurricular schools in New York that friends and family I know have attended or taught at.  Public Earth is so detailed in its taxonomy that it even has a Culinary School category.

And that use of APIs and layering goes both ways.  Public Earth has a detailed API that can be used to both pull content from and push content into the layer.  I think being able to push content into Public Earth is of particular importance.  There are many stakeholders that want to be able to contribute local map information in individual and bulk fashions to a central wiki-like repository.

Public Earth has already taken feeds from dozens of providers, like CitySearch, Sam’s Club, and SpaFinder, and plans to incorporate many more. So if you want to update information for individual locations, natural attractions, schools, or businesses use the front-end.  And if you have a bulk feed of locations you service in some fashion, you can become a content partner to PublicEarth, or just push them through the API.

If you are interested in using the API during this beta period, email the team, email me, or leave a comment on this post and we’ll be sure to get you one.  Finally, my big congrats to the PublicEarth team.   I think PublicEarth is an important site, and as Mike Hirshland put it “The notion of high value discovery layers over web utilities is a theme in the Polaris portfolio.”  What Brizzly is for Twitter, PublicEarth is for Google Maps.  You can find my profile and contribution on PublicEarth here.

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This guest post was written by Steve Poland, a former TechCrunch writer working on his soon-to-launch start-up InSeconds that allows sites to easily customize each visitor’s experience, resulting in optimized revenue for each visit.

Affiliate marketing is 15 years old this month—CyberErotica is said to have launched the first program in 1994. The adult industry has always been ahead of the curve, but I digress. Despite 15 years of existence, which is essentially an eternity in “online years”, the performance based marketing method is still in its infancy. Sure, there are lots of affiliate programs that exist for many online etailers (and other sites that seek sales, leads and visitors) and $2.1b was paid out last year from affiliate programs, but affiliate marketing is still not as easy as it should be for website/blog Publishers to implement and get compensated for their referrals.

For those that don’t know, affiliate marketing works like this—a company with a product or service for sale pays a referral fee to Publishers (marketing companies) that can drive sales, leads, or visitors to them. The Publisher is taking on the risk here—they might be outlaying their own cash on advertising to promote the product/service, or they are linking to that company’s product/service in the content of their site’s own webpages (when they could be linking to another company instead). The Publisher signs up for an account with the affiliate program and is then given “trackable links” to use in their content, which track referrals back to them. Most etailers have an affiliate marketing program in place—for example, Amazon.com’s Associates program will pay 4%-15% referral fees to you when a visitor of your website clicks a link on your site and makes a purchase at Amazon.com.

Twitter & Facebook Turn Everyone Into An Affiliate Marketer

Most recently, it’s not just websites/blogs that are referring sales, but rather individuals themselves, who are using realtime sites like Twitter and Facebook to influence their friends and followers by recommending products to buy, music to listen to, and movies to watch. These realtime discussions are becoming important sources of referral sales and leads for websites—if someone is asking on Twitter what digital camera they should buy, you bet your ass that Amazon.com wants anyone on the Internet responding to that user’s question to be linking to a camera for sale on Amazon.com (and not Walmart.com or BestBuy.com). Amazon.com wants to make sure that those influencers are compensated for referring people to buy from their website, which thus positively reinforces them to continue linking to Amazon.com product pages in the future.

Everyone with access to the Internet today is a Publisher. They are a voice. This has always been the case, but not the way it is now with Microblogging. Individuals were Publishers on a smaller scale via email forwards, email replies, IM, or most recently blog posts. Blogging broadened individual’s view points (influence) up to a global scale—no longer would they only influence just a few friends in a closed-circuit email, but they could influence the masses online. But blogging wasn’t realtime discussions. Instant messaging and chat rooms were always realtime discussions—but primarily on a one-on-one or small-group basis. Twitter and Facebook status updates, aka microblogging, has mashed the realtime nature of instant messaging with the global scale and voice of blogging.

Amazon.com Pioneers Affiliate Marketing, Again

As an early pioneer of affiliate marketing for site/blog Publishers (holding the patent on all the components of an online affiliate marketing program), it only makes sense that Amazon.com would now become an early pioneer of affiliate marketing for individual publishers—those who simply tweet and comment on their friend’s Facebook updates. Last week, Amazon.com announced they would start compensating individuals with referral fees for using Amazon.com links in their Twitter messages and in their Facebook status updates/comments. Although it will likely lead to more noise (and spam), I think we’re going to see many companies follow Amazon.com’s lead. I also think this has the potential of being a game changer, if some other pieces fall into place—more on this in a bit.

What has shocked me over the years is the number of links in webpages that aren’t trackable links. Most links in content are just regular links out to other webpages, which means that they don’t contain a tracking code that corresponds to them as the referring website—which means that when a sale is referred and occurs on a site that has an affiliate program in place, that affiliate program site doesn’t know who to pay the referral fee to (even though they honestly would like to, because it encourages future linking to them by that referring Publisher). In a perfect world, all the links on all the webpages on the Internet that link to Amazon.com product pages would be trackable links which would earn those websites referral fees for whenever their visitors click over and purchase products from Amazon.com. Ditto for all the links that have affiliate programs in place.

Affiliate Marketing for Publishers Still Not Quick and Easy, Yet

I would go out on a limb and estimate that 99.99% of all links on the web are not trackable links. Why? Because it’s been a bit of a pain in the ass, quite frankly. If you’re a publisher and you’re writing a content piece, you would need to go away from your writing, login to the affiliate program for the website you want to link to (i.e. Amazon.com Associates), and then generate the trackable link for the webpage you want to link to—ensuring that when your visitors click that link, that you’ll earn referral fees from Amazon.com when purchases occur. Not to mention that you have to signup for all of these affiliate programs; some of these programs are handled by third-party companies and become discontinued (making your links dead). And then there’s the money—if you don’t get very many visitors each month to your site, you may only earn a few dollars a month from affiliate programs, which then discourages you from putting forth the time to place trackable links into your content in the first place.

The lack of ease that sites/blogs have had to endure to use affiliate marketing over the years is the same for Individuals now. Amazon.com has said they endorse trackable links by users in social media, but it’s still not easy enough. Sure, you can go over to Amazon.com, login to your Associates account, and a button appears at the top of every product page saying “Share on Twitter”, which then creates a tweet with your trackable link in it, but that’s still one too many steps. People are lazy. More than half of Twitter users are using a Twitter application to do their tweeting. Until the affiliate programs are integrated into the social networking platforms (Twitter, Facebook, MySpace, forums) or the applications used on these platforms (Tweetdeck, Seesmic, Tweetie, bit.ly), this affiliate marketing by individuals won’t take off.

It’s in the interest of the platform (Twitter) to make this easier because it will ultimately allow their users to earn money. It’s in the interest of the users, because it earns them money and reinforces their usage of the platform (Twitter). It’s in the interest of the affiliate program (Amazon.com), because it positively reinforces users to share links to their site. (On the flip side, Twitter might not want to encourage this for fear of making teh spam problem even worse than it is).

“Facebook Credits” could become de facto Virtual Currency with a Facebook integration of Amazon.com

But if you really think about it, Facebook should really be integrating these affiliate program partners into its platform first. Facebook has the most to gain by integrating. You may have heard of the virtual currency system that Facebook has been working on—Facebook Credits. It will allow users to purchase Facebook Credits with cash and then use them in third-party Facebook applications, such as leveling up your character in a game or buying a virtual rose for a friend. To get people using this system, Facebook will likely give away some initial credits to every user, to get them to see how simple they are to use, then get the user to pull out their credit card and refill.

What about a constant refill of Facebook Credits every month to help spur more in-app activity/purchases? That could happen. Even if users were merely earning $0.44 or $1.32 monthly from their link sharing habits, if these referral fees were automatically turned into Facebook Credits, Facebook could really jump-start this in-app currency of theirs (and if they operate anything like Apple, they’ll nab 30% of all in-app money spent). This will work for Amazon.com and other affiliate program participants, as long as the user knows that the 1000 Facebook Credits they earned this month were from their sharing of Amazon.com links. Facebook would love it because these affiliate links would be an income generator for their users, encouraging their users to spend more time on Facebook, and of course there is revenue associated with users spending their credits. Finally, Facebook application developers would love it because they’ll be seeing a steady stream of revenue as well. Meanwhile, app developers and Facebook can steer clear of Scamville-type offers. With affiliate links, you only get paid if someone actually clicks through and buys something. Good referrals get rewarded,while bad referrals get nothing.

Plus, imagine the publicity for a Facebook or Twitter. I can see the headlines now, “Facebook now ‘employs’ 300 million people” or “Facebook lets 300 million people to start earning money just by sharing links”.

This is Now, Get Ready for the Effects

One effect of affiliate programs becoming integrated easily into these realtime platforms (and/or client apps) is that referral fees will go down. Amazon.com currently pays out 4%-15% on referral sales, but that’s because they know only a small percentage of their sales occur now from referrals (because of the lack of ease—and because of the laziness of sites linking to Amazon.com). But with a vast usage of trackable links, then for example, if sales remained flat and 5% of all purchases were referrals previously and now that number becomes 25%, then Amazon.com can’t be paying out 8% referral commissions (unless sales went up 5x too), so Amazon.com would reduce that to 1.6% referral commissions (8%/5).

Yes, this movement is going to turn up the volume of spam noise to us all via our use and searches on Twitter, Facebook, and elsewhere. Those people who you follow may get spammy, but their influence over you will go down (just like those people that send you too many nonsense email forwards). Everyone has a personal brand and if you spam your audience with tons of links, they won’t be listening to you as much.

But what I’m talking about isn’t the future—it’s here now, with Amazon.com leading the way. Those companies that don’t embrace affiliate marketing for Individual Publishers, will lose. If someone is tweeting about the new iPod, that someone is going to link to the webpages that will earn them money.

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Alex believes that the recent coverage about the dangers of advertisements and advertising in the social gaming space is a welcome debate that may help save this industry from what this insider sees as the social gaming equivalent of the “tragedy of the commons,” where all constituents – users, advertisers, offer providers, and app developers – could permanently lose. The recent Zynga, RockYou, and MySpace announcements are an encouraging first step, but more needs to happen.

Unconstrained Markets Can Create Harmful Advertisers

In an efficient ad marketplace, the top keyword usually goes to whoever can spend the most money on it, normalized for conversion. Who can afford to spend the most money? Unfortunately, it’s not always the company with the best product, service, or price; under pure laissez faire advertising, it can be the company that tricks, lies, and steals more pennies out of each customer than any competitor. This often forces ethical competitors to make a very tough choice: roll over and stagnate (or die), or play a similar game. Playing to win means staying microscopically behind the red line or breaking the rules and not getting caught.

Let’s keep that as the backdrop as I tell a sordid story about lead generation on the Internet.

Offers Can Be Done Well and Benefit Everyone

First, “offers” and “incentives” don’t have to be dirty words, and when used properly provide consumers better value. Four quick examples:

1. You’re buying a new phone, say a Blackberry. You get the Blackberry for free if you agree to a 2 year contract with Verizon, but it’s at your option. You get a better price (free, if you’re OK being locked into Verizon), Verizon gets a guaranteed customer, and RIM sells another Blackberry.
2. You need to buy flowers for Valentine’s Day. You’d normally just search for “flowers” on Google, but you happen to already be on McAfee’s website evaluating anti-virus software. You see that you can get McAfee AntiVirus for free if you buy your flowers from FTD, so you shop at FTD. You get McAfee software for free, McAfee gets paid by FTD, and FTD gets a new customer.
3. You get $30 off your order at Amazon.com if you sign up for a (free) Amazon.com Visa card. Amazon gets a higher order since you spend more, Chase gets a new customer, and you get a better value.
4. You have $20 in your shopping cart at Amazon and you are offered free shipping if you spend another $5, so you buy another book and get free shipping.

These real examples work very well for all parties, all of them can be and have been extended to social games, and it would be hard to argue that they are not legitimate. The problem is that they are crowded out by less legitimate alternatives that are proliferating today, a theme which Michael nailed in his last post. Incentive marketing can be a disaster if not done right, though, and the “win-win-win” can turn into “lose-lose-lose.”

Two Examples of Getting It Right In Social Gaming

Example Screenshot: Remember Amazon.com’s free shipping if you spend over $25? No such thing as shipping in online games, but Restaurant City, one of the leading Playfish games with over 17M monthly active users has offered customers a free movie ticket to anyone who selects the $39.99 option

Example Screenshot: PetSociety, Playfish’s most popular title with over 21M monthly active users, enables customers to purchase flowers from FTD during Valentine’s Day and receive 8,000 coins toward their account.

Historically, Offers Have Been Implemented Poorly

Consumers Scamming Advertisers – Cash For Clunkers: Back in the late 90’s and even after the bubble burst, a lot of companies offered you “cash” for signing up for offers (like Blockbuster, Vonage, etc). Netflip (aka MetaReward) scaled to nearly $70M in revenue before being shut down by its acquirer, Experian. The reason? The lead quality was bad – no, atrocious. At one point in 2006, Earthlink was paying $200 to acquire a customer for its moribund dialup business. “Cash back” sites would offer consumers $100 to sign up for a $20/month service, which said consumers would summarily cancel, netting the cash back site a $100 profit and Earthlink a $200 loss. Result: Consumers scammed advertisers, and advertisers ran for the hills, but it took years for this to happen and the ecosystem to devolve.

Advertisers Scamming Consumers – Free iPods: A few years later, and fueled by cheap media, “Free iPods” (often referred to as “Free iPod Scams” and later encompassing “Free [product X]”) grew to over a half billion dollar/year industry. It was a pure breakage model; your iPod would be delivered, but only if you got through dozens of pages of co-registration advertisements and offers. It got scammier and scammier since barriers to entry were low, and whoever scammed customers the most received the most revenue to get more customers. Everyone went along for the ride because every website and ad network benefited in the form of more “free iPod” advertisements. Eventually, the FTC came in. Result: Consumers got scammed, and legitimate advertisers ran for the hills, but this too took years.

Social Gaming Today: Offers Still Done Poorly, But With Hope?

Now it’s 2009 and the age of social networking. Replace “free iPod” with “free virtual currency” and see if you can figure out how this story could end. It’s actually worse because every time a consumer signs up for another offer, he or she earns more currency – yet by the 100th offer, the chance of lead quality being high for non-shopping offers (e.g., Gap, BestBuy, Target, etc) is infinitesimal; somebody who immediately signs up for both Netflix and Blockbuster to earn coins will probably be a bad customer for both. Returning to the “tragedy of the commons,” the network (or app developer) with a conscience for quality who won’t let consumers do 100 untargeted offers will simply be out-monetized by the network/developer who will, and that hurts the long term prosperity of everyone.

Many legitimate advertisers have already started to cut their payouts or bail, such that the “scammy” offers yield the highest returns. Many app developers don’t want to run scammy offers but don’t have a choice if they are to stay competitive in another tragedy of the commons.

Where Are the Complaints?

There’s also a large obfuscation layer between the user and the advertiser. It often looks like this:

The offer providers are companies like Offerpal, SuperRewards, DoubleDing, Gambit, Firecue, GratisPay, and to some extent my own TrialPay, and ad networks are companies like Adteractive, CPAStorm, SearchCactus, Gratis Internet, ClickBooth, Affiliate.com, etc. The app developers often rotate different offer providers, and the offer providers often rotate different ad networks, even though the user at the beginning and the advertiser at the end stay constant. This makes it easier for users to scam advertisers, harder for offer providers to correctly track completions (there are more links in the chain to break – many people sign up for offers and are not “credited”), and easier for scammy offers to keep resurfacing such that the game publishers don’t always know what’s going on. It’s the price they pay for higher short term revenue.

Moreover, user complaints are often directed at the advertiser since the offer provider and ad network are relatively invisible in this chain, which is why you’ll hear many app developers and offer providers claim they get no complaints even though scammy offers collectively yield tens of thousands of complaints to various attorneys general, the FTC, and internet message boards. Despite this clever obfuscation, it’s still bad for the game publisher; users have less money to spend directly (since they had a chunk of change “scammed” away), and ill-will is bred towards the game publisher.

To Prevent Further Damage, Here’s What Needs to Happen

It doesn’t have to end this way – there are numerous legitimate forms of incentive marketing (see my initial four examples), but they’re not as profitable on a short term basis as allowing users to scam advertisers 100 times, or allowing advertisers to scam users several times (even the most naïve users get the hint after a few interactions). This has been tough for my company because we’ve felt the only way for us to “win” was not to play the game, and focus on higher quality and sustainability. That’s ok because only a small fraction of our revenue comes from social gaming, so we aren’t desperate to monetize at any cost, but I’d hate to see the industry implode.

So how do we emerge from this sad state of affairs?

1. Market forces (hopefully). It’s about quality and not quantity. At some point, there may be an inflection point where the “legitimate” offers (shop at Gap, shop at BestBuy, etc), shown ONLY to the “legitimate” users, actually outperform scamming by users or scamming of users. This is because a disciplined approach yields higher quality, and advertisers reward higher quality with higher payouts. One reason why QuinStreet, a leading performance advertising company, beat its competition over the past decade was because it focused on the quality of its leads.
2. Regulation (hopefully). Facebook cracks the whip and bans app developers who show scammy offers. I think most app developers would welcome this regulation as they don’t like this stuff but have no choice if their competitors do it.

Actions Needed Today

The solution is a mixture of both. Having Facebook crack the whip does nothing to solve the problem of users scamming advertisers, which imperils the whole ecosystem. Indeed, we work with companies like McAfee and Skype, assiduously measure our quality because we work directly with the vast majority of our advertisers, and we have seen the tremendous volume (and often abysmal quality) of incentivized social gaming traffic sour some advertisers to the point of throwing the baby out with the proverbial bathwater.

The problem is similar to click fraud in search engine marketing, and the solution is similar:

Advertiser Feedback Loops: Offer providers need to establish direct relationships with advertisers and create a quality feedback loop. The vast majority of our advertising deals are direct, and we insist on feedback loops (did the user “quick cancel” a trial?) so we can eliminate bad sources of traffic. It doesn’t mean that all of our traffic is perfect, but we spend a tremendous of time eliminating the negative externalities, which provide for better unit economics. App developers who care about quality might even want to consider working directly with advertisers, lest they receive the lowest common denominator of payouts from offer providers who don’t focus on quality.

Limits on Offers: There should be strict limits on what users can sign up for – not by law but by rational self-interest, since this will yield more long term revenue. The vast majority of our “alternative payment” business revolves around letting users pay for an item like McAfee VirusScan by transacting with one and only one advertiser of the user’s choice. This increases the quality, which lets advertisers pay us more, and in turn lets us pay McAfee more. Advertisers will pay more if they recognize that fraud is lower and quality is higher, just like with search engine marketing. Multiple offers can work (e.g., retail shopping at different stores) but it’s much more complex in lead generation.

Game Publishers Should Insist on Long-Term Partnerships: Game publishers who think about long term quality (and don’t swap out providers, where the providers don’t swap out networks) will make more long-term money – partially because they won’t burn as many customers, but primarily because quality breeds higher payouts from advertisers.

Let’s hope we can solve the tragedy of the social gaming commons. Virtual currency is a multi-billion dollar industry growing at a massive rate, and reckless short term behavior can threaten an even more prosperous long term future.

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Did you know how Mark Zuckerberg supported Facebook in the early days, before he got venture funding? Casino ads. And how about those advertisers who were making over $100,000 a day selling Acai Berry and other weight loss products – they are friends of mine, pioneers of new advertising channels. You see those ads saying “Inbox (5). Nick, someone in San Francisco has a crush on you!” (with your name, profile picture, and city in the ad). I generated millions of dollars from these offers on Facebook – I am not proud of it, but it was very lucrative.

I will walk you through how these online scams work on Facebook and other social networks – the mechanics of how the money is made, some of the people involved, and who is actually clicking on ads. If you’re reading this article, there is a good chance that you are not the type of person actually clicking on these spam ads, but are you curious as to who actually is?

In June 2007, Facebook opened up their application developer platform so that anyone could build games on top of the social network. By having access to user data, game developers could instantly make engaging, viral games. Rate who is hottest among your friends, share quizzes, race cars, grow vegetables, and so forth – all with a click of a button. Users in one click gave the game permission to access their profile data and they didn’t think twice about it.

Facebook hadn’t consider what was possible when the game developer passed on user name, profile picture, and personal details on to an advertiser – and the kind of deceptive ads that were possible.

These ads looked like they were from Facebook- the blue button, white background, same font. And, of course, they had your profile picture, your name – plus that of your friends, in the ad. If you’re a 15 year old girl, would you know what’s being served by Facebook, the game developer, or the ad network? These same offers have been running for years on MySpace, using tactics such as fake Windows system messages and pop-ups.

But the perfect storm being able to dynamically insert user data into an ad, disguising the ad to seem like part of the application, lack of enforcement by the social networks, and billing the parents’ cell phone – well, it’s no secret what happens next.

By early 2008, the platform was generating 400 million impressions a day, as people poked, bit, slapped, kissed, and drop-kicked each other to the glee of a college-age crowd of game developers. These developers weren’t professional corporations – they are college kids who build a game for fun over the weekend and now discovered they could make over $10,000 a day in ad revenue. Yes, we wrote some big checks. The numbers today are much higher. Given the choice of making money versus being ethical, these kids chose money in nearly every instance.

When the Facebook platform first launched, developers used Google AdSense, which was paying 10-15 cent eCPMs, meaning that developers were earning 10 to 15 cents for every 1,000 ads they shown. But soon, ad networks, such as the one I operated, stepped in to show that by using social data and some clever ad copy, we could raise this to well over $6—that’s 60 times better than AdSense. AdSense was getting a 0.1% CTR and earning 15 cents a click. Our ads were getting up to a 4% CTR and also earning 15 cents a click. You do the math.

Believe me, I tried to do honest optimization—running legitimate flower ads on Valentines Day, Walmart ads on Cyber Monday, auto insurance offers on car racing games, and so forth. For months, I went through over 150 offers across a dozen networks, systematically testing offers, ad copy, targeting, creative templates, and so forth. I couldn’t get a single one to work. And in a previous life I worked on Yahoo!’s internal analytics team—our job was to optimize traffic.

I finally came to this realization: People on Facebook won’t pay for anything. They don’t have credit cards, they don’t want credit cards, and they are not interested in shopping. But you can trick them into doing one of three things:

• Download a toolbar: It could be spyware (such as Zango) or something more legitimate, such as Webfetti or Zwinkys.
• Give up their email address: You’ve won a “free” camera or perhaps you’ve been selected as a tester for a new Macbook Pro (which you get to keep at the end of the test). Just tell us where you want us to ship it.
• Give up their phone number: You took the IQ Quiz, so give us your phone number and we’ll tell you your score. Never mind that you’ll get billed $20 a month or perhaps be tricked into inviting 10 other friends to beat your score.

Method #3, getting their phone number, has been the most lucrative thing on Facebook, even more than the fake weight loss offers, for the last 2 years. As an ad network, we were at the mercy of what the game developers want—more money. Here’s what ad networks struggle with—to either run what ads make the most money or else be forced out by other ad networks willing to be shadier than them.

Publishers (game developers) chose whoever makes them the most money.

And that led to things like:

Showing personal data on landing pages: This got a couple ad networks banned—they took the user name and images and put them on landing pages, which increased conversion. This is the equivalent of steroids in Major League Baseball.

Cloaking: This is when you show a different page based on IP address. We and most other ad networks would geo-block northern California—showing different ads to Facebook employees than to other users around the world. One of the largest Facebook advertisers (I’m not going to out you, but you know who you are) employs this technique to this day, using a white-listed account. Our supposition is that it makes too much money for Facebook to stop him. Believe me, we have brought this to Facebook’s attention on several occasions. Here’s what this fellow does—he submits tame ads for approval, and once approved, redirects the url to the spammy page. To be fair, players like Google AdWords have had years more experience in this game to close such loopholes.

Sharks who smelled blood: I was contacted by every major ad network to either run their offer and/or help them optimize their ad platform. One CEO (not saying his name, but they’re on Comscore’s list of the top 25 ad networks) threatened physical violence if we didn’t cooperate with him. I got wined and dined like you wouldn’t believe. That’s how much money was at stake—whether on the game inventory or the self-serve ad platform.

Weak enforcement: Paul Jeffries, who enforced (or didn’t enforce, depending on your view) the platform rules, wanted to allow a laissez-faire economy, stepping in only when the violations were so egregious that his call center was getting flooded with complaints. He called me into a meeting and told me that my ads were costing him more in customer service than any revenue I was possibly generating. That pre-supposed that he knew what we were generating – in the high 5 figures a day. And most of that was profit, since we paid out only a fraction of what we earned. Remember that we had to beat only what Google AdSense generated.

There was no way that Facebook—and definitely not the Federal Trade Commission—could keep up with the “innovation” happening. Witness the virtual currency scam, where users complete the offers mentioned above to earn points in a game. It doesn’t take a genius to know that the quality of such leads is garbage—these users are filling out forms just to get the points.

They sign up for Netflix, a platinum credit card, get an auto insurance quote, whatever. The industry term for this type of traffic is called “incentivized”. The underlying advertiser is paying for these leads much like they would if they were coming from paid search. They may be told they’re getting incent traffic—or maybe not. Or maybe the ad network, the middleman between the advertiser (company paying for traffic) and publisher (source of traffic) is mixing PPC, email, and incent (also called social) traffic to hit certain quality thresholds.

Either way, the advertiser is usually blind—they can’t see the referral data (which is understandably masked) and they probably can’t figure out what’s going on anyway.

The three major ad networks that deal in incentivized (or virtual currency) are OfferPal, SuperRewards, and Q Interactive.

OfferPal is run by Anu Shukla—she and I have sat down before, where she flatly claimed that most of her offer inventory was unique (it was actually brokered from MemoLink, a company down the street from us in Denver). Ms. Shukla also touted her optimization technology, but couldn’t discuss it because of the proprietary nature—I’m sure you understand. You can watch her video with Arrington to judge for yourself.

SuperRewards is run by Jason Bailey (aka ChickenHole), who was able to quickly morph himself from Millnic Media to this new company. This fellow would call me up and yell at the top of his lungs, as I wouldn’t refund his money for setting up multiple accounts to game our network. I did refund his money, only once he agreed to a ban on our network.

Q Interactive is the quietest, but largest player of the group. Formerly coolsavings.com, it’s run by Matt Wise, and is, in my opinion, the most reputable of the bunch. They have Fortune 500 clients and a more massive bankroll and sophisticated technology platform. You won’t find information on their virtual currency platform, as they work with large publishers only.

The offers across all of these networks are similar. There is a lot of money to be made if you’re a game developer on the MySpace or Facebook platforms, so choose your ad networks wisely. Ad Networks are not going away soon, as the big brands aren’t there yet and someone must fill that vacuum.

In case I have thoroughly disillusioned you of all social advertising, let me prognosticate about a slightly brighter future:

When any new platform opens up, the spammers are there first: Traffic is cheap and their untargeted offers are profitable. But as legitimate advertisers come on, they bid the price of traffic up and squeeze out the spammers. The most powerful bit of social advertising, unlike traditional PPC, is the ability to target by interest and by location. And local represents 74% of Facebook’s ad revenues in 2009. That’s a deceptive stat, as it likely includes dating, which is technically “local” – but the point still stands.

Facebook will either clean things up or become a MySpace: Users loved the “trust” and “clean look” of Facebook. I believe Facebook will put controls in place on their fledgling platform, as told to me by the executive in charge of their online marketing. I honestly believe from my meetings at Facebook, that they’ve all drunk the Zucker-koolaid and are putting the user experience ahead of earnings. That’s why, if you’re a UK resident, you’re not seeing those sexy Russian dating ads from a couple months ago—but man, were those profitable. But you may continue to see these girls:

Deceptive ads will be gradually replaced by trusted ads: The underlying premise of all the advertising techniques we’ve discussed so far is that trickery is profitable. Fool them into thinking the new friend request is from Facebook, lie to them that the miracle skin crème is actually free, tell them they’ll earn points if they just click this button – which then puts their email address on a list that’s resold to the top spammers in the world. Incidentally, if you hate someone, sign them up for one of those free offers – it will burn their email to a crisp. Just kidding – don’t do that.

The local and big brand advertisers are slow to react, but will eventually shift their ad dollars to Facebook, as they figure out how to advertise effectively. Facebook is the “other Internet” and represents 25% of all pageviews in the US. What’s possible right now:

Imagine getting an ad on your birthday, saying “Happy Birthday, Nick! Mention FBCAKE and get a free slice of cake today at Jim’s Coffee Shop” (yes, you can target people on their birthdays).

What if you’re a B2B company and want to hit small businesses? You can target by job title and company. That’s not possible in traditional PPC, where a search for “massage” can be a consumer with stiff muscles, a student looking for a massage school, or a practitioner looking to buy massage supplies.

What if you’re Maggianos and want to target folks who like Olive Garden? You can hit precisely those fans—and even narrow down to where they live, how old they are, and if they are married. Then send them to the nearest location to book their wedding anniversary party.
 Are you a Denver liposuction doctor and want to target middle-aged females in upperclass neighborhoods who watch “Desperate Housewives” and like to eat chocolate?

What if Farmville could be sponsored by Albertsons and offer real fruits and vegetables on sale? Wouldn’t that be more powerful than clipping coupons from the daily newspaper?

It’s going to take a few years, but these legitimate advertisers will push out the scammers and Facebook will put more rules in place. Enforcement will tighten, but spammers are clever with shifting their entities, enough to make us all “dizzy”. We said that when these platforms first launched, earnings were in the 10 to 15 cent range. Then spammers raised the bar and could afford to pay $6 per thousand impressions (or about 20 cents a click) for the same inventory. But when the legitimate guys come with the hyper-targeted local ads, they can afford to pay $10 or even $50 per thousand impressions for that inventory. The spammers will be forced out of this particular game and onto whatever is next.

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Four months before my latest book hit store shelves, my publisher wanted to change the title. Viral Loop might be catchy, and reflect what the book is about—and isn’t that what a title is supposed to do?—but Hyperion worried that some readers would be put off by the word “viral.” Would they shrink away for fear it was about “swine flu”?

The book looks at entrepreneurs who built multimillion- and in some case billion-dollar businesses from scratch by incorporating virality into their products and businesses.

Many iconic companies of our time, including Facebook, Twitter, YouTube, eBay, PayPal, Flickr and rising stars like Twitter are prime examples of a “viral loop”—to use the product, you have a strong incentive to spread it. At some point, as the number of users doubles, then triples, the company achieves what’s known as a “viral loop,” when the product spreads even if the company does nothing to promote it. The trick is that they all created something people really want, so much so that their customers happily spread the word about their product for them. The result: Never before has there been the potential to create wealth this fast, on this scale, and starting with so little.

Fears of swine flu as a reason to change a book’s title may sound inane to TechCrunch’s audience, but from Hyperion’s perspective you are anything but representative of a mass audience (sorry). Every publisher wants to maximize its chances of sparking a bestseller. The challenge is to create a title that would not only appeal to those in the know but also induce a regular human being (read: non-geek) browsing the stacks in Barnes & Noble to pick up a copy, sample text and carry it to the checkout aisle. (Insider’s tip: That’s why editors place such great emphasis on the first 50 pages of a book.)

Hyperion suggested we call the book “Share,” because that’s what Web-based viral dissemination is, when you get down to it: Users sharing links, memes, observations and ideas with one another. Since I would be following Wired Editor-in-Chief Chris Anderson’s Free in its publishing lineup—and his first book, The Long Tail, was a bestseller—Hyperion believed a title like Share would be more likely to succeed. I refused since I had invested tens of thousands of dollars into a social marketing campaign with Viral Loop as its centerpiece. More to the point, I believed Viral Loop perfectly encapsulates what the book is about. (I didn’t invent the term; I first heard it from Marc Andreessen, who I interviewed for a Fast Company cover story.)

Now that Viral Loop is out, and I’m in full book pimping mode, doing radio and TV interviews with interviewers who don’t have a clue what social media is, I wonder if Hyperion might have been right. On ABC News Now, the anchor referred to Digg as “Dij”—apparently he’d never heard of it. A septuagenarian radio host cracked a string of borscht belt jokes about diseases and the flu after introducing my book. (Him: What’s that word that means you’re doing a lot of things at the same time? Me: Multitask? Him: Multicask?) While I want to talk about viral coefficients, viral business plans and success stories, and the entrepreneurs who founded these businesses, mainstream interviewers want to know how to sign up for Twitter. Clearly there are the social media “haves” and the social media “have nots.” How do you reach the latter without alienating the former?

The problem, I think, is the word “viral,” which comes from biology and was retrofitted to cover the phenomenon of word-of-mouth—or on the Web, so-called “word-of-mouse”—dissemination of ideas. I propose we kill it and replace it with something better. (Where’s Don Draper when you need him?) If I had my druthers I’d also change the word “blog,” which sounds like the noise someone makes after scarfing down a plate of nachos after tipping back a few too many tequila shots. But one thing at a time.

With that in mind I’ve created a Change the Term Viral contest. If you have a better term for “viral” a.) post your suggestion to the comments thread of this post, and b.) email it to viralloopbook@gmail.com.

The winner will get props for his or her genius in the forward of the next edition of the book and win $250. The runner up gets $100. Third prize is $50.

Each participant must post to the comments thread because that way the community can weigh in. The reason for the email is so I can contact the winners and arrange payment. Winners will be announced on viralloop.com next week.

Learn more about Viral Loop on Amazon.

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When I met Michael Arrington back in April, I told him he was crazy to dismiss the possibility of a first-class technology startup coming out of Europe. I was born and raised in the Czech Republic, I’ve spent the last 15 years working towards building a global hi-tech company. So naturally I took it a bit personally. But I’ve been thinking about this quite a bit since then.

The story usually goes that Europeans just don’t have the drive and commitment to spend enough hours necessary to get a fledgling company to an escape velocity and grow it from there. Our love of the two-hour lunch and Augusts in Provence is the evidence most often cited to prove this theory. But I believe that there are some very driven people in Europe who are willing to put enough time into it.

My problem with the European startup ecosystem is somewhere else. I actually believe that it bears some signs of a Cargo Cult. Here is the definition from Wikipedia:

A cargo cult is a type of religious practice that may appear in traditional tribal societies in the wake of interaction with technologically advanced, non-native cultures. The cults are focused on obtaining the material wealth of the advanced culture through magical thinking, religious rituals and practices, believing that the wealth was intended for them by their deities and ancestors.

The best known examples of Cargo Cults come from some Pacific islands during World War II. The American airfields and their personnel brought relative prosperity and modernity to the island people, but once the war was over the Americans took their planes and equipment and left. The local people wanted to bring the prosperity back but they did not understand the substance of why the Americans came there. They only saw the form. And so the locals crafted wooden headphones, lit fires to light up runways and tried to attract back the planes with canned food and other useful goods by emulating airfield traffic.

Something similar happens in the startup community in Europe these days. People start companies, write business plans, meet with investors, talk about term sheets and exits. But in reality most Europeans don’t actually understand the substance of the system—the business plans are wooden headphones and term sheets are fabricated control towers. Repeating the form of US-based startups without a real understanding of how much the deep and complex ecosystem of Silicon Valley contributes to the success of VC-funded US startups won’t bring prosperity to companies coming from Europe.

In order to overcome the limitations of not being in the Valley and to avoid the the cargo cult mentality, I had to adjust the typical model. I’m on my third attempt to get the trans-Atlantic startup model right.

I started my first “global” startup in Prague in the summer of 1997. I was so impressed by Marc Andreessen and Netscape that I wanted to build something similar. And so I started NetBeans and sent the business plan to Esther Dyson. Esther introduced me to her friends in Silicon Valley. And that’s when I first realized that I had no idea how the system works.

And so NetBeans was marketed in the US, we raised money here but the engineering team was always based in Prague. We were ultimately able to build the company on a shoestring. Eighteen months later we got a call from Sun Microsystems and we agreed to sell our baby. I did not know until the last day if my transaction was going to happen. I had spent all my money (and more) on lawyers and advisors and there was no break-up fee in the term sheet. Startups are absolutely not for the faint of heart.

I thought Systinet would be very similar, but it turned out quite different. We started working on the code in Prague in 2000. By the time I got here after the Summer of 2001, the situation did not look so rosy. Fortunately we managed to get the attention of the VC community; by Christmas time we received a $21M term sheet from Warburg Pincus. In November 2005 we signed a term sheet with Mercury Interactive for $105M. What we did not know is that during the due diligence, Mercury would be investigated by the SEC for stock option backdating and the company was delisted from Nasdaq. Not a pleasant experience for a small startup going through a very disruptive (and expensive) process of being acquired. Mercury was eventuaally acquired by HP.

I am now working on my third startup: Good Data.

I am a huge fan of the Customer Development Model by Steve Blank, but it assumes that the company can continue spending money on engineering and market/product fit tests until the target market is actually validated. And as much as I like the startup ecosystem here it seems to me that the people cost of software development forces startups to launch half-baked products. Very few companies can make the “Four Steps to the Epiphany” work financially – this is one reason having engineering located in a cheaper country from day one is a major plus.

Good Data is still early but we managed to raise money from Marc Andreessen (among others)—the same person who inspired me to start NetBeans. Since Good Data was born in the cloud, we own no hardware (except notebooks), we have no PR agency, we do no outbound marketing, there are no software downloads, but we’re able to release a new version of our service to our customers twice a month. Startups are cheaper to operate these days, and technology helps us be much more agile than ten years ago—agile throughout our business. And being here in the Valley lets us be part of new trends—we can move even faster.

My advice is always the same to European entrepreneurs: emulating and competing with Silicon Valley startups in Europe looks easy but the substance is quite a bit more complicated. You just cannot compete with Silicon Valley completely from the outside. Europeans—and all entrepreneurs—should consider that bootstrapping and focus on local markets is usually a better way to obtain the material wealth of the advanced culture rather than through magical thinking, religious rituals and practices.

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The following guest post was written by Edo Segal (@edosegal).

Media scarcity is dead. In the future my son will have a flash drive that he will pay $29 for that will have the capacity to hold all movies and music ever released by a major label, studio or tv/cable network. It will take 30 seconds to clone the data over the network to a friend who will pay $14.99 for a device with double capacity a year later. How does the media industry survive such a coming disruption?

For many of us that have been in this game for a while, the word “convergence” harbors some shameful vibes. It conjures up many false hopes, dashed dreams and misfires. Nevertheless, I would contend that convergence is upon us and it has arrived from an unexpected delivery man: Steve Jobs. Apple has created a media consumption experience that has reduced friction to such a point that soon the consumer will not know if he is buying music, a movie or a game. The notion of App is changing. The lines between these different forms of media are quickly blurring and soon will be completely artificial. Already these distinctions are merely fossilized conventions that stem from consumers’ discovery habits. As those evolve, like learning that it is easier to go to Amazon and search to find a product than going to aisle 9 at the store. The coming confusion of the consumption experience where a user won’t care or know if what they are buying is a movie, a game or a music track presents vast opportunity.

The prospects for the old media industry appear bleak, as the rest of the media industry follows the music industry into decline. Indeed in my discussions it is apparent that the smart money in Hollywood already sees the writing on the wall. While the trend will take longer, it is clear which direction the wind is blowing. The main lesson to learn is that the market will punish you if you don’t deliver the goods.

But the entertainment industry has a vested interest in the success of this new type of convergence, as within it lies the secret to its continuing prosperity. The only way to block the incredible ease of pirating any content a media company can generate is to couple said experiences with extensions that live in the cloud and enhance that experience for consumers. Not just for some fancy DRM but for real value creation. They must begin to create a product that is not simply a static digital file that can be easily copied and distributed, but rather view media as a dynamic “application” with extensions via the web. This howl is the future evolution of the media industry. It has arrived from a company that is delivering the goods. Apple has made it painless for consumers to spend money and get the media they want where they want it, proving that consumers are happy to pay for media if delivered in ways that make it easy and blissful to consume. For all the criticism Apple draws on the walled garden nature of its business, it has even come around to stripping DRM and allowing users to download mp3 files.

Even today if you look in the iTunes App Store you will see a myriad range of “Apps” that are just evolved ways to package media. While the traditional part of iTunes still mirrors the product taxonomy of a Tower Records, the App Store is creating a folksonomy of media products. It is where new ideas evolve, thrive and go instinctively based on market power. The App Store is where the action is. This is where evolution is unfolding as direct consumer spending spurs media development.

In preparing this post, Erick asked me, “Is Apple a media company?” I thought about that and the answer is really that Apple is what media companies are missing. The missing part of the puzzle is what made media conglomerates such juggernauts in the past. Namely, distribution. The internet is stripping them of their control over the how their products are distributed. Media companies used to be able to create scarcity merely by delaying the distribution of their products across different channels—theaters, pay-per-view, DVD, cable channels, network TV, and so on. The internet disrupts this ability to create media scarcity. It is such a huge disruption, in fact, that it threatens the fundamental profit engine of the media business.

Both during my time interacting with senior management at Time Warner (where I worked at AOL after it acquired the company I founded, Relegence) and with some of my current portfolio companies that are working with the film and music industries, it is clear to me that many of the smart people running these media companies understand which way the wind is blowing. The music industry, as the one that has suffered most of the carnage, is ripest for change. Executives there are receptive to new ideas and move forward quickly, leaving me somewhat optimistic. It is also clear to me that it is hard for the industries which have not endured their level of pain to flee the golden cage of media’s past. But for those firms which rise to the occasion, there will be vast rewards. People’s hunger for good content will not subside. It will continue to grow, but so shall the unbearable ease of pirating it. The premise of extending the media experience to the cloud is a core necessity for the survival and growth of the media industry. It is the only way to for media companies to weather the coming tsunami of increased bandwidth and the ever open web. Hybrid media packaging with both files and an application layer in the cloud is core to a lucrative future.

For a great example of how change is happening see what Britney did today at @BritneySpears. It was, I believe, the first time a major artist premiered a music video on Twitter. This drives people to Amazon or iTunes to buy the track but in the not too distant future it could be the start of much more than that. A complete experience will unfold that will be interactive and convert to new revenue streams. Not just a purchase of a track but of an app that pulls consumers into an experience and further promotes user engagement and virality. Media becomes a platform with a funnel of traffic and conversions to alternative revenue streams. All boosted by the frictionless billing that Apple has created in the App Store. Media executives will have realtime metrics for their success as it maps to revenue and in turn this will accelerate innovation and help redefine media.

If you are a media exec and you look at your product and at the end of the day it’s a digital file that can be copied, then you have a serious problem with your format. Think of your product like a pie chart of the value you are giving the consumer. If 100% of the value is in that file, it is not a sound approach for defending the future of your business. However, if a portion of the experience is derived thorough an integration with a Web component that will yield additional value in functionality or social elements, then it will be more sustainable. There are many such examples emerging in the app store (I am T-Pain, TapTap and many more). Applications that let consumers interact with the media. Create things and share them with their friends. These will not only make the consumer the one who markets your product, but also create an unprecedented level of engagement. That level of engagement will directly map to reduction in piracy as consumers will pay for this experience and wont be able to copy it. Sell access and experiences, not media files.

Guest author Edo Segal (@edosegal) has launched and sold several companies. In 2000 he founded eNow, which he sold to AOL in 2006 (after it was renamed Relegence). Today, he runs his Incubator/Investment vehicle Futurity Ventures, which recently launched a new search engine for wisdom.

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Yesterday, Facebook announced they are going to drastically alter the way applications can message users once again, likely throwing a wrench into every app developers’ growth rate. Hints of the coming turmoil appeared last week when Facebook changed the way feeds work. This caused enough worry that apparently Mark Pincus, Founder/CEO of Zynga, canceled his appearance at Harvard Business School so he could sit with his team and figure out what the impact would be to the viral rates of their massive hits such as Farmville and Cafe World. That’s not surprising, since getting posts in the feed is critical to continued growth, but the myopic focus on the “viral rate” by some in the industry has created an over-dependence on perhaps the wrong number.

(As an aside, those who complain about Facebook being an unreliable channel to build a business off of should try dealing with a retailer such as Best Buy. They will be happy to take a 50% cut of your revenue and then one week decide to eliminate your entire section of products and ship them back to you. Oh, and they’ll bill you for the shipping.)

In all the talks about virality the general focus is on the new, clever, and sometimes underhanded ways to increase your viral rate. What gets lost is the core message that, as Siqi Chen of Serious Business puts it, viral messaging tactics are just a force multiplier on the inherent viralness of your product. Or, in simpler terms, how good your product is in the eyes of your users actually is the most important thing. Viral messaging is just a way of greasing the skids on that user’s intent. It is an important later step, but not the root.

And how do we measure that intent? It turns out that in Facebook at least, the level of retention is the best public number to predict likelihood of a hit.

Real retention numbers for other people’s products are notoriously hard to come by, but in Facebook there is good 30 day retention data called the DAU/MAU Ratio – which can also be called Stickiness. This is the ratio of Daily Active Users to Monthly Active Users. For example, a DAU/MAU ratio of 50% would mean that the average user of your app is using it 15 out of 30 days that month.

It turns out this simple metric is enough to predict, with a high level of probability, the success of a product. For example, look at the correlation between the following set of Facebook games.

Here we have games that fit a broad set of criteria, in terms of brand association, demographic appeal, play style, and time since launch. See how the second column and the fourth column are almost perfectly in order? Despite this broad cross-section of games it appears there is a very direct correlation between stickiness and success. Let’s take a deeper view of the data.

For those who aren’t stat geeks, this is called the coefficient of determination (R2) and predicts whether two correlated data sets accurately predict future success. If everything lined up perfectly on the linear regression line above you would have an R2 value of 1, and then we could say there is a perfect correlation between Stickiness (x axis) and the Size of the app (y axis). Using these social games we have a rather astonishing “fit” of 0.77.

Stepping back, this data is quite remarkable actually, since you would expect Stickiness to go down as you get huge. It would stand to reason that your 20 millionth user, who might be experiencing their first Facebook game, is going to be harder to retain than your 1,000th. The fact that this is not happening yet, that no one has found the edge of users where suddenly retention metrics collapse, says something very powerful indeed about the potential size of the social gaming market.

But it isn’t the market size implications that are the big takeaway, the relationship between Stickiness and success is. This of course will also cause a messaging arms race around retention, and the prevalence of Free Gifts is a good example of that already happening. But just as with the viral rate it’s important to remember those are all simply tactics to enhance a products inherent retention. The clear inference is that building something users love to come back to is the best predictor of success.

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Many of the most successful Web 2.0 companies, including MySpace, YouTube, eBay, Flickr and rising stars like Twitter are prime examples of a “viral loop”—to use it, you have to spread it. The result: Never before has there been the potential to create wealth this fast, on this scale, and starting with so little.

In Viral Loop, Penenberg tells the fascinating story of the entrepreneurs who first harnessed the unprecedented potential of viral loops to create the successful online businesses—some worth billions of dollars—that we have all grown to rely on. The trick is that they created something people really want, so much so that their customers happily spread the word about their product for them.
One such business was Hotmail. After their 20th venture capitalist meeting, Sabeer Bhatia and Jack Smith, former hardware engineers at Apple who first came up with the idea for webmail, finally raised seed money from famed VC firm, Draper Fisher Jurvetson.

PS: I Love You. Get Your Free Email at Hotmail

After the two sides worked out terms governing the initial $300,000 seed investment, Sabeer Bhatia and Jack Smith walked out of the Draper Fisher Jurvetson offices with a $50,000 bridge check and quit their day jobs. Working from home, Smith, after bringing onboard another engineer, got down to building a prototype. They also needed to come up with a name, which fell to Smith, who stayed up late with his wife to brainstorm. Sitting with a blank sheet of paper they listed possibilities that contained “mail” in some form. Out of two-dozen there was Cool Mail, Run Mail, this mail, that mail, but no “A-ha!” moment. Finally his wife suggested, “Hotmail.”

Smith wrote it down. He wasn’t sure about the “hot” part, but given everything else this seemed the best candidate. Then he noticed it contained the letters “HTML,” the acronym for “HyperText Markup Language,” the lingua franca of web pages. Smith canvassed Bhatia the next day while riding in an elevator to their attorney’s office. As usual, his friend initially gave it a cool reception but they were running out of time so he went along with it. On March 27, 1996 Smith registered the Hotmail domain.

At the same time he finished a prototype within two weeks, sharing it with a small circle of friends who provided valuable feedback, mostly relating to layout, how e-mail should be viewed and the index page arranged, the look and feel of the interface, how the columns should appear on the screen. Smith demonstrated it at the next meeting with Draper and Jurvetson, who were duly impressed.

Draper asked, “How are you going to get the word out there?”

“We’ll put it up on billboards,” Bhatia said. He also mentioned radio advertising.

“God,” Draper replied, ” that’s expensive marketing and we’re giving this away?” He thought for a moment. “Can’t you just give it out to all those guys on the web?”

That would be spamming, Smith replied.

I guess spamming is bad, Draper thought. He hadn’t heard the term before. Then he flashed back to Harvard Business School, where he had received his MBA—a case study his professor had covered in class: women holding parties for their friends then selling to each other. A certain percentage of the women at each party became salespeople by referring more business. Tupperware, that was it. He also recalled MCI’s “Friends & Family Plan,” which harnessed the power of social interactions to spread the product. He wondered if they could do something like that with webmail.

“Jack,” Draper asked, “could you put a message at the bottom of everybody’s screen.”

“Oh come on, we don’t want to do that!” Bhatia blurted out.

“But can you technically do it?” Draper asked.

“Of course we can technically do it,” Smith said.

“Oh, great,” Draper said. “And it can persist, right? You can put it on one message and if he sends an email to somebody else you can put it on that one, too, right?”

“Yeah, yeah,” Smith said, not convinced.

“So put ‘PS: I love you. Get your free e-mail at Hotmail’ at the bottom.”

Bhatia and Smith communicated through pained expressions. “Oh, no,” they seemed to be saying. Draper had seen that look before. Of all the investors in the world, why did we end up with this idiot? Frankly, he didn’t care what they thought. This just felt right.

“Wait a second guys, don’t you get it?” Draper asked. A tag line at the bottom of each message would act as free advertising. “I can send you an e-mail and you can send it to all your friends and they get it and they can sign up and send it to their friends and pretty soon it takes off.”

Smith said, “I don’t think…”

Bhatia interrupted. “Let’s move on to other business.”

Draper agreed to table the discussion for now, but had no intention of letting it go. He vowed he would keep pounding until they listened.

They launched HoTMaiL on Independence Day 1996. Not only did they like the symbolism—they viewed webmail as a populist tool because any user could log in from anywhere in the world—Smith had long promised the service would be ready by then. After turning on the registration function and hitting the switch in the early afternoon, Smith accompanied his tiny technical staff to Chili’s Grill & Bar in San Jose to celebrate. To keep track of signups he brought along a laptop with an attached radio modem receiver on the back, the antennae sticking up like a divining rod. Over quesadillas Smith counted 100 registrations in the first hour. After lunch they went to the movies, and by the time the summer blockbuster “Independence Day” began to roll he tallied 200 signups. Upon exiting the cinema, Smith logged in again to find that fifty more joined HoTMaiL. They were finding the site via word of mouth and word of mouse. People were talking about it, and letting their friends and family in on the deal via email, using the Hotmail message as a proof of concept: Eighty-percent of those who signed up said that they learned about it from a friend.

Growth was robust but not staggering for the week. At the next meeting at DFJ Tim Draper once again pushed the two young entrepreneurs to insert a tagline into each message. Bhatia and Smith were adamant about not adulterating email. It just wasn’t done. They would feel like they were polluting emails with advertising, and what about privacy issues? If someone is adding a tagline what else were they doing? A user would wonder what else they had access to and they were also fairly certain it was unethical. But Draper wouldn’t let it go. The benefits, he contended, far outweighed the risks. If they were predicating their entire business on the size of their user base, they should be doing everything in their power to increase it as fast as possible. “P.S. I love you. Get your free email at HoTMaiL.” The more he said it, the more he liked it.

The next day Bhatia phoned Draper with the news that they agreed to do it, but without the “P.S. I Love You” part. The impact was almost instantaneous. Within hours Hotmail’s growth took on the shape of a classic hockey stick curve. They started averaging 3,000 users a day, compounded daily. By Labor Day they registered 750,000 users and within six months they were up to 1 million. Five weeks after that they hit the 2 million user mark, adding more than 20,000 signups a day, with Smith desperately trying to keep the servers up and running. At times, the site became sluggish and suffered major outages. But through it all Smith, using little more than virtual spit and glue, kept Hotmail—they had dropped the awkward capitalization by this point—afloat.

The tagline with the clickable URL that Draper insisted that Bhatia and Smith insert into every outbound message served as a promotional pitch for the company. Simply by using the product every customer became an involuntary salesperson. This implied endorsement from a friend or peer made it more powerful—and more far-reaching—than traditional advertising. The receiver of a Hotmail messages could see a.) his friend is a user, b.) it works, and c.) it’s free. Successful consumer branding is often based on user affiliation. (The cool kids wear low cut jeans, so I will, too.) This plays to our tribal instinct. It also resulted in clusters of users. Bhatia sent a message to a friend in India and within 3 weeks Hotmail registered 100,000 users there. It also became the largest email provider in Sweden without spending a nickel on advertising there. In contrast, Juno blew through $20 million in marketing and advertising yet Hotmail gained three times as many users in half the time.

As Jurvetson related in what would become a famous white paper, the Hotmail adoption pattern was similar to that of a virus “with spatial and network locality.” A person’s email address book is a type of virtual social network that is not encumbered by geography. A certain percentage of contacts will be friends, family and colleagues who reside relatively near by; others may be scattered throughout the world. A Hotmail message sent across the country might result in a new cluster of users. Jurvetson noted a “mathematical elegance” to Hotmail’s “smooth exponential growth curves” in the company’s early days: cumulative users = (1+fan out) cycles. “We would notice the first user from a university town or from India, and then the number of subscribers from that region would rapidly proliferate,” he wrote. “From an epidemiological perspective, it was if Zeus sneezed over the planet.”

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The number one question you all asked after reading my last blog post about starting a business from scratch was “how do I find my co-founders?”

Great question – let’s start with a bit of self reflection:

Close your eyes and visualize your group of closest friends.

Now, think specifically about how tall (or short) they all are.

Great, now ask yourself “are all of them roughly the same height?” I’ll bet most of them are – you included.

And therein lies the problem in finding co-founders for that startup you’re dying to launch. It’s most comfortable to hang out with people like ourselves, but those are exactly the folks you probably don’t want to co-found a startup with. Seems a bit unintuitive, right? I’ll explain.

The best founding team for a startup is a group of two or three people who have synergistic – not overlapping – skills. Note that it’s also important your goals and passions be similar. If one of you wants to sell fast and the other wants to build a billion dollar business, that’ll make for pretty serious friction down the road. So too would a team where one person’s more interested in enterprise startups while the other person’s passion lies in consumer experiences. With that out of the way, however, it’s critical that you look for people with complementary skills to your own. In consumer internet, that usually means one front-end user-facing developer, one back-end server-side developer, and ultimately a business person (details will come in a later post).

The reality though, is that we tend to hang out with people who are just like us. Remember that story I told about the three business school students telling me about their tech startup, leaving me to wonder who’d actually build the product? I see that all too frequently – from business folks and techies alike. It’s just easier to hang out with people in your same classes at school, or your same group at work.

If you happen to be in school now, you’re in the most fertile place possible to meet your co-founders. Take advantage of it! How’d I meet Elaine and Sandy? Mutual friends from school. How about some other teams? Larry and Sergey from Google met at Stanford. So did Jerry and David from Yahoo!. The Plaxo founders also met in school, which is also where Mark from Facebook met his co-founders. Having trouble meeting folks you think would be good co-founders? Here are a couple ideas:

1. Join student groups relevant to your interests. If you’re a business major – go check out the Engineering Society’s monthly meeting. If you’re in the CS department, I’ll bet the business school students would kill to meet you at the next Entrepreneurship Club meeting.

2. If your school doesn’t already have a student group designed to foster collaboration between groups of students with the skills necessary to get a startup rolling, start one! BASES at Stanford is a great model to follow. It brings together students from both the undergraduate and graduate levels, across disciplines such as design, computer science and business.

Ok, so most folks reading this are probably out of school. Fortunately, there are a number of examples of successful founding teams that met outside of school. Chad and Steve from YouTube met while working at PayPal. Sean and Shawn from Napster met in an IRC channel. Cisco was a husband and wife team. It helps to be in school, but it’s not an absolute requirement. A few practical ideas applicable to everyone, in school or not:

1. Get out there and find activities that attract diverse groups of people. In Silicon Valley, rock climbing’s a current hot spot for startup folks. So is ultimate frisbee. There’s at least one weekly ultimate frisbee game I’m aware of that’s chock-full of people from the startup industry, on both the business and tech sides.

2. Ask your friends for intros to people in an area you’re trying to learn about. Chances are someone in your group of techies knows someone business oriented. The first folks you meet may not be a fit, but keep asking for referrals and you’ll get there.

3. Join / attend local organizations designed to foster introductions between folks interested in startups. SVASE or Founder Dating in Silicon Valley, First Tuesday in London and Hackers and Founders in New York all come to mind.

4. Team with co-workers at your current job or that internship you did last summer. Just make sure to not violate any non-competes, etc, in the process! Generally speaking, as long as you’re not working on a project your employer would reasonably want to own, you’re probably ok. Of course, do not use any of your employer’s resources. A great friend of mine is scheming, right now, with a co-worker on their next great startup. One’s a PM and the other’s an engineer.

I’m sure some of you are thinking “that’s all great – but I live in the middle of nowhere and none of those resources are available to me.” To be blunt, find a way to move to Silicon Valley. Other cities like New York, Boston, Seattle, LA and Austin TX also have pretty strong startup communities. However, nowhere has as many real estate agents, lawyers, accountants, landlords, employees, co-founders, mentors, and VCs all steeped in startup culture as does Silicon Valley. The ecosystem is just hard to beat. The result is that you’ll be exposed to many more people who can help you get started. In my case, I grew up in Connecticut and spent a fair amount of time in New York – all the while trying to start companies, relatively unsuccessfully. Friends in Silicon Valley kept telling me to move out there for all the reasons I mentioned above. I finally found my ticket in the form of admission to business school in the valley. Find your ticket.

The hardest part of starting from scratch is finding the right co-founders. Ideas, comparatively, are easy. You may spend three years finding your co-founders while you’ll come up with a solid idea every 3 months or so. Luckily, once you settle into a great founding team you’ll be able to execute much faster on that killer idea you all come up with – beating those ten other folks who came up with the same idea at the same time.

Remember, the ultimate goal is to create a founding team that can, within its own skill set, get a working prototype out the door. This means you need to find folks with skills that compensate for your weaknesses. Co-founding a startup is like getting into a marriage – picking the right people is critical. In later posts I’ll get more specific on how to figure out if the folks you’re meeting are the right people to work with, and also how to deal with issues like splitting equity and paying yourselves before raising funding. Feel free to follow me on Twitter to get notifications of later posts on this topic, both here and on the Meebo Blog.

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Editor’s note: Below is an open letter to our President from guest author Edo Segal, a concerned web geek who cares about the future of our democracy. It is followed by a proposal and a new website for anyone who thinks they know what #obamashould do (cynics please skip post).

Mr President,

On the night of your acceptance speech, just before you walked on stage, “you” sent out an email saying “i will be in touch soon”—but you disappeared and all we were left with was the strange feeling you get when your older brother ditches you for his cooler friends. Does it take you winning a Nobel prize to get another direct letter from you?

Where’s the attention? The yes-we-can attitude, making us feel we can be good again? It seems that since you made it to the Oval Office you have been too busy at work, and our relationship has really suffered.

I recall that as the election results where announced, there was an epiphany that hit the pundits and us web folks at the same time. “He’s going to govern this way” we all thought. What we meant was that you will continue the evolution of direct democracy beyond using the Internet for fundraising, heralding a new age of direct access to the citizenry. A new age of democracy where the President has your email and can talk to you directly. An age without intermediaries and pollsters—just us and that cool guy who’s running the country.

Regardless of our political views, almost everyone in this country was in awe of how you came to be in office and changed how elections are won forever. But for the readers of Techcrunch, the people who grease the wheels of our progress online, it feels like after the hangovers were over and you moved on to set up your transitional government, from that day, what was a highly effective and motivating direct relationship with your supporters, an emotional relationship that was predicated on a real connection evaporated. And what we were left with was the most effective spam bot in the world (Gmail doesn’t block it) . This is wrong in so many ways, let me count just a few:

1. Stop asking me for money: Why are you still asking me for money? I think I am not alone in being confused with the notion that you are still asking me for money after you were elected President (I know why you need it intellectually but not emotionally). I mean at this point, I feel like you should be paying me back with change and not billing me every week. I pay a big bill every April that should just about cover it.

Using the “Network” purely as a means to raise money without the additional layers of engagement and relationship is offensive. We are the network. By just using email as a system to raise money you loose the soul of the connection you established with millions of people.




2. Your singular focus is distracting: While there has been much discussion about the administrations’ notion of taking on multiple fronts at the same time, the online channel recently has been fully saturated with a singular purpose of supporting the very important policy goal of universal healthcare. But in doing so, you have played into the hands of your opponents. The grind on Capitol Hill and the levels of complexity that are involved in making this happen, and the time it takes are not a recipe for engagement—they are a recipe for disaster. You are losing your audience and failing us on a major promise of direct democracy. 



When I explained my support for you at the very early stages of your campaign to bewildered people who didn’t see how it could be possible for you to win the Presidency, I articulated that regardless of the specific nuance of your policies, the fact you have the power to motivate people in this way is priceless. You demonstrated that you can build on top of the best practices of prior online campaigns (Dean). Delegation to really smart people culminated in the most effective campaign financing system in the history of democracy. But if you don’t keep watering the soil from which your support stems, that direct relationship, you will not be able to make the historic policy changes you seek. Your base is eroding as you focus all of your communication channels on a VERY heavy piece of legislation. Don’t spam us, engage us.

3. The promise: From the perspective of the history of media, the level of engagement you can generate through the Internet has typically been reserved for occasions of war and violence, for times of strife and conflict. Like the days of WWII when people huddled around their radios to hear the comforting voice of their leaders. Imagine applying the same level of engagement that won’t just fuel death destruction and line the pockets of the military industrial complex, but rather will power true change, growth and improve the quality of life for all people. This is within your grasp if you follow through and use the medium appropriately.

Mr. President, beyond the content of your ideas, now is the time to extend the way you govern as we all heard you promise. Make us care again. Online engagement is the key to fostering the support you need to accomplish your policy goals. Engagement is the key to maintaining your base as you mount these vast campaigns. Getting the government to set up a network of Web 1.0 sites is a start, but we need much more. If you continue to spam us and recycle old speeches off a teleprompter into email (like you did with the Nobel eMail) you will lose your base, but if you step up to the challenge and continue to take risks and push the envelope in structural ways that only you can, your greatest legacy could be more than enacting historic legislation or winning a premature prize. It could be the very way our democratic process works and how we view government.

That is my letter to Obama, but it is not enough. The notion that we will evolve the very essence of democracy beyond the already achieved goal of changing campaign financing and moving power away from private interests is profound. I truly believe it may end up being the greatest piece of innovation we are collectively offering the world in the coming decades. But to make additional progress, you and I need to step up. If each of us contribute a bit of creative energy we can accelerate this evolution by a generation

In the past, the main skills that effected political outcomes in the communications realm were polling, copy writing, speech writing, and directing and producing for radio and television. But today and in the future, the most potent creative skill-set is that of creating online connections. Yes, I’m talking about you. Our professional careers depend on our ability to create platforms that engage millions of people and constantly grow that level engagement. The readership of this blog constitutes the highest concentration of such competency on the planet. We spend our lives creating platforms that aim to engage millions of people.

We get it, it’s tough for government to take risks and thus political innovation moves at a glacial pace. Maybe we can give the pols a hand, help speed things up a bit.

Rather than just rely on comments and the ill will of the trolls, I took a little initiative and with the help of the good people at iGeneration who volunteered their time to build Obamashould.org, a site for the community to contribute ideas to the President. Please spend a few minutes there and voice your opinions in a constructive way. Or just tweet your ideas with the hashtag #obamashould. The site will track retweets, and the ideas gathering more support will float to the top automatically. Its like an http://www.ideastorm.com/ meets tweetmeme.com and uservoice for our President. BTW, Mr. President, if you want the source code, it’s yours. If you are a developer and want to contribute to the project please join us. We will take the best ideas that surface to the top from there and get them built by the community. We may even launch some of them here on Techcrunch in a few months.

Let me throw out some #obamashould’s to start the ball rolling. Click the YES re-tweet button if you support it!

Idea 1: What you did to get us, you need to do to keep us. Keep a weekly Youtube post that gets emailed to the base. It feels like you are becoming hostage to the status quo of what presidential communications has always been. For both the Y Generation and many of us older folks, the notion of what constitutes presidential behavior is changing rapidly with your actions serving as the main catalyst. communications is when in fact you are the one that is supposed to re-invent it. It’s not a presidential address in the conventional sense of the word. Give us genuine direct talk over words tested with pollsters any day. A direct candid discussion about a given topic once a week that is not read off a teleprompter is priceless for the continual sense of a direct relationship. Just flick open your laptop in the oval office or in your study at night and talk to us. Have a small panel of trusted advisers review it, and if no serious red flags are raised post it and email it to us. The value of genuine conversation from a man with your insight will way overshadow the shortcomings offered in the prose. You will probably say things you will regret, but the damage done will be dwarfed by having a continued sense of renewed personal relationships with your citizens. If you do this, they will be there when you need them. Retweet to vote up or Comment Here


Idea 2: Engage the people via email and ask them for their opinions, not just their money. Have a weekly poll question that is linked to social media (twitter, facebook), creating a viral engagement engine. In addition to the immediate policy objectives, you need to understand that such engagement is not only a means to an end, but an end in itself. Retweet to vote up or Comment Here


Idea 3: Give $500 of your money to charitywater.com (Video) and send out an invite from their system to everyone on your mailing list to do the same. Tweet it, put it on facebook. Show people how they can use the web to effect positive change in the world and do good again. Why not? That single email will effect millions of lives around the globe. Giving changes people, help them give and start that chain reaction of good will. Use your power to promote things that have to do with generosity of spirit, not just hard core policy. This is a way to lead through example and not just talk in the abstract about the need for volunteerism. Your effect on the world cannot be reduced to a series of policy wins and losses. Different from prior Presidents making public their charity contributions, doing this via a digital medium is like clicking a button that activates a viral system and magnifies your contribution a million-fold over the web. Retweet to vote up or Comment Here

What do you think #obamashould do?

Go to www.obamashould.org and please contribute ideas now. If you want to join a vibrant open source community of people that are passionate about helping evolve democracy online, we need your help. Join us here.

Guest author Edo Segal (@edosegal) has launched and sold several companies. In 2000 he founded eNow, a search engine for the Real-time Internet in an age that predated RSS as a popular medium. As such he has had a decade to think about its implications. He ultimately sold the company (renamed Relegence) to AOL in 2006 and today runs an Incubator/Investment vehicle called Futurity Ventures. He recently launched a new search engine for wisdom.

Photo credit: Flickr/White House.

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You can follow Kedrosky on his Infectious Greed blog, or get the cliff notes version on twitter at @pkedrosky.

Hating venture capitalists is profoundly satisfying. After all, they are slack-jawed, monied, oily, know-nothings who carom off innovation, fire capable founders, squash angel investors, and exist mostly to make commercial bankers look smart and interesting.

Or at least that’s the story we like to tell. By “we,” of course, I mean all of us who lovingly poke venture capitalists in the eye with sticks now and then. They are such easy targets, what with making up numbers about how many jobs they create, missing great investments, delivering awful ten-year returns to investors, having higher failure rates among companies they fund than among the ones they don’t, and generally being so self-important and irony-unaware.

But that doesn’t mean VCs are quacks. Or that what they do isn’t hard. Or that it’s unimportant. Because it is important, and the good ones are smart, and what they do is very, very hard.

Creating a successful startup is among the hardest things you can do in a capitalist economy. Entrepreneurs must successfully navigate a sea of multi-dimensional uncertainty, from technology (will it work?), to people (do I have the right employees?), to market (will anyone care?), to financial (can I finance doing this, and can I then sell the product or service for more than it costs?) At big companies you can fail at launching a product, fail at hiring people, fail at making money on a product, and fail at figuring out whether something will work. Your big company will probably be unaffected, and you may even get promoted. Do any of those things wrong at a startup and, in all likelihood, you’re dead. You are wandering a maze of dark and twisty passages — most of which are paved with trapdoors to hell.

The idea that anyone at all would build a business around funding startups is the remarkable thing. No revenues, no sure market ahead, no collateral, no liquidity, and doe-eyed founders who were in high school when Enron blew up. It all adds up to more ways to break down than an old Winnebago. Far from wondering why so few companies get venture capital, we should perhaps wonder why any do, and how venture capitalists remain so damn optimistic. To borrow an industry adage, the best venture capitalists retain the capacity to fall in love despite having had their heart broken over and over again.

And the opportunities for heartbreak are legion. Even if the mortality numbers you usually hear are wrong, failures rates are high for startups. Across all sectors, about one-quarter of startups die off in the first year, while half-ish make it to the five-year mark. The numbers are different, however, for venture capital-backed companies. Failure rates among venture-backed firms are lower in the first few years, but higher later on.

Does that sound nasty and mean-spirited? I don’t think so. Matter of fact, it sounds like VCs are being precisely the sorts of patient investors that people say they aren’t. They are giving risky companies a chance to experiment and find something that works, which is crucial, given that most successful startups don’t end up doing what they started out trying. It is a luxury that markets don’t afford other companies.

Another favorite club with which to whack venture capitalists is their supposed inability to create innovative new companies. Just look at Bessemer’s well-known anti-portfolio, with them turning down Google and Apple and Federal Express (seven frickin’ times!).
Imagine if those innovative companies had actually been funded and…oh wait, they were. The companies still happened, and succeeded, even if some venture capitalists said no. Given how often the average VC must say no in a given year – a bazillion times, give or take – it should come as no surprise that they sometimes say no when it turns out they should have said yes (and vice-versa).

The “VCs as innovators” problem wouldn’t be so bad, of course, were it not for the scene-stealing entrepreneurs. Those bastards keep creating risky startups and getting all the glory. Damn you Sergey Brin and Jeff Bezos and Steve Jobs. Just in case you needed a reminder, it’s not VCs who create companies, it’s entrepreneurs. Blaming venture capitalists for their capital not changing the world is like blaming Pfizer’s treasury department for Viagra not saving your marriage. Yo, you have bigger problems, so to speak.

Wouldn’t it be nice if venture capitalist drove more innovation? Of course it would. But that’s like saying “Wouldn’t it be nice if supermodels followed you home?” Of course it would, but it’s fanciful. Innovation is one input into the startup business, not its main output. For startups or VCs to pretend otherwise is a speedy path to going bust. Venture capital investing is hard enough without turning it into a Disney-style dream factory for self-styled social engineers.

Here is what we should want from venture capitalists. They should be trying to find and help early-stage companies at rising above the muck and dirt and crushing difficulties of being a startup. At the same time they must produce hefty profits in a timely way for their own impatient investors. That VCs can’t do the preceding, while simultaneously satisfying their critics by making no funding mistakes and changing the world with every deal, is a feature, not a bug.

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This is a guest post by Robert J. Moore, the CEO and co-founder of RJMetrics, a on-demand database analytics and business intelligence startup that helps online businesses measure, manage, and monetize better. He was previously a venture capital analyst and currently serves as an advisor to several New York startups. Robert blogs at The Metric System and can be followed on Twitter at @RJMetrics.

A few weeks ago, my former employer led a $100 million investment into Twitter and I must admit that I was quite jealous of my former colleagues. Chances are they got the opportunity to do some very cool analytics on Twitter's data.

Rather than wonder about what I missed, I decided to figure out what I could from the outside looking in. Using some statistical trickery, the Twitter API, and my RJMetrics dashboard, I uncovered a ton of astonishing new information about Twitter. Here are some highlights:

• Twitter's user growth is no longer accelerating. The rate of new user acquisition has plateaued at around 8 million per month.
• Over 14% of users don't have a single follower, and over 75% of users have 10 or fewer followers.
• 38% of users have never sent a single tweet, and over 75% of users have sent fewer than 10 tweets.
• 1 in 4 registered users tweets in any given month.
• Once a user has tweeted once, there is a 65% chance that they will tweet again. After that second tweet, however, the chance of a third tweet goes up to 81%.
• If someone is still tweeting in their second week as a user, it is extremely likely that they will remain on Twitter as a long-term user.
• Users who joined in more recent months are less likely to stop using the service and more likely to tweet more often than users from the past.

Read on for some detailed charts a deeper dive into the data.

How We Did It

In most cases, this kind of outside-looking-in exercise wouldn't be possible. Twitter, however, is a special case for a few reasons:

• The company is pre-revenue, so its value is wrapped up in user activity and engagement
• A Twitter user's activity data (tweets, followers, etc) is all public by default
• Twitter's API allowed me to automatically download up to 20,000 data points per hour
• Twitter uses auto-incrementing ID numbers (1,2,3,4…) for both users and tweets
• The central limit theorem tells us, among other things, that a large enough random subset of a large data set will behave like its parent set with a high degree of statistical confidence

In the end, our sample size consisted of about 85,000 users and just over 3 Million tweets. By piecing all of these things together and pulling the data into the RJMetrics Dashboard, I was able to chart loads of information about Twitter's user base and user behavior. I've looked around, and this appears to be the largest public analysis of Twitter's user base online. Enjoy!

Number of Twitter Users

This analysis leverages the fact that Twitter uses auto-incrementing ID numbers for both users and tweets. We identified the range of IDs that were consumed by the system in any given month and the percentage of them actually tied to real Twitter accounts. ("Dead" IDs are likely canceled accounts, SPAM accounts, test accounts, etc.) In combination, these numbers give us a reliable approximation of how many new users joined Twitter each month:

This shows us the exponential growth experienced by Twitter in 2009. In Q3, this plateaus at a rate of about 8 million new users per month. A chart of total cumulative users is below:

Hockey, anyone? As of September 1st, the actual number of live Twitter accounts was just above 50 million.

Average Number of Followers

According to the data, the average Twitter user has 42 followers. It's interesting to see the distribution of users by the number of people following them:

As you can see, the vast majority of users have ten or fewer followers, and over 20% have no followers at all! As we know, most users have been on the system for less than a year and, as shown in the chart below, the number of followers is proportional to the user's time since joining:

Number of Tweets

It's also interesting to look at the number of status updates, or "tweets" made by the average user. Obviously, the number of tweets from any given user grows over time (per the trend shown in the chart below):

When we look at the distribution of tweets by user, we see a very surprising trend: over 75% of all Twitter users have tweeted fewer than ten times.

"Protected" (Private) Twitter Profiles

Before moving onto analyses at the tweet level, it's important to note that some of the users we identified have "protected" their tweets, meaning we were able to see how many followers they had and how many times they had tweeted, but were unable to download specific tweets (and, more importantly, tweet times).

The chart below shows how many users in our data set are "protected" by the month they joined. The overall number sits around 10% (and dropping):

Also interesting is how "protected" Twitter users differ from public users. As shown in the charts below, protected users tend to tweet far more often, but have far fewer followers:

Power Users

Another limitation of the API is that it can only return the 3,200 most recent tweets for any given user. This is obviously not a big deal for most users, but there are some users out there who have passed that mark. Our sample data set showed that less than 0.02% of Twitter users have sent more than 3,200 tweets. These users will have incomplete data sets in our study, but the population is so small that they should not have any meaningful impact on our conclusions.

Tweets by Source

It's interesting to see how different tweeting methods have risen up over time. Below I show the most popular methods and what percent of Twitter traffic came through them each month since 2007:

The web clearly dominates this list. Let's exclude it to get a closer look at which other sources are driving tweets:

Twitterriffic has clearly seen better days, and text messages (txt) have been declining as a channel, as well. Meanwhile, TweetDeck appears to be aggressively gobbling up market share.

Time Between Tweets

Since we know the timestamp of every tweet in our sample data set, we can study the time between tweets and the recency of tweets from the userbase.

Remarkably, the average time between any two tweets from the same user is exactly 24 hours.

The chart below shows the average amount of time between tweets for a user's first ten tweets (when applicable). The x-axis contains the time of the tweet in question, and the value is the average amount of time since the previous tweet.

Surprisingly, the time between Tweets actually drops as users do more tweeting. However, this could be biased by the fact that most users have tweeted fewer than ten times. To clear things up, let's look at the average time between tweets based on how many times the user has tweeted:

Indeed, as you might expect, users who send more tweets also tweet more frequently, and the dropoff is quite significant.

Probability of Incremental Tweets

Since there is such a huge dropoff in tweeting activity up until the 10 tweets mark, we thought it might be interesting to look at the "probability of an incremental tweet" based on how many tweets a given user has completed. This can be calculated with just a few clicks in RJMetrics:

As you might expect, with every Tweet a user performs, their chance of tweeting again goes up.

Active Tweeters

We know that Twitter has 50 million registered users, but we also know that the vast majority of them have tweeted fewer than ten times. Let's investigate just how many of these registered users are actually actively tweeting.

Using our tweet data, we can identify what percent of the user base sent out at least one tweet in any given month. This "unique tweeters" statistic is charted below (to get a fair statistic we excluded protected accounts from our denominator):

The number seems to hover in the 25% range. In other words, only about 1 in 4 registered users is actually tweeting in any given month. (Although it's worth noting that some users may only be using Twitter to read others' tweets, meaning they are not full-fledged "zombie" accounts.)

Notice the bump in early 2009, right around the time when new user growth began to accelerate aggressively. This suggests the obvious: on average, a newer user is more likely to tweet than an older user. When new user growth exploded in early 2009, the concentration of new users became denser, driving this average up. To illustrate this (and get a better look at how users behave over their lifetime), we turn to cohort analysis.

Cohort Analysis

A cohort analysis is a great way to look at user behavior and loyalty over time. Each line in the chart below represents a different "cohort" of Twitter users based on the month they joined (we chose 7 cohorts from different time periods to avoid clutter). In the chart below, we monitor what percent of the users in each cohort come back to tweet again in each month after having tweeted in the first month. Obviously, month 1 is 100% by definition:

This is quite a telling chart:

• There is an expected usage dropoff in month 2, but after that point usage holds predictably steady. This is great news for anyone trying to forecast user activity early on in a new user's lifetime.
• The newer cohorts, despite being significantly larger in size, actually consist of more loyal users. The two highest lines are also the two most recent, meaning that users who joined in 2009 are actually more likely to keep tweeting after their first month than those who joined in the same month in 2008.

Since the dropoff in Month 2 is quite pronounced, let's zoom in and look at weekly cohorts to see if we can see how usage drops off at the weekly level:

We see a similar pattern here, although more recent cohorts don't stand out as much as in the monthly analysis. Again, however, the dropoff in the second period doesn't seem to further decline as time goes on. This means that by the second week of a cohort's lifetime, Twitter can reliably predict its users' future behavior as a group.

Another cohort analysis that might be interesting is to look at how many tweets a cohort makes each month after joining. This metric will incorporate both the dropoff in usage from the users who churn in the first month and the uptick in activity from users who stay on the platform:

Wow! This is a remarkable image. Despite the massive dropoff in users after the first month, the tweeting activity from the users who are left is so voluminous that it makes the "tweets per month" of each cohort average over 100% (and, as before, the more recent cohorts are the more loyal)!

In other words, the users who stick around actually tweet so frequently (and at such a rapid pace compared to their first month) that they more than make up for the lost activity of those who churned after the first month. This is a very powerful and unexpected statistic.

Conclusion

Everyone has their own feelings about Twitter's reported $1 billion valuation. I hope this article gave you a taste of what its new investors likely considered before coming up with that number.

To learn more about RJMetrics and our original blog posts including the business intelligence rap and our twitter followers guide, check out our website and follow us on Twitter @RJMetrics.

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Last week, we announced a City App Store to highlight and centralize software applications developed from government data available on DataSF.org. The response from the community has been overwhelming.

We have received a number of new civic apps that are now featured in the DataSF App Showcase. We’ve added Mom Maps, a new iPhone app that helps you find kid friendly locations in San Francisco, Dadnab a text messaging service that gives you transit directions, and then there’s EveryBlock, which has just added a new feature. The site breaks down what types of services people are requesting from the city by neighborhood, zip code and day.

This type of innovation is exactly what we were hoping for when we launched DataSF.org less than six weeks ago.

We were not sure what people would create with the data, but we knew that many of our talented developers wanted to help improve San Francisco. Now, our community is coming together to help fill our app store with even more civic apps.

The Center for Investigative Reporting’s California Watch reporting team, Spot.Us, Craigslist founder Craig Newmark, MAPLight.org, the Gov 2.0 Summit, Sun Light Foundation and others are announcing today that they are joining forces to sponsor the first DataSF App Contest on Nov. 7.

The day-long app-building contest is open to developers, journalists, community organizers, policy wonks, students and others interested in building a better San Francisco from more than 100 datasets available on DataSF.org.

Register here for the DataSF App Contest. If you are interesting in sponsoring the App Contest, visit the Spot.Us page

A team of judges will pick the winning app at the end of the day and award a cash prize or Apple gift certificate to the winning team. More than $1600 has already been raised from community sponsors. If you would like to donate to the contest please click here.

We are excited to see what apps will be created from this contest. The only limit is participants’ imagination and the amount of data we are able to make available by Nov. 7. In San Francisco we are moving away from a one size fits all government to making government a platform for innovation.

If you are using or have created an application based on City data that is not in our DataSF App Showcase, we would like to hear from you.

Join Mayor Newsom on Facebook or follow him on Twitter.

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The following guest post is written by Larry Chiang, a co-founder of Duck9 who also regularly blogs for BusinessWeek. Today he is reporting from the Finovate startup conference.

At the FinovateStartup conference in New York City today, it is clear that financial startups are pushing forward regardless of funding woes or a lackluster economy

Companies here at Finovate center around financial innovations. They track personal finance and are aggressively plodding forward because consumer adoption of the internet is rising. These companies did not just present ideas, they brought along established industry stalwarts to their demos. What’s more, many of these start-ups are already white labeling their product and integrating into established company sites (T-Mobile ads, Yahoo, Bank of America). The user interfaces are better than average, which is perhaps influenced by Finovate’s previous winner Mint.

Best in Show went to Kasasa, an Austin, Texas-based financial website that uses real-world rewards and charity donations to get people to open free deposit accounts. They dragged a community banker up to the stage who gave a testimonial about Kasasa’a ability to generate new saving accounts. BillShrink showed off a location-based ATM fee avoider and bank account selector. Canopy has tools to better understand and manage healthcare cost, including Health Savings Accounts. Their oh-so-chic iPhone App matches up medical services to your personal HSA.

A typical company presenting was SmartyPig, which adds a social component to saving. It crowd-shares personal saving goals for a vacation or a set of golf clubs. FinanceWorks demonstrated online banking data aggregated into TurboTax. Outright takes and scrapes sales data for one-person businesses (such as eBay sellers) and helps the entrepreneur alleviate the burden of quarterly tax pre-payments. Home-Account seeks to be a Kayak for loan mortgage shopping. It plugs into Homes.com, Movoto.com and Bills.com and ‘B’- and “C”-grade paper companies like Freedom Financial Network.

Most of the sites demoed today offer features such as interest payment tracking, loan shopping, expense account summaries and more everyday, core consumer finance applications. Many of the demos featured summaries of expenses, and visually extrapolated spending behaviors to identify trends. For example, Credit.com boils down 20+ pages of credit reports into one graph (with a trend line).

At the heart of the functionality for consumer finance are apps that summarize “money in” / ‘money out’. In the same way that dashboards revolutionized the ability of C-suite officers to forecast a company’s revenues and expenses, the average consumer now is able to get dozens of data points that paint a picture of their personal budgets.

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One reason I started this column is because I see a lot of “injustices” in the VC-start-up universe, and while I’m obviously aware that we don’t work in the charity sector and that business is business — and we’re here to maximise investment returns! — I do think we should let market forces determine what’s reasonable or not for business practices and deal terms. However, this works only if entrepreneurs actually have access to experience and insight into what really has been “standard” or acceptable in the past.

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Editor’s note: This guest post is written by Shelby Bonnie, the CEO of Whiskey Media. He co-founded CNET in 1993 and was the Chairman and CEO from 2000 to 2006. He served as Chairman of the IAB from 2001 to 2003. Whiskey Media is a content platform with three sites, giantbomb.com, comicvine.com, and animevice.com lots more to come.

OK, Advertising Week just ended… does anyone else feel like the online advertising industry is the orchestra, playing on while the Titanic is sinking?

We have a problem, folks. And I, for one, think we should start to fix it by killing off the CPM, once and for all.

I have been in the Internet media space for 16 years and will start by stating the obvious: The CPM has done more to stunt innovation and drag down quality products than any single thing on the Internet. Maybe it works in other mediums, but it sure as hell doesn’t work on the Internet. Having been both a small and big publisher (now small again), it’s been my experience that the collective focus on CPMs and counting eyeballs by marketers, agencies, and publishers has led to a whole mess of unintended consequences that have produced a series of “solutions” that work for none of those parties. And perhaps more importantly, it’s been terrible for users.

All campaigns start with the best of intentions: “let’s do something creative, engaging, and unique!” But unless someone really senior from the agency or client side intervenes, the road for a campaign always leads to the media buyer and the dreaded spreadsheet, where the two most important columns are impressions and cost. Ironically, there’s usually some good stuff in campaigns, but they are thrown in for free as “value adds.” At some point, publishers decide that if all clients care about is impressions, then OK, we’ll give them impressions. The output is an industry that overproduces shallow, superficial, commoditized impressions. Why do we have so many bad sites that republish the same junky content–content that’s often made by machines or $1-per-post contractors? Why do sites intentionally try to get us to turn lots of pages with tons of top 10 lists, photo galleries, or single-paragraph summaries of someone else’s story?

In 2002, my first full year as Chairman of the IAB, we made a decision as an industry to kill the original small banner (468×60). Though it was the only unit that many of our partners accepted, if we didn’t kill it, the industry would have had a very difficult time moving past it. We had to be bold and take some risk, but at that time we ushered in the move towards larger ad units, a move that all agree was a big improvement. We are at a similar point today. The focus on CPM is causing a bunch of behavior that is bad for publishers, marketers, and users. Only by killing it do we have the opportunity to invent our new future.

Why is the CPM such a problem?

• You always get what you pay for. I believe in basic economics. If you pay for impressions, you get impressions. Is that, in the end, what marketers really want? How about engagement? How about impact? How about actually selling product? A glut of impressions has helped no one.
• All impressions are not created equally. There’s a big difference between seeing an ad on a page of content that contains one uninteresting paragraph and twelve ads, and seeing a single ad on a page that is relevant to the ad and covers a topic for which the user is highly passionate and engaged. The differences between social network and content inventory is another example–how do you put those items on the same spreadsheet?
• There is no natural constraint . TV, print, and radio can only put so many ads within their product. But on the Internet, that is not the case. We can continually increase the number of ads per page or manipulate users’ behavior to goose our impression numbers. Can’t you see some publisher saying “if they just want impressions, why don’t we go from four ads on a page to eight” or “couldn’t we turn a new ad every time someone loaded up a new e-mail?”
• It doesn’t mean anything anymore. With such a glut of impressions from all media and the number of impressions with which people are bombarded with every day, it just doesn’t matter anymore. It’s an arcane notion that’s a holdover from a time when there wasn’t as much media. As I said, TV, radio, and print had natural constraints and there was a lot less of it. So just seeing an ad was, by definition, unique and impactful. Those days are no longer.
• Senior marketers get it, but there is a whole infrastructure built around the CPM. The process is built up around how ads are bought and sold, based around a media plan, and asked for in RFPs. All the good, creative thoughts get boiled down into spreadsheets, that are for the most part owned by folks that are not that far removed from their last college class. Even senior folks have to try to fight their own system to keep the ideas that they like.
• This is not a win for marketers. In a world of over-produced impressions, even great work by marketers is ignored at best and more commonly not even seen.
• The ultimate losers are the users. They get a lot of bad content and bad ads.  They are literally overrun by ads all day.

What will a new solution need?

• Simple. In the end, I realize that to make the business of marketing work it can’t all be art. You have to have a way to create a streamlined process. Everyone wants and needs a way to compare campaigns and metrics to determine success. Simplicity can lead to scalability, which allows for more efficiency for publishers, agencies, and marketers. Having said that, the simplicity we now have has led to a model that doesn’t work.
• The metrics should be more closely aligned with what you want. Whatever you pay for is what publishers will start mass producing. If you want engagement, pay for engagement. It is unclear whether there is one metric or many. A starting point might be to start with uniques, actions (like sharing, contributing, and engaging), and time.

What about the CPA or CPC?

• CPA and CPC have their appropriate time and place, but let’s recognize that those situations are limited. Yes, they work great when people know exactly what they are looking for, but how do you convince them to buy something they don’t know they need? Pure click performance just emphasizes the status quo of what I already know and already buy. Yes, it’s an action… but so is a video view, a wiki contribution, a contest sign up, a tweet about a product, and so on. We also know that a singular focus on these items would create as crazy a set of unintended consequences as we’re currently dealing with today.

Where do we start?

• First, just stop using the CPM. Yes, it will break every model and process that the industry holds dear, but we need to get rid of the crutch. The ensuing turmoil will bring creative thinking, new ideas, and entrepreneurial passion.
• Let it be a movement, not a task force or sub-committee. Create room and dollars for entrepreneurs to experiment and try new things. They all might not work, but we will collectively learn. A bunch of task forces by industry associations will only make it worse.
• Think open source. This should not be proprietary or an individual company’s technology, it needs to be an effort on everyone’s part to do this together with the benefit accruing to us all.
• Realize that we all share a common need to fix this. The fight is with the system, not each other.

I certainly don’t have all the answers myself, but as a veteran of this space and someone who deeply cares about the medium, it is about time we all make a concerted effort to change our direction. I would love to hear your thoughts (shelbyb [at] whiskeymedia [dot] com).

Photo credit: Flickr/SuperFantastic

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I have watched with interest as the Apple backlash intensifies* (see below). It seems the App Store has broken the camel’s back. There is massive resonance here for both entrepreneurs and VCs.

This quote from Chris Messina is my favorite. He thinks that the Apple App Store is a “flash in the pan” because it is a proprietary platform and, hey, wait a minute, proprietary platforms are counter to consumers’ interests. That’s why Microsoft accrued haters. And why folks are starting to feel the same about Apple?

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People are social animals, and love to both move in packs. But they also like to purposefully individuate. One game-changing aspect of the real-time movement is being able to see this as never before. With real-time, and with algorithmic visualization, our “telescope” is strong enough to see the laws of social physics at work: existing social groups incubate new topics of interest, and existing interests incubate new social groups; both move in response to each other.

Twitter bills itself as the pulse of the planet, but it’s more like the pulse of creative networks. Take a look at these surprisingly visceral data movies, freshly computed from the TechCrunch50 Twitter stream, and showing an evolving network of companies competing for attention and publicity during the course of Tuesday:

To explain, companies (colored balls) are competing for the attention of people (smaller white balls), all just repelling each other and floating in 3D space. At the time a person tweets about a company, a line is drawn between the two and pulls them together, until a while (set to 30 minutes) has passed, and the connection fades away.

The movie reminds of some amateur Youtube journalism – a chaotically evolving social situation, like a natural disaster. The camera jerks around everywhere, trying to sample some disruptive sequence of events. But if you look at the details, you can get a feel for the dynamics of the room — who burst onto the stag and when, and who was riding in on someone else’s coattails.

For example, around the :36-second mark, AnyClip bursts onto the scene, lighting things up in green and wildly bouncing around from the energy of grabbing both the existing audience and a bunch of new people. And you can see how Crowd Fusion and Hark feed off of it, but do not take it over completely.

At times the audience hand-off is very civilized and orderly, such as in the morning session, when ClientShow, Metricily, and Affective Interfaces are all basically sharing the same set of influencers’ attention. The next session, starting off with Cocodot, draws a very different audience which develops off-scene and then gets sucked in once there is more audience overlap.

From a PR point of view, the best possible case is something like what happened when Threadsy, Lissn, and Radiusly hit the stage after the 46 second mark: its the “colliding galaxies” model of social formation, where you drew an audience on your own, and then the preexisting audience found you compelling enough to move over as well.

These are exactly the kinds of details and context a company presenting at next year’s TechCrunch50 would want to know, something that simple aggregators and bean-counting analytics are unable to provide.

Movies are great at setting context, but static images that emphasize time evolution can be incredibly useful for comparing events. And actually, this turns out to be the more useful way to look at the events of the first day of TC50.

The plots below show each company of Day 1, and plot the number of tweets per minute during the course of the day associated with each company. In the first one, we just make one dot for each tweet, and in the second one, we bin up the number of tweets per minute, and show a kind of “volume” plot of the conversation share each company is getting.

In one glance, we can see how Bing took the stage and had lasting power, while Google took the stage with more initial buzz, but then quickly faded. Clicker and iTwin were able to break though the conversation, while whoever had to follow Penn&Teller was either at a big disadvantage or didn’t do enough to energize the crowd.

Interestingly, unlike Day 2, the end of Day 1 was mostly a muddle of conversation about a bunch of companies. In a way, the Google announcement seem to let the air of the balloon a bit, with no one being able to generate much excitement afterwards.

The two days of TechCrunch50 provided a wealth of data on the bubbling subculture of technology startups, but the principles at work are far, far greater than self-interested promotion.

Consider a Google News headline, and think about how many thousands of TC50’s underlie the movement of that incredibly large-scale structure. Or how events decades or even centuries in the past still echo in the social fabric, like background radiation of the universe, or like decayed supernovas reforming into a solar system.

Why do we care about discovering social structures? The endgame here involves turning that information into transformative actions, and erecting new structures.

From the micro-optimizations of the immediate moment, to the long-term constraints and opportunities of society, we can observe TC50 from vibrant new perspectives. Expect to see a lot of startups combining both ends of the social info to social action pipeline at next year’s TC50.

By then it will surely have a monosyllable buzzword, but for now, lets call it “socially integrated analytics.”

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I was one of those kids who just couldn’t stop trying to start a company. I think I just really feared working for the Man. Problem was, I seemed to suck at the whole startup thing. Multiple attempts followed by multiple failures. At some point I just said, “screw it, I’ll get a high paying job.” Problem was, I couldn’t stop thinking of the next great thing that got me ridiculously excited. Turns out, it wasn’t so much that I was the problem. Rather, I didn’t have anyone around me familiar enough with startups to tell me that I was doing it all wrong.

This is the first post in what’s going to be a series of blogs on how to go from nothing – no connections, no team, no money and no knowledge of how the startup industry really works – to operating a growing business. I mentioned to Mike that I was going to kick this series off over on the Meebo Blog, but he suggested I start it here. Gladly! So for this first post, here’s the best advice I can give you: join an awesome founding team and get your product out the door ASAP. Then, forget everything else, VCs included, and just build.

One of the things I do as a founder of a later stage startup is to meet with early stage entrepreneurs to help them get their companies going. Nine times out of ten, the meeting ends with them asking me for introductions to VCs. Little do they know that, even if they could raise VC, it’d start them down the wrong path. So, this is what I tell them:

At the exact moment you had your idea, ten other people had the exact same idea. There was just something in the environment that made it the right time for folks to think that one up. The race has already begun! Who’s going to execute first? Who’s going to execute best? If you want to waste nine months trying to raise VC money for that idea, great. But six months in, you’re gonna cry when you see someone else put out that same product you’re pitching me right now. Like I said, forget everything else and just get your product out the door. Now.

Inevitably, the excuses begin: I need to hire people to build the product. I don’t know any developers. I need money for the servers. I want to get that last promotion at my current company first!

Here’s the rub: in consumer internet (and often enterprise), if your founding team doesn’t have the chops to get a prototype of your product out and in the hands of a blogger to test and write about, you might as well save yourself a lot of pain – you’re not going anywhere. Need proof? Just look at some of the most successful tech companies in the last decade: eBay, YouTube, Sun, Oracle, Apple, Cisco, Facebook, Yahoo!, and Google. All of them share a couple common traits: they launched before taking outside investment, and they were able to do it because they had a set of founders with the skills to build the initial version of the product themselves. Only eBay was founded by a single individual – the rest were team efforts.

With that background, let’s get to the three most important things you can do to go from nothing to a kicking startup.

First and foremost, find a great founding team. One person is almost never enough. You just can’t do it all. Rather, team up with one or two other people who have skills synergistic – not overlapping – with your own, but with similar goals and passions. I can’t tell you how frequently teams of three business school students tell me they’re going to start the next great consumer Internet company. When I point out that they’re all business people, and wonder who’s going to build the product, they almost always fall back on “we’ll get a couple of undergrads to do it,” or, “we’ll outsource it.” If I hear either one of those, I know the startup’s already dead. Sorry, folks. Harsh, but probably true.

The best composition is probably one engineer whose passion lies in the pixels on the screen and another engineer whose passion is making bits fly really fast through servers. In Meebo’s case, for example, I was lucky enough to partner up with Elaine and Sandy. Elaine is a JavaScript wizard who has a great visual eye and makes sure every pixel is in its place. Sandy is a straight C nerd and is all about efficiency. Together, they built the first versions of Meebo from scratch. Now, if you have a business guy along for the ride, that works too. But let me tell you, the sum total of my contribution to Meebo prior to our launch was getting us incorporated (read: easy) and suggesting that “the button might look better over there” (read: not much). Post launch, if you gain traction, is where the business person will help take the load off of the technical folks. The business person can take all the meetings while the technical folks work on making the product better.

Second, like I said, forget everything else and just get your product out the door. No office. No phone system. No hiring. No press. No legal muck. No raising money. No looking for partnerships (who’s going to partner with you anyway?). The success or failure of the adoption of your product is what will create 99% of the initial value of your company. If no one ever uses your product, you have no value. Oh, and for the record, raising VC does not help get traction – in another blog post, I’ll argue that if anything, it hurts. So just forget everything else and focus on what matters – getting an alpha of your product out the door and into the hands of your friends and family. Use some URL like www.mygreatstartup.com/shhh.html. Then, once you’ve fixed the initial bugs and incorporated a feature or two that everyone requested, go live. Remember: keep it simple. The initial product you build is for you – you don’t know what features everyone else wants. Launch fast and light, and listen to your users for feedback. In the product, always have a way to ask for user feedback. Remember, once TechCrunch or GigaOm writes about you, you’ll most likely get crushed with a single surge of traffic (we fondly call it the “blog spike”), only to watch almost all of it flitter away. Take advantage of that surge to learn and iterate.

Finally, get good mentors. If someone had been there and just told me “join a great founding team, focus on the product, and forget everything else,” I would have saved a lot of time and heartache. A good mentor is someone who has been part of the startup community themselves – someone who has a realistic understanding of some of the basic dos and don’ts of starting up. You don’t need many – one or two to begin. In Meebo’s case, two of our friends, Todd and Cam, gave us a ton of pre-launch advice. Every time we started straying down a wrong path, like flirting with just talking to that one VC or even thinking about approaching a company about a partnership, they’d always come out with something like, “is that going to get the product out faster?” Trust me, once you’ve launched and achieved traction, you’ll have your pick of mentors, VCs, partners and all the legal expenses you need.

I hope that some of this hit home for those of you who’ve been working on your own startups. In later posts I’m going to get into more detail on specific topics like hiring, raising money, what types of ideas have the potential to get big, finding your founders, and the like. You can follow them over on the Meebo Blog, so bookmark this post and Mike tells me they’ll link to subsequent posts. Alternatively, follow me on Twitter (@sethjs) where I’ll mention when I put up a new post.

Update:

Part 2: Finding Your Co-Founders

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George had the opportunity this weekend to attend Chinese e-commerce behemoth Alibaba Group’s 10 year anniversary celebration, dubbed the “Alifest”.

Alibaba is best known for its international B2B e-commerce and sourcing market place Alibaba.com, but also operates Taobao – the “eBay of China” and largest C2C Internet retail web site, Alimama – an online advertising exchange and affiliate network – as well as Alipay, China’s most popular third-party online payment system modelled after Paypal but offering additional features such as escrow services.

Alibaba’s chairman Jack Ma, a former English teacher, founded Alibaba in 1999 out of his Hangzhou apartment. Ten years later the company has grown to China’s second largest Internet company, after digital entertainment giant Tencent. His company Alibaba.com’s 2007 IPO on the Hong Kong stock exchange was the second largest Internet offering ever after Google’s debut on NASDAQ in 2004.

Since 2005, Yahoo! is a strategic shareholder when it acquired 39% of Alibaba Group for US$ 1 billion. In return Alibaba operates the portal Yahoo! China, but the secondary role Yahoo! China plays for Alibaba became evident when Ma shared his vision for the next 10 years of Alibaba during this weekend’s press conference. This was once again underscored yesterday when Yahoo! sold $150 million worth of shares in Alibaba.com.

Jack’s dream is to focus on empowering and encouraging small and medium sized enterprises (SME’s) across the globe and it centers around 3 major goals for the next 10 years:

Goal 1: 10 million people “work at” Alibaba

By “working at” Jack symbolically referred to millions of SME entrepreneurs that will not literally be employed by Alibaba but are turned to “netrepeneurs” and independently utilize and work online with Alibabas trade platforms and software solutions:

Alisoft was established in January 2007 and offers software as a service solutions for SME’s. In July 2009, Alisoft was merged with Alibaba Group R&D Institute to lay a solid technology foundation to further develop Alibaba Group’s businesses. At the same time Alibaba Group this weekend announced the establishment of a new subsidiary focusing on cloud computing. In the medium run, it is evident that Alibaba will strive to emerge as a leading software solution provider for SME’s, eventually competing with Western players such as Salesforce.com.

Goal 2: 100 million new jobs created worldwide by Alibaba

A megalomaniac target at first glance, this could very well become reality when considering Alibabas resources and Jack Ma’s obviously wide-reaching personal connections that became more apparent to me through the course of Alifest.

In May 2007, Alibaba.com introduced the Ali-loan program offering financing to small Chinese businesses in partnership with leading Chinese banks. This model was now hinted to be extended across other countries in cooperation with Muhammad Yunus’ Grameen bank. The second corner stone to achieve this goal involves Alibabas training department, Ali-Institute that was upgraded this July to become a new profit-oriented business unit under Alibaba.com.

During the cleverly staged Alifest program speakers such as Nobel prize winner Muhammad Yunus, former president Bill Clinton (both over video) and Starbucks CEO Howard Schultz underpinned the importance of fostering SME development across developing nations and endorsed Alibabas global efforts. This is quite remarkably for a Chinese company. Provided, you still consider it as such: “In 10 years we wont make differences between local or international companies any more, but only between differences in integrity”, Jack Ma said during his speech this weekend.

All points considered Alibaba is indeed in a powerful position to shape the worlds economy in the coming decade. Taking Alibabas already undisputed status among SME manufacturers in what is soon to become world’s largest economy, even the third proclaimed goal by Jack Ma can seem plausible:

Goal 3: 1 billion people trading on Alibaba Group’s platforms

The roadway to Alibabas most eager goal was visualized to us impressively when Alibaba.com’s CEO David Wei gave us an exclusive tour of his company’s new headquarters. (Which by the way also has a basketball court inaugurated by another of Jack Ma’s friends Kobe Bryant, who was also present in Hangzhou this weekend)

David presented us Alibaba’s realtime trading statistics generated from the three pillars of its business: international trade, domestic Chinese wholesale and domestic Chinese retail. (the according graphs can be seen in the picture above from left to right).

During the time of our visit last Friday evening at around 7pm Chinese time, 2.87 million concurrent users were active on Alibaba.com’s B2B portal. According to David the daily average concurrent user number is 4 million, around 10% of its 42.8 million worldwide registered users. The groups domestic C2C e-commerce marketplace Taobao holds around 78% of the online consumer market in China. As of mid-2009, it served 156 million registered users. Transaction volume on Taobao reached nearly US$ 11.8 billion in the first half of 2009, and by that exceeded the largest retailer in China in transaction volume during the same period.

David continued to say that “Alibaba’s combined trading statistic give us 3-6 months lead time to predict Chinas domestic trade and export volumes”. These are without doubts immensely powerful insights to possibly the biggest driver of our current world economy. Not without reason, Alibaba’s founder Jack Ma was one of the first to recognize the economic downturn in February last year, when he predicted “a though (economic) winter is coming, dark clouds are forming and the thunder is coming closer” during the annual Alibaba all-employee conference. “Today, the darkest period for Chinese exporters is over”, Alibaba’s CEO David Wei confirmed to us.

I asked David to tell us more about AliExpress – a new international wholesale platform for small-sum orders from its Alibaba.com database of Chinese manufacturers. He confirmed “the platform is still in beta but bound to launch in rather weeks than months from now”. The service offers minimum orders as low as 1 item, escrow payment and delivery with full tracking. Advertising “factory prices on even the smallest orders” the service is de facto a B2C marketplace just like Amazon and in part eBay that connects the Chinese manufacturers on Alibabas existing B2B portal Alibaba.com with the US consumer market. It will also be the first international roll out of Alibaba’s online payment and escrow system Alipay now competing with PayPal China in fight for Chinese SME merchants. Alipay currently facilitates about 4 million online payments worth up to US$100 million per day. It surpassed 200 million registered users in early July 2009.

With AliExpress the company for the first time attacks eBay directly in its home market. In China the US company already lost against Alibabas Taobao, giving up its domestic eBay platform and partially selling it to Chinese Internet group TOM Online in 2006. Not included in that sale, however was eBays and PayPals cross-boarder business of Chinese merchants selling to US consumers, that continues to be operated by PayPal China itself. This remaining eBay asset is now under serious threat, with Alibaba entering the B2C export business.

The move nevertheless comes with many risks for Alibaba. Only in December last year, Alibaba’s competitor Global Sources Direct, a division of NASDAQ-listed online sourcing platform Global Sources, announced it would discontinue its wholesale services. The platform was established in 2005 as a joint venture between Global Sources and eBay. A major part of the failure was attributed to the fact, that in such a cross national market place setting, it is impossible for its operator to guarantee quality, availability and delivery times. Instead it has to rely on the goodwill of its merchants, which in a developing market like China is a huge challenge. It remains to be seen how Alibaba can solve this problem better than its competitors.

Additionally to its international challenges Alibaba Group is under constant attack from rising Chinese rivals such as Baidu’s new C2C e-commerce platform Youa. Since the end of last year China’s number one search engine Baidu.com has blocked all Taobao merchants offers in its natural search results, leading to a huge loss of search volume. In retaliation Alibaba Group, previously one of the biggest ad spenders on Baidu, stopped all its PPC campaigns.

In the “Art of War”, Chinese military strategist Sun Tzu writes “concentrate your energy and hoard your strength”. However, Alibaba’s Jack Ma seems to ignore this advice by competing on multiple battlefields both at home and abroad, potentially stretching his company’s resources too thin. Yet the man reinforced his modesty in yesterdays closing speech when he said “looking back we are now a big company, but looking ahead we are still a very small company”. Having seen Ma passionately in action this weekend, it is clear that he’s lost none of the tireless energy that has made him successful, instead gaining in charisma and determination that will be necessary for the next 10 years ahead.

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