Disruptive Business Models

Inverters - the next wave to "green the grid"

2009-10-20T18:21:00.000-07:00

More details soon, but learning a lot about inverters and how electricity moves around the power grid. Reactive power is what allows the energy to flow - creates magnetic field, etc. It is something you don't see or know it's there (or sometimes that you are paying for it) but it makes it all possible. There are a lot of efficiency gains to be made both on the grid and within end-user facilities. More soon on this subject.

Sale of Largest Solar Distributor in North America - Closed

2009-04-15T09:13:00.000-07:00

This is the deal we worked on for 18 months - now going full bore on solar finance!

Acquisition Gives ITOCHU Largest Solar Distribution Network in the U.S.
April 13, 2009

New York: April 13, 2009 -- ITOCHU Corporation, jointly with ITOCHU International Inc. (collectively, ITOCHU), has agreed to acquire the business of SolarNet LLC, a solar energy solutions provider that includes DC Power Systems, the largest privately-held wholesale distributor of solar energy systems in the US, and Stellar Energy Solutions. ITOCHU has been actively implementing a global solar energy strategy since 2006 and has made a number of strategic investments, including the acquisition of California-based wholesale distributor and systems integrator Solar Depot in 2007. With the acquisition of SolarNet, the combined market share of Solar Depot and DC Power will give ITOCHU collectively the largest solar distribution network in the US. SolarNet will be operated as a majority-owned subsidiary of ITOCHU, beginning immediately. While the current management and employees will be retained, ITOCHU personnel will be added to strengthen the capability of SolarNet.

ITOCHU also supplies manufacturing equipment to solar module manufacturers globally and is involved in the systems integration, financing and development of solar energy projects in various countries. Observing the rapid growth in the solar industry, ITOCHU recently centralized all its solar energy related business into a new business department in order to provide a stronger and more streamlined approach to executing its solar energy business.

“ITOCHU is pleased to add the substantial business experience and capabilities of DC Power and Stellar Energy Solutions to our rapidly growing solar energy business activities in the US market and around the world,” said Harutoshi Okita, Senior Vice President, ITOCHU International Inc. “This acquisition expands our presence in the US distribution market and extends our capabilities with regard to the development of large-scale solar systems.”

ITOCHU expects this development to result in an improved product offering and level of service for solar dealers and customers across the country, making world-class solar solutions available at the most competitive prices. The acquisition also positions ITOCHU as a leading integrator of commercial-scale solar power systems, with a project pipeline of over 80MW across the US.

“SolarNet’s partnership with ITOCHU will give our companies the resources to execute our aggressive business plan and continue to provide outstanding customer service in a rapidly growing business. We are excited to have a partner with such a long-term vision and global reach,” said Joseph Marino, President of SolarNet. Mr. Marino will continue with SolarNet after the acquisition as a member of the Board and as Founder.

ITOCHU will actively expand SolarNet’s business throughout the US market by building on its existing solar energy business activity and utilizing its global business network to add value to SolarNet. Through these efforts, ITOCHU expects its growing solar operations to accelerate the adoption of solar power in the US.

Minority owners of SolarNet and Board Members include Chris Tyson and Mark Sampson, who will focus on providing financing services to the company and solar industry (www.energyfinancecompany.com and www.newedgesolar.com).

*********************************************************
About ITOCHU
ITOCHU Corporation is a diverse global trading company headquartered in Tokyo with annual revenues of more than $28.5 billion in the fiscal year ending March 31, 2008. Founded more than 150 years ago, ITOCHU consistently posts global trading transactions of over $100 billion every year. With more than 150 offices in more than 70 countries, ITOCHU Corporation operates over 700 domestic and overseas subsidiaries and affiliates involved in a wide array of industries, including technology, energy, media,
telecommunications, aerospace, electronic machinery, textiles, food products, finance, real estate,
insurance and logistics services.
For more information on ITOCHU Corporation, please contact
https://www.support.itochu.co.jp/main/ssl/coy/inquiry_other/inq_other_e.html or visit the ITOCHU
websites at www.itochu.co.jp/main/index_e.html and www.itochu.com.

About SolarNet
SolarNet™ facilitates solar energy solutions by fostering collaborations between solar contractors, engineers, architects, investors and energy users. By utilizing Solar Service Agreements (SSA), innovative financial contracts that pair solar investors with energy users, SolarNet makes large-scale solar solutions accessible to more corporate and government clients. For more information, please contact David Michalek at david@dcpower-systems.com or visit the SolarNet website at www.solarnet.us.

About DC Power Systems
DC Power Systems is the largest privately-held wholesale distributor of solar energy systems in the US. Established in 2000 in Healdsburg, CA, the company has grown rapidly and is a full-service provider to over 1,000 dealers throughout California, the US and Latin America. DC Power serves residential and commercial markets through four warehouses coast-to-coast. DC Power offers in-house design, engineering and installation support to its SolarNet™ dealers. The company's world-class technical expertise encompasses a broad range of technologies allowing adoption of the most site-appropriate products. DC Power also offers small-scale wind turbine systems.

More information on DC Power Systems: www.dcpower-systems.com

About Stellar Energy Systems
Established in 2004, Stellar Energy is a leading solar system integrator with comprehensive services including project financing, engineering and installation management. Recently, Stellar, SolarNet and Sharp collaborated to design and construct the largest solar installation at a winery and one of the largest in California – a combined 2.8MW owned by Foster’s Wine Estates.

More information on Stellar Energy Solutions: www.stellarenergy.com

About Solar Depot
Solar Depot is a wholesale distributor and systems integrator of solar electric and solar thermal systems. For over 30 years, Solar Depot has been designing and supplying solar energy systems for residential, commercial and industrial applications, making Solar Depot among the largest and most experienced solar integrators in the United States. Solar Depot serves its customers through three full-service facilities in California, located in Petaluma (corporate headuarters), Sacramento and Corona. For more information, please contact Kevin Shimokobe at kevin-s@solardepot.com or visit Solar Depot’s website at www.solardepot.com.

Media Contact at ITOCHU International Inc:

Michael Solomon: Michael.Solomon@itochu.com, (212) 818-8083 or (914) 960-2368

Source: ITOCHU International Inc.

PG&E 500MW plan - 1/2 PG&E Land 1/2 Private

2009-02-24T14:34:00.000-08:00

Many reports of announcement - but the really interesting news is that 1/2 (or 250MW) will be contracted out to private developers. No details on whether this will be "build to own" or PPA style deals (with PG&E as offtaker).

Question - can PG&E take the CSI subsidy as well? Or is that a violation of the CPUC rules that setup the CSI?

Solar in a Box - the Ultimate Residential Solution?

2009-02-24T09:32:00.000-08:00

Installation costs for residential solar typically represent more than half the cost of the installed array, and the installation process cries out for innovation. Several companies have created "solar in a box" products. Typically, they come in kit form and include panels with dedicated inverters, racking/attachment system and wiring for interconnection to the grid.

Here's a typical example.

This is a good start, but there are some tradeoffs with this type of system:

1. the low profile means that you will not get optimal tilt for maximum efficiency;
2. the low profile may also create roofing issues - both for air circulation and also roof replacment
3. these systems still require multiple roof penetrations, which may cause maintenance issues in the future
4. the micro inverter systems provide for easy assembly and redundancy (partial panel shading is less of an issue with microinverters, as is individual failure) but also add cost.

I haven't yet seen any installation cost figures with these systems, but it is interesting to think of this type of product being used in a DIY application. Say for sale at Home Depot, the homeowner can install the system and call on a licensed electrician simply for the interconnect. That may be one way to reduce installation costs down to more like $1-2 per watt, giving the homeowner and extremely fast payback when including subsidies and the new federal solar grant.

Grants instead of Tax Credits - Boom?

2009-02-17T15:32:00.001-08:00

The new stimulus bill apparently will provide for government grants to replace the current tax credit scheme. On the surface this should solve a lot of problems, since as everyone knows there is a lack of investors with tax credit appetites. Couple of interesting wrinkles though (as I understand it):

1. must place in service in 2009 or 2010 - so long term projects are out of luck (like utility scale solar)
2. must be a tax paying entity to use (so non-profits, schools, etc. would still seem to need a third party ownership structure to facilitate)

Will be interesting to see what the regs that actually implement the legislation look like and how long this will take. Could affect project/construction finance if the grant check is going to take a long time to process, for example.

Solar Data - Opensolar.org

2009-02-04T16:54:00.001-08:00

Great mashup of CSI data and Google Maps - you can see the locations, components of costs of projects that have received CSI rebates - http://opensolar.org/.

Suggestions -

1. Instead of pulldowns provide search functions for installers.
2. Allow searching/sorting by geo, size, $$, type of panel, date, etc.

Great start though and very useful..

MMA New $200M fund - $10/watt?

2009-01-30T10:07:00.000-08:00

News on MMA's new fund - http://greenwombat.blogs.fortune.cnn.com/ - stated $200M fund, 20.6MW = approx. $10/watt.. This seems high in relation to the prices we are seeing and what most lenders will fund. Possible developer note/other depreciation or tax credit multiplier?

Using Twitter to Update my Blog

2009-01-30T10:03:00.000-08:00

Can't seem to get it together to post more often, so just added Twitter Badge. Will try that!

AB 811 - New California Law Authorizes Cities to Make Low Interest Solar Loans

2008-07-23T09:18:00.000-07:00

California has passed a new law AB 811, that authorizes cities in California to make low interest loans secured by a lien on the property. The liens transfer to any subsequent owner if the property is transferred and the property owner makes payments much as they would property tax payments.

This mechanism should allow cities to easily raise bond money to finance the programs, given that the loans are secured by liens and, like tax liens, will presumably be senior to all other liens.

The low interest and presumably easy availability of these loans should be a serious spur to PV sales. Low interest loans plus the CSI will bring many installations close to grid parity on a monthly basis.

I also think this has to be seriously troubling to PPA and lease providers.. wonder what their "spin" will be?

SCE ProLogis Solar Deal - Who pays?

2008-03-28T09:24:00.000-07:00

Yesterdays announcement that ProLogis had agreed to lease roofspace to SCE for solar arrays raises some interesting issues for the industry, most importantly, can private sector PPA based solar integrators be competitive with public utilities?

Arno Harris thinks so. He is the CEO of Recurrent Energy, so of course he has to!

The biggest question is whether the public (and the many public watchdog groups) will support the rate hikes that SCE will propose to finance this project. Should ratepayers finance SCE's entry into yet another profitable business for SCE? What does this say about using regulated/captive customer bases as a competitive advantage over private enterprise?

This is also an interesting deal for ProLogis. Arno Harris says he knew that SCE and ProLogis were talking, but doesn't indicate why they went with SCE instead of Recurrent Energy or some other PPA company. You would have to think it was simple economics. Presumably, ProLogis would make more from leasing the roofs to SCE that it would selling power to tenants. Again this raises the competition question.

Mr. Harris also says the deal "Doesn’t Serve ProLogis’ Tenants or Green their Buildings – This sounds like a great deal for SCE and ProLogis—but it doesn’t allow ProLogis to make any green claims about their properties and it provides no benefits for their tenants. From what we can see, all the green benefits go to SCE and ProLogis just gets some roof rent."

I am not sure I follow that argument. If you make your rooftop available to solar, the equipment is installed and generated power that is replacing other less green power, presumably you have "greened" your building. Hard to see how the "greenness" depends on who you sell or provide the power to. Also, it seems that ProLogis received plenty of positive publicity and the other "warm fuzzy" factors an institutional landlord presumably cares about when doing green deals yesterday.

I do however agree with his observation that it remains to be seen whether this plan really gets off the ground, or whether it dies at the feet of the CPUC (failing to approve rate increases to pay for it) or other reasons. Lastly, if the deal does get done, it will be interesting to observe this massive plans effect on supplies of solar panels, inverters, etc. Supplies could well tighten and make other projects unfinanceable for ReCurrent Energy and others in the PPA business.

California Solar Initative - Affordable Multifamily Program

2008-03-19T07:58:00.000-07:00

The CSI is making progress on the long promised program for affordable multifamily housing. A draft staff proposal was submitted on February 29, 2008 and a public hearing was held this week. Presumably the program should be available in the next 90 days.

This one is going to go fast, even faster than the commercial CSI, which in many areas is now all the way down to step 5 ($.22 per KwH). The affordable multifamily program is only slated to get $100M and the subsidy will be an EPBB, and may be as high as $3 per watt! This subsidy, combined with the federal tax credit (at least through the end of 2008!) and depreciation means that it should be possible to offer solar systems to property owners at very little (or no) capital cost and relatively competitive power purchase rates and terms.

Again, I imagine this will be a "race to file" in order to reserve these credits. Property owners should be out getting all their engineering and pricing done now!

California Solar Initiative Subsidies are Going Fast!

2008-01-17T10:44:00.000-08:00

California Solar Initiative Subsidies are Going Fast!

Here's the latest numbers:

January 2008 Opens with High Solar MW Reservations

TRIGGER TRACKER SNAPSHOT FOR JANUARY 15, 2008
Administrator	Customer	Current Step	MW in Step	MW Under Review
PG&E	Residential	3	14.40	2.08
PG&E	Non-Res	4	38.10	17.85
SCE	Residential	2	10.60	1.31
SCE	Non-Res	4	40.10	21.09
CCSE	Residential	3	3.40	0.28
CCSE	Non-Res	4	9.00	1.86

As you can see, Tier 2 is mostly gone throughout the state, and Tier 3 for commercial is only available in PG&E administrated areas. The question now is whether installed prices will drop fast enough to make up for the lowered subsidy, or will we see a "bust" - lack of new solar projects now that the high subsidies are all reserved?

Also at issue is the 30% federal tax credit that expires at the end of 2008. There was no extension of the credit in the energy bill enacted in December 2007.

The first quarter of 2008 should be very interesting for observing announcements of new projects (or lack thereof).

California Energy Commission Report on Solar Potential

2007-12-02T13:07:00.000-08:00

The California Energy Commission (CEC) through the Public Interest Energy Research Program (PIER) commissioned a report from Navigant Consulting that has quite a bit of useful data (as of September 2007) for solar market sizing. The report is titled "California Rooftop Photovoltaic (PV) Resource Assessment and Growth Potential by County, and can be downloaded here.

The report focuses on the potential for PV installations by county for the state of California, and takes into account such factors as roof tilt, shading, declining installations costs, tax credits, etc. in order to arrive at a total possible installed generating capacity.

One thing that really jumps out is that Navigant estimates a max of 500MW in installed panels by 2016 without subsidies, but that the use of subsidies will increase the total installed base to 800MW.

Then Navigant makes another assumption that "new business models" such as power purchase agreements (PPA's) come into play. Using PPA's plus all available subsidies, the total installed market jumps to 1,700 MW by 2016. So in effect the PPA's could have more impact than the subsidy.

Finally, the goal expressed by the state of California is to reach 3,000 MW. The report states that only way to reach this goal is to assume that technological breakthroughs (like thin film or advanced crystalline silicon) lead to a large price reductions in installed cost.

Solar Power in California - Disruptive Opportunity?

2007-11-15T07:25:00.000-08:00

For the last couple months I have spent some time learning about the solar power opportunities here in California. The market is being fed by two financial engines - (1) The California Solar Initiative (CSI) which is a subsidy program from the state of California and (2) the Federal tax credit (30% for commercial installations) which is scheduled to expire at year end 2008, but many are working to extend this in Congress.

There are currently a number of companies that are taking advantage of these programs by offering the consumer what amounts to a fully financed installation by using a power purchase agreement (PPA). The customer pays the vendor (instead of or in addition to to the local utility) and gets a solar power array in return.

The interesting dynamic here is that installation and materials costs are widely expected to fall, in a fashion similar to the semiconductor industry. With tech companies like Google jumping into the fray with funding and the stated intention of driving the cost of solar below that of coal, there is almost an incentive for many consumers to wait and see rather than jump in with a commitment to a PPA that could last many years. Maybe a new type of PPA will have to be crafted that takes into account the falling costs (of course, once the array is installed it is a fixed sunk cost, but what if pricing and installation costs fall so quickly and sharply that it is worth removing and replacing the array? What about "upgradeable" arrays? Will companies that can offer this type of technology or agreement have a competitive advantage?).

I also wonder if there is an analogy to the PC industry of a few years ago, when prices were falling rapidly and power was increasing rapidly. There the hardware makers had the friendly software makers who were able to give consumers a reason to upgrade to faster machines to run more complex software. Is there an analogy in the PV industry? Rising power costs could be one motivator, I suppose.

Private Equity for Real Estate

2007-11-02T11:12:00.000-07:00

For the last year or so I have been working in the world of raising money for investment funds focused on real estate. Primarily we are building a database and calling on university endowments, state and other public pension funds as well as private pension funds (like corporate pension plans). The fund managers that we are raising capital for are all first time managers.

The process is an interesting one. There are literally billions of dollars in investment capital available but the pension fund reps are so overwhelmed with inquiries seeking capital that it is very tough to break in a new manager.

The system seems very "broken" when you start to learn about it. There are undoubtedly many, many new managers that could produce excellent returns for these pension funds (and given the increasing demands for returns by the funds, they need high returns), but because of the information asymmetry problem (no time to vet new managers or manage the risk inherent in a new manager), few new managers are given a chance.

Shouldn't there be some kind of "farm system" for new managers? Something where an investment club of save 5-10 similarly situated endowments or funds like Harvard, Yale, MIT, UC or Calstrs, Calprs, NYSTRS could invest relatively small amounts (say $5M each) and fund a new manager or group of managers? Then as the manager are vetted they can "graduate" to the next level where they have their own fund with larger amounts from each investor? And the investors, for their hard work and risk get the opportunity (and right) to invest in future funds?

Seems like technology could also enable this. By having a simple web based management/governance system that goes from gathering initial submissions to monitoring investment performance, you could somewhat automate the process of managing this small program and make it functional for the large funds to try this.

There are a couple firms with allocations from Calstrs doing this now - but they are really creating their own fund in cooperation with the emerging manager and taking a piece of the promote -which is not as attractive for the manager, obviously.

Community Reinvestment Act (CRA)

2007-08-07T05:55:00.000-07:00

Most financial institutions that makes loans to consumers are required to meet a set of federal laws collectively known as the Community Reinvestment Act (CRA).

"The CRA was enacted in 1977 to prevent redlining and to encourage banks and thrifts to help meet the credit needs of all segments of their communities, including low- and moderate-income neighborhoods." (from the Office of the Comptroller of the Currency - one of the chief enforcement bodies of the CRA)

Most financial institutions satisfy their CRA requirements in two ways: (1) lending to lower income customers or in lower income communities and (2) buying tax credits wherein the proceeds of the tax credit sale go to fund affordable housing.

A few (mostly larger) institutions will directly invest in affordable housing and other initiatives that support low and moderate income communities (venture capital targeted at businesses in low income communities is one example).

The interesting disconnect in this market comes from the fact that most of the tax credit deals only go to larger institutions because it is just easier to sell the deals (and more deals) to these larger customers. Often the smaller financial institutions get shut out and have a lack of CRA qualifying deals to pick from.

The other interesting issue is that the institutions have to meet geographic requirements (invest/lend in their service areas). There can often be an asymmetrical information problem because the institution is not made aware of all the deals in their service area and the entity raising capital doesn't know of all the potential investors/financial institutions who can "get credit" for investing in their deals.

To date, there is no central clearing house for this information, nor is there anyway for smaller institutions to band together to go after the "bigger" opportunities, or to directly invest in affordable housing and earn CRA credit (without making a direct loan on a property, which they may consider too risky).

It's been a long time

2007-06-08T10:49:00.000-07:00

Decided to start blogging again. Sold my interest in BetterPPC to my co-founder in October 0f 2006. It was a hard decision for me, but it was the right decision and I think Ben will be very successful with BetterPPC (and he has been doing well since the sale). I wish Ben and the BetterPPC team all the best.

Why did I sell my interest? I guess it all comes down to choices and stages of life. I didn't have the passion for running a very small startup with limited resources anymore. I guess to be honest I was "burned out". 2+ years of my life went into BetterPPC and I didn't feel like I had the passion that it would take to push it to the next level. My co-founder did and wanted to do it on his own steam, so the deal made sense and provided me with some reward for all the hard work I had put in.

Since then I have been working in real estate finance, mostly because of an opportunity to work with a great team that just happened to come up. I had met the founder and president of the company several years previously and when he found out I was free, he asked me if I would like to give his industry a try. It made sense to me because for a change I would be responsible only for myself and making deals happen, rather than making all the decisions and having all the responsibility inherenet in running a company. So far the experience has been great, I have a background in real estate (I was a commercial broker at the beginning of my career, I developed an industrial park in 1998 before moving into technology and I practiced real estate law as a lawyer), and I have been learning a lot.

We work in the areas of structured/secured financing and equity fundraising for institutional investment funds. It has been a kick to work with some of these managers and in some ways the process is very similar to raising VC money for a startup company. You have to have a great idea in a great market, a great team and convince investors that you can execute.

I wouldn't be true to my own business theory (and title of this blog) if I didnt' also say that there may be opportunities to disrupt many of the current process in this "tradition rich" industry. Hopefully more on that in more frequent postings in the next year.

I still have a passion for technology as well, keeping up with the online ad world, video, social networking, widgets, etc. and can't help myself from looking for opportunities there as well.

Finally, I have become completely engrossed by the sport of kite surfing and have gone from a complete beginner to being able to have fun in some pretty heavy conditions. Down right now with a knee injury but that is also a sign to work harder until I heal!

Posting a Photo

2007-06-08T10:27:00.000-07:00

Google AdSense to add Affiliate Marketing Option - CPA

2006-06-22T09:21:00.000-07:00

Saw this post today that some AdSense advertisers have received information about a new alternative to AdSense that is based on cost per action (CPA). This essentially turns AdSense into an affiliate program, where the publisher gets paid on a per lead basis. Some observations:

1. This has to be a response to the major click fraud problems that advertisers experience in AdSense and contextual advertising in general;

2. Google should do affiliate programs MUCH BETTER than CJ, etc. in terms of payments, reporting, policing the network, etc. so I would agree with the original poster that this is big trouble foor CJ and the other affiliate program providers;

3. We always think in terms of optimization, and given that an advertiser can eventually pay for ads through CPM, CPC or CPA, there are that many more opportunities for testing to find the optimal ad, bid and method, so analytics tools will be that much more important.

Of course if Google expands the lead generation market even more with this, lead quality measurement will become that much more important, because all the click fraud guys will move to "lead fraud"....

Update: Help-U-Sell and Yahoo! Panama

2006-06-20T12:16:00.000-07:00

Long time since my last post, reflecting many changes at BetterPPC. The highlights:

We are now managing over $2.5M in monthly spend, some of the largest PPC advertisers have become customers!

We have developed a "packaged click" product that allows small businesses and franchise organization to programatically buy PPC advertising and create coordinated campaigns between the parent company and individual offices. Our first customer in this business is Help-U-Sell(R), a national real estate franchisee with over 800 offices across the country.

Yahoo! is now testing their new platform, code name "Panama" and will finally allow multiple ads to be run automatically. We intend to take full advantage of this new functionality and bring the power of BetterPPC to Yahoo!

Google AdWords Desktop Manager

2006-01-28T12:52:00.000-08:00

The new desktop manager Google has released (beta) is pretty amazing. Combines many of the features of the web interface with the bulk change/uploading features of the API (without having to program to work with the API).

If your company is doing basic keyword bid management - this is going to be a serious alternative for the customer.

Google "Beginning of the Backlash?"

2005-11-30T16:17:00.000-08:00

John Battelle and Fred Wilson both post today on the beginnings of a percieved backlash against Google.

The timing of these types of opinions coming forth and the new AdWords Terms of Service are interesting, and my previous post regarding the new "no 3rd party apps" terms of service generated a lot of comments both here and at the BetterPPC Blog. Many, many small companies have been working on applications for AdWords that use the API since it was released in January and now are worried that the effort will be for naught.

Is Google going to be the next Microsoft, a giant predatory that wants anything and everything for itself and exacts a toll on all connected with it?

Or do they intend the more modern (and moderate) approach of encouraging many 3rd party apps to flourish around the search engine and ad platform (and gmail and maps and base and ...). Seems like this would be a more "enlightened" and also more profitable long term approach.

As a follow up to this story, the "AdWords Evangelist", Google Employee Patrick Chanezon has posted a response (warning: not very enlightening). Meanwhile the "Commercial API" appears slated for release on January 1, 2006.

Seems ironic now, but we are actually now eagerly awaiting the release of MSN AdCenter and revamping of Yahoo SEM! - let the market forces begin!

Google's New API Terms of Service - A "Google Economy" or Not?

2005-11-20T21:45:00.000-08:00

I spent quite a few hours this weekend reviewing the new Google AdWords API terms of service. All I can say is "wow". As pointed out on the Google AdWords API Developers forum, Google either Google wants to prohibit virtually EVERYONE from using the API (and if so, then why bother developing and releasing it in the first place?) or they have the world's worst lawyers.

When you read the agreement, the gist of it is basically this:

AdWords advertisers can't use any applications that use the API that have been developed for them by third parties. Advertisers can only use those that are developed for them in house or "custom" built for them. If your app can be sold to more than one customer or is hosted and made available for more than one customer, apparently that is against the TOS.

(See Section II, paragraph 2 - "2) Non-Compliant AdWords API Clients. You shall not use an AdWords API Client that violates this AdWords API Agreement. For example, you may not use your Developer Token with an AdWords API Client developed or hosted by a Third Party (excluding an Internal-Use Only AdWords API Client developed for you)."

That's it. End of story.

Another important part of the backstory on this is that Google has a "My Client Center" Account structure. The MCC is like a master account and the API calls are made through the MCC account, via the MCC Developer token for each account. The cited language above now prohibits this. The problem with putting all customers in the software provider's MCC account is that it then limits the client to using only that provider's software. Currently many advertisers use different software for different functions and this will be impossible under the new terms and conditions.

I found this hard to believe so I called Google and asked if, for instance, AtlasOnePoint would no longer be available to advertisers, and was told no, absolutely not, and that there was no special deal for them or anyone else. The intent of Google is not to prohibit these types of services. The rep I spoke with said someone from the API team would get back to me (but no one has as of yet).

Other issues for a later post include the fact that Google is going to require extensive Google branding on any app that uses the API, security measures for the data extracted, prohibitions against sharing the data and a paragraph previewing service charges for access to the API. This is especially hard to believe since presumably, any service that uses the API, in order to be commercially viable, would have to help advertisers be better/more efficient at what they do, which would presumably result in more revenue to Google, so why would Google charge for that and by doing so, discourage use of the API. Surely, Google, with all the billions of dollars in the bank, can't be worried about the expense of supporting an API, can they?

We'll see.

Blog Spam

2005-11-20T21:43:00.000-08:00

Wow, I guess Google really needs to do some work on blog spam. Nice examples of it in all the comments to my entries.

Pay 4X Per Click or Optimize Your Ad Copy

2005-08-29T08:50:00.000-07:00

That's right, over the last few weeks, Google has implemented a minimum (that's right minimum) bid per click policy for AdWords (and AdSense as well).

Now if Google's algorithms determine that the ad you are running on a particular keyword is not generating enough revenue for Google, you have two choices:

1. Agree to a proposed minimum bid (which I have personally seen to be 4X or more the amount of the recent average CPC for keyword/ad combo).

or

2. Change (optimize) your ad copy.

Yes, that's right, you have the opportunity to avoid a potential 4X increase in your CPC cost if you create the right optimal ad.

It will be interesting to see if even Google (the 800lb Gorilla of all Gorillas) can make this stick, especially with MSN Search launching in a few months.

More Detail on Longer AdWords Test

2005-08-04T10:01:00.000-07:00

Google is apparently going to start allowing testing of text ads of up to 200 words in length in the next few weeks. The headline and display URL formats will remain the same. Google will alternate the new format ads automatically with the original ads and compare them to see which ad performs better. CPC charges will be the same, and during the test period, the longer format ads will not be used for calculating Quality Scores during the test period. More info at Search Engine Journal (including link to original report).

Big Changes coming to Search Engine Marketing

2005-08-04T09:48:00.000-07:00

Some big changes that were long rumored being reported this week:

1. Google is testing longer format text ads

2. AskJeeves will sell ads directly to advertisers, rather than being solely a syndicator for Google.

3. MSN is in late stage testing on their own version of AdWords.

These changes are great for advertisers. There will be more opportunities to find the best messaging with longer text ads on Google; more chances to precisely target your ads by buying direct on AskJeeves if that works for you, and obviously more opportunities to do the same on MSN by buying directly from MSN. The fact that MSN is going to mimic Google's auction system also probably means a more competitive market for keywords as well.

Great summary at Search Engine Journal

Small Etailers can make it on their own!

2005-07-19T06:47:00.000-07:00

Great article by David Kesmodel in the WSJ (subscription).

For those of you without subscription access, the article talks about the increasing number of online retailers who are looking for alternatives to eBay. Many are going out and building (or having others build) their own website. As we all know, websites and shopping carts have dropped dramatically in price and complexity over the last few years and are now accessible to virtually anyone who wants to open an online storefront.

The big problem with severing ties to eBay is getting traffic. One customer mentioned in the article, OldDogNoNewTrick.com (love the name), puts business cards in with every product sold through eBay referring the customer to the stand-alone site! Great idea.

You can probably make more money outside eBay IF you get your visitors cheaply enough (it is all about customer acquistion cost, after all!).

Search engines are probably the most cost effective way to get new customers, and that's where BetterPPC comes in.

In addition to making sure your site is easy for the search engines to "crawl" - meaning use a lot of plain text, not images, and always have a "site map" - meaning a directory of your site on one page where each section is noted by a hyperlink that the spider can crawl, you also want to take advantage of pay per click advertising on the search engine (and partners') pages as well.

You need to do three things to get up and running after you setup an account:

1. Choose keywords that relate to your products.
2. Decide how much you want to pay per click.
3. Write your ad copy

After a week or so, you should have a good idea of whether your advertising is profitable. The easiest way is to just compare ad costs to profits and make sure it is a positive number! Another easy way to track profitability is to use either Google or Yahoo!'s built in free tracking.

The next step is to start to refine your ad copy by creating and testing more ads, and the results will be amazing. Use BetterPPC to test a variety of different ideas in your copy, and our patent pending process will have you on your way to higher profits in one week. You can start here - www.betterppc.com

So if you are trying to "break away" from eBay (or at least open a new sales channel), read David's article, get your own website, start advertising, and use BetterPPC!

Joe Agliozzo

New Google AdWords Policy Emphasizes Creative

2005-07-17T12:58:00.000-07:00

Like most of you, we received the Google email on Friday that discussed the changes in the Keyword Evaluation policy. In addition to going back to the simple, active/disabled nomenclature (rather than in trial, etc.), the email discusses Google's continuing policy of really stressing the relevance (and quality) of the AD COPY. That's right, the same problem/issue that we created BetterPPC to solve!

The importance of testing to find the most relevant copy:

1. You have a new chance to show ads on previously disabled keywords. In the past, we've found that if a customer account contained keywords that had previously been disabled, often Google would not permit ANY new ads to run on these keywords. In conversations with customer service at Google, we would often complain about this and ask how customers could ever find relevant ads if Google would not even allow any new ads to run! Apparently Google heard our complaints (and similar compaints from many others) and now they are allowing customers "another chance". Of course, we urge you to make the most of this chance by using BetterPPC, which will give you the BEST chance of finding that relevant "magic" ad that will keep your campaign alive and profitable.

2. NO MINIMUM BID. This is huge. It has always been an advantage to find the most relevant ad (the one with the highest CTR) because Google will show a more relevant ad with a lower Max CPC over a less relevant ad with a higher Max CPC. The reason is the famous G profit= CTR x CPC. If you remember basic algebra, a higher CTR or CPC means a higher "G profit". Now Google has taken this one step further and ELIMINATED the minimum bid. Now if your ad is high performing on CTR (meaning relevant) you can avoid even a $.1o minimum bid. Talk about crushing your competition! If you test for the most relevant ad copy (with BetterPPC hopefully), and find an optimal ad, you can lower your max CPC even more!

We will also be discussing this change at Search Engine Strategies, San Jose, on our panel "Creating Compelling Ads". See us at the panel or at our Booth in the exhibit hall. We will be doing live optimizations on site at no charge, so come by our booth and bring your Google AdWords username and password!

Obviously we are excited about these developments, because they highlight the importance of testing and finding the best ad creatives - so get cracking and give BetterPPC a try today.

Joe Agliozzo

Here's a link to another great article discussing the change - Search Engine Watch

Trade Show Exhibiting

2005-06-24T15:48:00.000-07:00

The first trade show for BetterPPC was a great success. We met a LOT of great people and received great feedback on the BetterPPC service. Many advertisers we talked with knew that they could get better results by testing their ad copy, but the difficulty and tediousness of doing that kind of testing was holding them back. Seeing a test platform like BetterPPC, including the analytical test design/analysis program we provide, they instantly saw the value of testing. We were also located next to the Google booth, staffed by Google AdWords support folks, and they immediately saw the value in what we were doing and wished a tool like that was available to them when they are assisting AdWords customers. Of course, we told them we would love to make that happen - are you listening Google?

We are exhibiting at AdTech: Chicago next and will be unveiling a completely new User interface (using some cutting edge AJAX to help the customer navigate the system), along with an enterprise version of our product geared to agencies with multiple clients.

A couple of other things I learned about tradeshow exhibiting:

1. You can never have too many extension cords.
2. “Collateral” is important. As an attendee, I always feel like it is a waste and doesn’t get read, and as an exhibitor I wanted to skip it and do live optimizations for customers. But this wasn’t practical, you just have trouble getting (or often giving) that much time to people. Visitors come in waves and your booth (and everyone else’s) is either “slammed” or empty - very little in between. People expect to get something to take with them and you have to provide it.
3. If you can possibly squeeze it into your 10x10 booth, it is great to have a place to sit with visitors because you can really focus on them, and you also get a BREAK from being on your feet 9 hours a day, which is tough. This way you are still working and giving off the right impression, but you also get to take a rest!

Cross Posting

2005-05-31T13:47:00.000-07:00

Most of my new posting related to AdCopy optimization will now be over at the Betterppc website.

http://www.betterppc.com/blog/

I will continue to post here on other issues.

Authority Improves Performance

2005-04-07T14:42:00.000-07:00

We always stress in our presentations at events like Search Engine Strategies the importance of conveying reliability, trust and quality in advertising. Our analysis has shown that these concepts can have a huge effect on ad performance, lifting CTR's as much as 20-30% if used properly.

An excellent article by Todd Mintz in Search Engine Guide makes the same point - Give Your PPC Ad “Authority” and your CTR will skyrocket.

Vertical Search

2005-03-03T11:04:00.000-08:00

New Report from Jupiter Research on the opportunities in Vertical Search. "Vertical Search" means search devoted to specific categories or industries, such as Travel or Retail. The opportunities for advertisers are interesting here because currently, CPC prices are low. HOWEVER, make sure that you are using your tracking software religiously because nobody knows yet whether or not these clicks will convert.

Fred Wilson (A VC) also has a brief hit on this, and quotes Danny Sullivan.

Re-Launch of BetterPPC Product

2005-02-22T11:50:00.000-08:00

We have now completely re-architected the BetterPPC application to take advantage of the release of the new Google AdWords API. The change in the performance of our application is incredible and the user experience will be MUCH better.

We are also readying the launch of two Free services. An automated "Ad Generator" that uses AI to create test ads, and a program that looks at existing ad campaign data (no testing required) and selects the optimum match of ads and keywords. The performance of this program will obviously not be as good as testing, but it will be a quick and easy way to get the "instant gratification" of improving your campaign, and will introduce our customers to some of the amazing power of our test and analysis product.

Behavioral Targeting Company Nabs Amazon Chief Scientist

2005-02-22T11:46:00.000-08:00

Many believe as we do that the future of advertising lies in testing and data analysis. Poindexter Systems just hired away Amazon's chief scientist, Dr. Andreas Weigend. His expertise in testing and data analysis is probably one of the main reasons why Amazon is almost universally cited as being the best designed e-commerce site in the world. Amazon arrived at the design of their application through thousands of tests and analysis of user behavior.

I love this quote by Dr. Weigend: "Having an agile way of doing testing will affect where the market is going."

As a company dedicated to improving ad performance through testing ad copy, we agree.

Search Engine Strategies Chicago - 2004

2004-12-16T03:46:00.000-08:00

We were invited to speak at SES Chicago on the subject of Creating Compelling Ads and Landing Pages. The panel and the show in general were very good, with plenty of interesting ideas for improving both online ads and search engine optimization performance. We emphasized the value of testing (of course) and our case studies seemed to generate quite a bit of interest from the audience.

Also interesting was the panel discussing use of trademarks in PPC advertising. There were strong feelings on both sides, with trademark holders obviously feeling "ripped off" and advocates of free and broad search capabilities feeling that there is a bit of "big brother" censorship looming over the industry. In my opinion, it is not the trademark purchase that is the issue, but rather the content of the ad that appears on the results page. If that ad is clearly NOT placed by the trademark holder (in the eyes of the viewer) then there should be no liability. This is the same as the doctrine of comparison advertising in any other media. On the other hand, if the ad misleads the viewer into clicking on the ad thinking it has been placed by the trademark holder, that should give rise to liability. Meanwhile, you can avoid the hard questions about what should "show up" on a page when a particular word is used as a search term by a user.

Another interesting question raised was "Should Google be able to make money from "selling" my trademarked term? Aside from the question of what indices of ownership a trademark conveys (meaning not only the product or service the word is attached to, but also how the word is used), there is also the question of whether the user of the word itself to generate revenue, rather than using the word to sell a competing product or service somehow creates liability. I confess that I can't remember my law school cases in this area (I seem to fuzzily recall something about the word "Olympic" and that the IOC, as owner of the trademark had been able to prevent all sorts of companies from using the term as part of their company name, but I am not sure if even that situation is analogous to Google's.).

Of course, the day after the panel, Google was found (at least for now) NOT to be liable for selling Geico's trademarks (although the ruling appears to be based on the lack of facts supporting confusion, rather than any broader finding that there is no liability for this type of conduct, which you would expect from a trial court). The real law will be made at the appellate level.

PPC advertising continues to evolve in all areas, including not only effectiveness of the ads, but also the legal claims and consequences surrounding the medium.

Trademark Infringement in PPC Advertising

2004-11-14T13:07:00.000-08:00

John Battelle has a new post on Google and the potential policy that Google will prevent anyone other than the registered trademark holder from purchasing a trademarked keyword.

Rather than prohibit the purchase of the keyword, Google should regulate the copy that appears in the AdWords ad that appears when the keyword is used. Here's why:

A trademark on a word doesn't mean you "own" the word in all instances and can prohibit everyone else from using the word in any way, shape or form. Think about "Coke". Certainly coke is a trademarked term for colas, but probably not for the substance used in making steel. So a steel producer will not be infringing on the "coke" trademark, if they buy the keyword, coke, right?. Now it is true that the resulting ad is not relevant for one or the other viewer group, so there is no problem here.

Now take the closer case of "American Blinds". Clearly a trademarked term, and if a competitor buys the keyword "American Blinds" they are trying to steal a customer from America Blinds - but "WHAT'S WRONG WITH THAT!" - it's the American way, isn't it?

What you can't do is pose AS American Blinds to steal their customer - but there is nothing wrong with putting your ad up there along with American Blinds' ad so that the consumer can compare your offering with theirs. It is probably also safe to assume that a consumer who searches on American Blinds may want to see not only American Blind's offerings, but also see other competing offerings - isn't the ability to easily compare products one of the great things the internet has brought to consumers?

So the issue is really whether by buying the keyword, you are creating confusion about who the resulting ad belongs to.

The solution is therefore in regulating the ad copy, and not the purchase of the keyword.

Guy Kawasaki - "Art of the Start" and Bootstrappable Business Models

2004-10-12T06:40:00.000-07:00

I am starting to get into Guy's new book - The Art of the Start. Chapter 5 is called The Art of Bootstrapping (I like to skip around in most business books and use them more as reference guides).

There is a lot of great stuff in this chapter, but today I want to focus on Guy's thoughts on a bootstrappable business (meaning one that you can start and grow on your own steam). I think this is a really important topic because let's face it, 99.9% of all entrepreneurs and startups have to bootstrap. Also, as I have written before (as has Guy) most startups that are not bootstrapped, but instead receive venture or corporate funding don't succeed. Why? Because they don't have the laser focus you are forced to have when you count every penny. This includes not only how you spend your money, but even more importantly, how you spend your time. There is nothing like the concept of limited funds to focus everyone on speed to market!

On to Guy's characteristics for a bootstrappable business:

Low upfront capital
Short sales cycle (less than 1 month)
Short (under a month) payment terms
Recurring revenue
Word of mouth advertising

I would also add some additional characteristics of my own:

No inventory
Don’t need proportionally more people to handle more sales (scalability)
Can be marketed and sold effectively online (means don’t need partners distributors, etc. when you start out – no shelf space issue)
Free trial/Guaranty can be offered at little or no actual cost
High margins
Only solution available for target customers (means lower customer acquisition costs and also can get out there with limited functionality)

By the way, our new startup has all of these characteristics!

Guy's book has a lot more great stuff for startup entrepreneurs. The Art of the Start, combined with The Innovator's Solution by Clayton Christensen are really a "cookbook" for creating a great startup company.

Local Search - The Pie Gets Bigger

2004-10-06T06:26:00.000-07:00

Couple of interesting announcements yesterday from Yahoo! and Bill Gross of Idealab (Idealab was the spawning ground for Overture as GoTo.net, Yahoo! purchased Overture).

Gross announced Snap and Insider Pages in conjunction with John Batelle's Web2.0 conference. More about Snap in a future post (in short, the transparency and ability to pay on the basis of sales generated, etc. is pretty revolutionary).

For now, Insider Pages and also the announcement that Yahoo! Local Search is out of beta means that the local search market is really starting to get a lot of resources and energy.

Yahoo! Local Search includes the ability to search by location and look for local businesses, complete with mapping (Google offers a similar product). Insider Pages is a little more creative. Supposedly, Insider Pages combines local search type listings (like Craig's List) with social networking (like Friendster) to allow people to make recommendations, etc. I am sure this is exciting for the social networking folks because it may create the most realistic business model for this segment.

We are excited about anything that expands the supply of inventory for advertising while at the same time creating a new pool of advertisers that will take advantage of this type of advertising. From previous posts, you know that we feel that the local advertiser will one day buy paid search advertising as readily as they buy Yellow Pages advertising right now.

These initatives are one more step in that direction. When these advertisers come online, the key to getting their business will be having an extremely easy way to create very effective ads - which is what we are all about.

New Battle Brewing in Search Engine Optimization?

2004-10-05T08:55:00.000-07:00

Great post by Jim Hedger at Search Engine News Journal on the possibility of a new battle in the search engine optimization wars. Apparently, Jim feels that the PhD's at Google are fed up with what they see as the "gaming" of their search engine results by SEO firms. Jim speculates that Google may be rebuilding their ENTIRE 4.5 BILLION index of webpages, using a new spider to categorize (and characterize) the pages. If so, this will surely be more disruptive to many website operators than even the infamous "Florida" update that wreaked havoc on many web businesses. After Florida, many sites found that they had basically disappeared from Google search results and as a result they had zero traffic, customers and sales.

While we think SEO is an important overall part of running a successful ecommerce business, it is an "us against them" game (us being Search Engines and them being SEO firms). This adversarial relationship will often leave the SEO customer in the middle. The website owner finds herself with fluctuating numbers of visitors, customers and sales. Hard to run a business that way.

We came to the conclusion in operating our own online businesses that the only way to have a dependable revenue stream was to increasingly rely on paid search advertising, where we could control our exposure, budget and flow of customers. Our experience in managing our PPC campaigns and optimizing our ads to increase response and decrease average costs per click led us to our new product, which we will be launching shortly.

Paid search is an important part of any websites search engine marketing campaign, and as the battles over natural search listings continue, will become even more crucial.

Paid Search is Expanding

2004-10-05T08:40:00.000-07:00

Bambi Francisco's article (sorry, the article is behind a subscription wall at CBS MarketWatch) this morning is about law firms using paid search advertising to troll for Vioxx clients. The really interesting tidbits in the article are that pay per click advertising accounts for 40% of online advertising expenditures and is growing at 63% per year. Admittedly, these are some of the rosier forecasts we have seen, but everyone agrees that paid search is soon going to account for the majority of online advertising spending. It makes sense because paid search is tied to performance, and pay for performance always wins. She also makes the point that as news search becomes a more prominent feature for search users, more keywords will become valuable (for the duration of the news cycle) and then drop again. So the keyword universe that many advertisers complain has become limited looks like it will be a little more flexible. Companies will also have to be able to rapidly take advantage of newly popular keywords by being able to quickly create and place effective campaigns containing effective ad copy with the major paid search providers (Google and Overture) - something we are addressing with our new product.
Stay tuned.

As Guy Kawasaki Says "Don't Worry, Be Crappy"

2004-10-01T14:03:00.000-07:00

No posts from me since May because I have been working fairly non stop on my new company. We are in stealth mode, but getting ready to launch (soon!).

Guy Kawasaki is one of my favorite business writers and I was fortunate enough to partner with Garage Technology Ventures (when it was garage.com) when I raised venture capital for my first startup in 1999.

Guy has a new book out called "The Art of the Start". I am waiting for my copy right now, in the meantime, I have been thinking all summer about one of Guy's earlier books - Rules for Revolutionaries. One of my favorite rules is "Don't Worry, Be Crappy". What Guy means by that is that the best way to develop a product (and a company) is to get your product out the door, in the hands of real customers, as quickly as possible, even if it sucks (but not too much).

What you lose in "polish" and "presentation" along with some functionality is more than made up for in finding out (1) whether the customers are interested in buying what you are selling and (2) what you forgot about that customers actually need. No matter how much thinking the team does on product features, customers will always come up with different or additional stuff that they have to have and they will let you know about it.

Of course, you always have to reach out to your customer base and communicate that your product is under development and needs more work, you want to partner with the customer in making the best product possible, etc. Don't claim your product is perfect when you know it is not, be humble.

I have used "Don't Worry, be Crappy" twice now. When we launched Coreflix, we had a basic product and bam, customers were on it from day one. We did have to add features but the development process was much more focused with real customers giving us real feedback as opposed to focus groups, etc.

We are using it again now on our new company. We started out this summer with a really crappy beta that had only the bare minimum functions. This time we had to test not only whether beta customers were interested and would pay for the product, but also whether the algorithms the service is based on would work. The answer on both counts was an unqualified yes, but we also found we had to go back to the workshop and create a much more "automatic" product that was easier to use - around a 90 day process of very long days (and nights).

Once again though, "Don't Worry, Be Crappy" pointed us in the right direction.

I wish Guy's book had been around in 1999. We didn't use "Don't Worry, Be Crappy" at Netfreight.com and we spent over a million dollars developing our beta product before we got input from customers. Of course, we would need that money later, and when we didn't have it, we didn't have many choices.

"Don't Worry, Be Crappy" is probably one of my most valuable lessons learned.

Blog Moved

2004-05-10T15:42:00.000-07:00

Moved my blog over to Blogger.com today, thus the posts all have the May 10, 2004 date.

Original Postings were Feb, March, April and May, roughly...

Coreflix sold to public company

2004-05-10T15:33:00.000-07:00

Today we completed the sale of the Coreflix (tm) online DVD rental business to Americana Publishing, Inc.(OTC Bulletin Board: APBH). I have written about this business before, but in short it was a DVD rental service geared towards "action" and "extreme" sports titles. This was the first "disruptive" business I have launched and it proved to me the basic tenets of disruptive business model design, as described by Clayton Christensen in the Innovators Dilemma and the Innovator's Solution:

1. An initially smaller or niche market where there was a need, but not a lot of solutions. This was great because the customers were basically "nonconsumers" of DVD rentals in action sports (because no rental program existed). The best part was that we were able to launch early in the process with a very basic product and the customers were happy to have it and we had confirmation right away that we had a business.

2. We were patient for growth (and still are) but impatient for profits. We bootstrapped this company (VC's saw the market as too small, and they may yet be right, for their purposes such as hurdle rates of return, how much capital they need to invest, etc.), so we wanted to launch as cheaply as possible and then use cash flow to finance refinement of the business and expansion of the customer base. This is exactly what we did, and combined with 1. above, it worked beautifully.

3. We chose a rental model. I believe that rental models are inherently disruptive, because you are providing a solution that is inferior to the full benefits of ownership, yet fits the needs of many segments of customers. It also uses the principal of looking at the "job" the customer is trying to get done - which in this case was "view" DVDs without necessarily needing to pay the high price of owning them. Many/most action sports DVDs are also typically viewed only once, so the "job" the customer is trying to do is watch a DVD once, which is definitely better satisfied by renting than owning (especially given the stubbornly high prices at retail for purchasing these DVDs).

Emergent Business Strategy

2004-05-10T15:32:00.000-07:00

An important part of a disruptive business model is the concept of an "emergent" strategy. In short, startups never start out with the right strategy, part of the entrepreneurial effort is figuring out the right strategy as you go - thus the right strategy "emerges".

As Clayton Christensen points out in "The Innovators Solution" (see link in previous post), a limited or "right" amount of funding can go a long way towards prompting the management team to focus on emergent strategy - they simply have no choice if they want the company to survive. In our Netfreight experience (see post below) we didn't focus on changing our strategy as quickly as we should have because we had the luxury of being patient because of our venture capital funding. When the funding dried up, we didn't have time to create a new strategy.

Contrast that with Coreflix, which was/is a bootstrapped company, so we were constantly focused on changing/emerging our strategy in response to customer feedback (and getting customers right away was in itself an emergent strategy!). We learned what worked and what didn't work much more rapidly and also connected with the customer much more rapidly, at far less cost.

Emergent strategy is key, and has also been pointed out using other terms, by Guy Kawasaki (who's garage.com - now garage technology ventures - also funded NetFreight.com). One of Guy's mottos was "Don't Worry Be Crappy" - which meant, "get your product to market and get some customer feedback." Then you could change your product and strategy based on the feedback. This weeks article by Robert X. Cringley also includes some interesting references to the emergent strategy concept. Instead of focusing on an individual company though, Bob points to VC investment models, and the generally known principle that only through taking chances on a lot of companies can VC's hope that one will be a big hit (Bob also points out that how much of a hit the winner needs to be has also developed into a problem for the VC business).

Referring to Christensen, the emergent strategy as applied to VC investing consists of hoping that one of your portfolio companies gets their own emergent strategy right! If VC's were to additionally impose some of the funding discipline espoused by Christensen on their portfolio companies (say through staged investment, etc.) rather than giving a thumbs up (you get $3M at once) or thumbs down (not well developed enough, not a big enough market, etc. - you get nothing). Maybe their batting averages would be higher overall, and maybe some of the investment "overhang" we read so much about would start to dissipate, and a whole new crop of startups would be created (which could be nothing but great in light of the current job growth/offshoring/outsourcing controversy).

This type of investing model is even more important today because most angel funding and corporate funding has basically disappeared. VCs no longer have the luxury of having these seed stage investors nurture companies to the first round institutional stage that the VCs are known for. However, given the incredibly cheap resources (including offshore development) available to today's entrepreneur, the bright side is that most startups can test their concept/business model/product relatively cheaply, in fact this can generally be done for $200,000 to $500,000 max. With the billions of dollars in VC funding available, it makes sense for VC's to devote $10M to $20M per year to these types of investments. Funding 50-100 companies a year with these small amounts would provide the VC investors with their next "institutional round" candidates, and would also spur innovation, employment and create the next generation of entrepreneurial risk takers. More on the details of managing a program like this in the next post.

coreflix.com

2004-05-10T15:29:00.000-07:00

My co-founder and I, Ben Padnos, along with another co-founder, started coreflix.com (www.coreflix.com) in late 2002 as an internet based DVD rental service for Action Sports (Surf, Skate, Snow, etc.). Learning from my last company, NetFreight, I had conceptualized this business to fit into the disruptive framework.

A little background on the Action Sports DVD industry.

1. There are no theatrical releases for the DVDs.
2. The DVDs are not available for rent at Blockbuster, Hollywood Video, Netflix, etc.
3. The DVDs retail for $24.95 to $34.95, are typically 40 minutes long and have to be purchased sight unseen.

So, we felt there was a good sized population of customers who would love to have a $17.95/month "all you can eat" (flat fee) rental service. (I believe that rental as a business is almost inherently disruptive because you are enabling a larger population of folks who either cannot afford to buy or don't use the product enough to buy it the opportunity to use it). Users would select DVDs through our website and we would use the USPS to mail them out in 2 way mailers.

Well we were right, we acquired hundreds of customers soon after launching and we get comments every day from our customers, telling us how much they love having an alternative to the old way of consuming these DVDs:

"Thanks Ben,

You guys are great to deal with. Coreflix has been a great way to find out which DVDs are cool and which ones suck, without spending a ton of $$$$.

-Eric"

The "Disruption" framework showed the way:

1. We targeted and enabled a population of consumers who previously didn't have the money or value this content enough to purchase it.
2. We gave them a simple, web based ordering process and used the USPS for fulfillment (customers were willing to accept the delayed gratification of receiving the product because they had no other alternative).
3. We helped them to more easily and effectively do something they were already trying to do - view a lot of action sports DVDS.

We also picked a niche that was not of interest to the major DVD outlets (asymetry).

Predictably, the "industry" (DVD producers) were mad at us and made all sorts of legal threats (all of which were basically hot air due to well established copyright doctrine). We believe, and tried to relate to them that a rental service was a way that the industry as a whole could gain more customers, by increasing the numbers of viewers of their product. There will always be more casual viewers who would rent but would not buy sight unseen (and so were not current customers), as compared to the "hard core" fan that purchases, and from which the industry currently makes its living. Fortunately (and critical to a disruptive business model) we didn't need their permission nor cooperation. Hopefully they will hopefully come around to our point of view, realize that this is good for the industry and help us promote the service.

Now we are trying to figure out how to grow the business beyond the die-hard action sports fan and get the more casual consumer. Stay tuned.

NetFreight.com

2004-05-10T15:28:00.000-07:00

I founded NetFreight.com in 1998. It was the first business to business internet based marketplace to service the transportation marketplace (long haul trucking, both full truckload and less than truckload). Over the next two years, we raised and spent approximately $3.2M, built some cool technology but never really got traction in the marketplace (although we did have some cool test customers like Home Depot and Del Monte).

The reason we never got traction is that our service (and the internet enabling of logistics and transportation management in general) was really sustaining for the marketplace we were after -larger companies with big freight bills. We were trying to provide better/faster, and as a result butting heads with all the large, entrenched third party logistics companies (3PL's) out there. They had huge amounts of money, customers who depended on them, and salespeople with tight relationships with the customer. Hard to break through that.

What we should have done is focus on the small companies, the ones that couldn't afford sophisticated transportation management software (typically VAN and private network based), but would have accepted our product as being "good enough" to do a job they were already trying to do (manage freight and hold costs down). The problem is that this market was hard to quantify, and the sales model required to address it was uncertain, so second round investors were not impressed (especially given that in March/April of 2000 you needed to be pretty bulletproof to raise money).

In the end we shut down the company, at least finding a home for the IP and other assets with another company, where the technology could live on and we could take care of most of our vendors.

A valuable lesson learned - sustaining business models are tough to execute without heavy duty backing and a lot of patience. There is no doubt in my mind that our internet based solution was superior in almost all ways to the old, closed, proprietary software solutions out there, but changing the mindset of customers with a sustaining product is very, very difficult.

Disruptive Business Models - Weblog Launch

2004-05-10T15:27:00.000-07:00

Today is launch day for my weblog describing my experiences creating and launching businesses based on Clayton Christensen's ideas in The Innovator's Dilemma and The Innovator's solution.