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There has been some vigorous comment discussion on the post of 2007 consumer internet predictions, mostly about the lead gen prediction. Firstly, its wonderful to get comments – thank you. When you first start blogging it feels like shouting out a window into the darkness; you’re not really sure if anyone is out there, listening. It’s good to know that I’m not just talking to myself!

On to lead gen. There were two broad schools of thought on the state of lead gen. One is epitomized by a Jason Calacanis’ comment which, while lacking in detail, none the less crisply conveys his opinion of the industry and those who work in it.

Lead generation is dead. Companies would really be foolish to start a new leadgen company – especially NOW. Geesh.

Others shared more detail, and see a troubling situation as the arbitrage opportunities between buying CPC advertising and selling leads dry up. The markets, both in paid search and in remnant banner advertising, have become more efficient, squeezing margins for lead gen companies.

Yet others are more optimistic. Langley Steinert (co-founder of TripAdvisor, now CEO of Cargurus.com, and one of the pioneers of lead generation) believes that advertisers would much prefer to pay for leads, and others agree, although sometimes with reservations about if this is in the long term interest of the lead buyers

How can we reconcile some of these positions?

Simplifying substantially, lead gen comprises three processes:

1. Acquiring traffic (e.g. from paid search, organic search, brand advertising, banner advertising, distribution deals etc).
2. Converting traffic to leads through a form-fill process
3. Finding the highest value for a lead among multiple buyers (ie having a network of advertisers and knowing who placed what value on each lead)

Historically, most lead gen companies have been vertically integrated, doing all three processes. Also, historically, lead gen has been focused on a small number of industries, including mortgage lending (including refi, and home equity), consumer credit (including credit cards, educational lending, auto loans), new auto sales and online education.

In these industries, I think it’s fair to say that margins are shrinking and that competition is growing fiercer. The market, while not perfect, is becoming a lot more efficient. Some companies have established a competitive advantage in process #1 by locking in traffic either from organic search, from long term distribution deals, or by having established branded destinations (e.g. Lending Tree). Others have established a competitive advantage in process #3 through the breadth of their buyer network (e.g. Autobytel). Entering these markets today is going to be a tough road to hoe.

As I said in my prior post, I think we’ll see similar principles applied in other categories that also have high customer value, can sustain a sales person’s costs, are infrequent purchases by consumers and have complexity in the decision making process. Possibilities include wedding photography, plastic surgery, LASIK, cosmetic dentistry, eldercare, even business purchases. These categories still allow arbitrage opportunities between CPC advertising and lead gen as they are still inefficient. However, they will also become efficient over time, and long term winners will need to establish competitive advantage in processes #1 and #2 as outlined above.

Interestingly enough, some companies, notably Leadpoint and Root Exchange, are trying to commoditize process #3 by establishing a “marketplace” for buyers and sellers of leads to efficiently find each other (taking a cut of the transaction in the process). If they are successful in doing this in the newer lead gen markets, they will serve to accelerate the margin compression and force successful lead gen companies to focus on the three elements of traffic acquisition that can sustain arbitrage: organic search traffic, branded destination traffic and long term distribution relationships.

It will be interesting to see how this industry plays out. Comments and thoughts, especially from industry practitioners, most welcome.

UPDATE: Some very interesting comments posted – worth reading if you are only getting a feed

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A couple of posts on Techcrunch, one on Filmloop entering the Deadpool, and another on a rumor that Slide took $20m in funding have sparked some lively debate in comments about the business models for widgets. I don’t pretend to have the answer to this, although I did note in my earlier post on 2007 Consumer Internet predictions that this would be the year that social networks would find a business model.

I led Lightspeed’s investment in Rockyou early last year (Sequoia was our co-investor). Rockyou is a competitor to both Slide and Filmloop – they help people to customize their online representations (on social network pages, blogs etc) by embedding widgets, including photo slideshows, glittertext, image text and other widgets. As has been noted in the comments to the Techcrunch posts, the technology involved here is not terribly complicated (although the challenges of scale are meaningful). We invested for a couple of reasons: (i) Rockyou had achieved very real adoption from users and (ii) we really liked the two founders, Lance Tokuda and Jia Shen. Lance and Jia have a great sense for their users needs. Here in the valley we can get a little insular, but Lance and Jia have developed a fantastic sense of what their user, the Myspace/Bebo/Friendster user, is looking for.

We have been very happy with our investment in Rockyou. It has only continued to grow since we invested – it now serves well over 100 million widget views every DAY, and it has diversified well beyond a dependence on Myspace (a majority of its visits do not come from Myspace anymore). Having too much of a dependence for new users on a single source is a scary thing for any company. When Myspace launched its photo slideshow widget a few months ago, we waited with baited breath to see the impact on our growth. If Myspace blocked Rockyou (or Slide or any other widget company) it would have a meaningful impact on the business. However, Myspace has grown in large part by being open. It briefly blocked YouTube in December of 2005 (eventually attributed to a misunderstanding) but reversed that shortly afterwards, perhaps due to complaints from its users. Its hard to read the FIM/Myspace tealeaves, but they have had plenty of opportunity to block successful widget companies in the last year and have not chosen to do so so far, even while they have launched competing services internally.

That being said, like most startups just past their one year anniversary, Rockyou is not yet profitable. As I mentioned in my prior post, Youtube is really the only company that has suceeded in turning widgets into a destination website that can be monetized directly. Photobucket drives enough traffic from users uploading and editing photos to be able to generate significant revenue from advertising as well. Its fair to say that none of the other widget companies, Rockyou included, have achieved the same level of success in creating a destination browsing experience to the same degree.

Its not yet clear what the business model for such widgets will be. One possibility is sponsorship. Rockyou partnered with Sony to offer “Casino Royale” themes and with Nettwerk Records to offer “Matt Wertz” and Leigh Nash” themes that users could apply to their slideshows. All three have been successful, with large numbers of users choosing these themes resulting in 10s -100s of millions of widget views. This could well be a path to monetization. Another is freemium models. Although the base products will always be free, users may be willing to pay for certain premium customizations. Rockyou allows users to customize a “pin” to replace the rockyou watermark on their slideshows for a small fee. Its early days, and we don’t yet have a clear picture of exactly what the monetization model will be, but these are both highly promising options. Venture investing, and starting companies, always carries elements of risk after all!

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Several recent articles (NYT, Richard MacManus, etc) on next generation search and the questionable wisdom of backing businesses with a mission to displace some or all of Google’s current market domain caused us to do some of our own reflection.

Not only is Google tremendously good at what they do, in less than 10 years they’ve established a consumer brand with iconography to rival the likes of Nike’s famed athletic swoosh or Coca Cola’s signature “wave” heralding the onset of good times. Google’s navigational search delivers tremendous value when consumers know what they are looking for. Its unlikely we’ll witness the demise of this offering anytime soon.

However, there are many instances where a minimalist approach to search results simply can’t deliver what the user wants because the user doesnt know what he or she wants.

For example, I had a friend who recently contracted SSHL, a termporary hearing loss condition. I needed information. My search on Google yielded a hodgepodge of linear page results, most of which had nothing to do with the medical condition. My search on Kosmix (Lightspeed portfolio company), a category-based search engine, provided well organized, relevant results and suggested specific symptoms, treatments, medications, best hospitals, and other relevant directional tips to guide me through my discovery process. Similarly, when I was looking for post-holiday sales on Espresso Machines, I found Google’s answer to be virtually unintelligable versus the clean array of choices yielded by TheFind.

While Google has a dominant brand and will continue to be a “start-point” for many navigational searches, there are a variety situations where the answer to a user’s query doesn’t reside on the top page of links from a Google search results deck.

There in lies the opportunity. While there are challenges for start-ups in developing the right distribution channels and content syndication partnerships to scale up traffic and consumer mindshare, if the quality of vertical search experience can consistently create “aha” moments for the consumer it will yeild market opportunity.

As previous articles have noted, its not a matter of out-Googling, Google. More likely, it will be about identifying segments of search where consumers need more than a traditional page of linear result links to easily answer their information request. Over time, it doesn’t make that sense one size will fit all. Google may evolve and adapt to this segmented notion, but they will be required to learn the same lessons and develop similar alternative approaches to those of many start-ups that have already begun the process of search disaggregation.

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I got a really interesting email in response to the 2007 Consumer Internet Predicitions post from Iggy Fanlo (CEO of AdBrite, ex President of Shopping.com and a guy who knows a thing or two about CPC advertising!):

You talk

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First – Happy New Year! The Lightspeed Team is very excited about the prospects for 2007. We’re just getting rolling with our blog here and hopeful it can be a positive resource to let you know how and why we …

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The WSJ (subscription) has a good article this morning on a new set of networking sites for investors. Techcrunch separetly has a review of stockpickr.

We’ve seen a few of these stockpicking sites over the last little while. I …

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Happy New Year everyone.

It seems to be the season for consumer internet predictions, so here are mine:

1. Ecommerce 2.0 arrives. Google‘s search revenues continue to grow at 70-80% growth rates. Yet the public ecommerce companies

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I recently got back from a fascinating conference in Sydney which brought back about a hundred of us expat Australians to talk about the Australian diaspora and how we could continue to help Australia from overseas. Peter Costello, the Australian …

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Allan Leinwand did an interesting guest column on GigaOm yesterday about VC’s providing some founder liquidity at early rounds. This picks up on a Venturebeat story from Friday about a related topic, “FF” class stock that is deliberately designed to …

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Lightspeed Venture Partners launched its blog this month.

What’s that?

Too many VC’s blogging already? Another example of VCs acting like sheep?

From our perspective the answers are clearly, no and no.

Ok. How about maybe and maybe?

The truth …

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