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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 about cos like Zappos filling the SEM void, but the math still doesn’t work… if search revenues (online advertising generally) is rising at 70-80% and e-commerce (total, not just the established entities) is rising at less than 30%, AND folks still aren’t using search for branding, then what is going on?

(a) Either we are moving to a far greater lifetime value model for customer acquisition (which really is branding in disguise) OR

(b) There is an rapidly approaching upper limit on search revenue growth that approximates e-commerce growth (Google and others’ slice of pie cannot get much greater) OR

(c)There are lots of greater fools (small cos trying to get off the ground, large cos not watching their SEM spend with any discipline) and will still end up drying up in the end.

Thoughts?

I’m going to hand-wave a little in my attempt at an answer here, but would love to hear comments from those more knowledgeable than I am about Google.

Google grew its revenues at 70% Year on Year according to their 2006 Q3 financials.

Lets say 30 percentage points of that came from the growth of US ecommerce as per Iggy (Comscore says 26%, I’ve seen others a little higher).

Search Engine Watch and Neilsen say that Google has increased its market share from the mid 40s to around 50% of all searches in the last year or so, which is about a 10% increase for Google, so that gets us to 40 percentage points of growth.

Google’s international growth is outpacing US growth as per their Q3 earnings slides: 92% vs 56%. I wheeled out my creaky excel and crunched the numbers, and this international growth premium over the US contributes about 14 percentage points of growth, getting us to around 54 percentage points.

Lead gen isn’t included in the ecommerce growth numbers, but is also clearly a driver of search engine marketing. According to the IAB, lead gen was up over 70% in H1 2006 over H1 2005. Its still a lot smaller than ecommerce, so perhaps that adds another 5 points of growth to get us to 59 points.

That still leaves around 10 points of growth that is likely due to increased pricing. I scanned some analyst reports which seemed to agree about pricing but couldn’t find size estimates

So Iggy is right. But its not as dire as it looks at first glance, or perhaps not as imminent. I agree with his point (a), that margins are getting skinnier and in some cases Search Marketers ARE applying a Lifetime Value analysis and taking a loss on customer acquisition for the first transaction. (I would disagree that this is branding in disguise though as it is still trackable). I don’t think his (c) is a major factor – people are being pretty rigorous in their ROI analysis in this area in my experience. But (b) is ultimately right – it has to be eventually. I don’t think we’re quite there yet though.

Comments and discussion much appreciated.

I’m going to post on Monday about Lead Gen in more detail as it generated a lot of comment discussion in the earlier post, and I think the SEM trends very relevant to that topic also.

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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 approach things the way we do.

I wanted to follow up on Jeremy’s post earlier this week 2007 Consumer Internet Predictions and share some of my thoughts regarding areas we’ll be watching closely this year. Full disclosure - I didn’t fully realize how hard blogging is. I’m really nervous! I have a lot more respect for all of you who routinely put yourself out there for the world to read about. But I do think there needs to be a lot more transparency from the VC community, so here goes…

1. Where are the NEW IDEAS in security? Despite the venture community pouring hundreds of millions into best-of-breed, segmented security solutions, it turns out customers want to buy and manage one complete, layered suite. The problem is that with 200,000 pieces of malicious code officially logged (100,000 of those appearing in the past 18 months according to McAfee’s AVERT Labs), the model for traditional anit-virus programs looks less and less exciting. The good news is that most experts finally agree that ridding software of vulnerabilities at the code level is the best defense. It would seem to me that companies such as Fortify Software and Mu Security are on the right track. So what’s next then? Mobile security is a relatively untapped (huge) opportunity. Two of the of the fastest growing things I can think of – social networking websites (Facebook and MySpace) and the proliferation of intelligent mobile devices serve as great mediums to spread malicious code – even if enterprises are well prepared!

2. Intelligent storage solutions. Talking with CIO’s from Lightspeed’s CIO Forum, I get a lot of great feedback about what the priorities are for 2007. One consistent message (complaint) I hear is regarding the explosive growth in unstructured data and the associated storage costs. Despite the continued decline in disk costs, overall storage costs as a result of needed capacity and performance, not to mention space and power, continues to be a major concern for CIOs. I’m hopeful 2007 is a year where we see more exciting new ideas about how to manage data intelligently over pure performance or blind capacity.

3. WiMax – Why not? I’m really excited about WiMax. As mentioned in a recent post by Katie on GigaOM, the mutiplayer chess match is just starting to heat up as massive players such as Sprint and Clearwire manage the infrastructure buildouts and work with the likes of Nokia and Motorola. I have this grand vision where some day there will be super cheap WiMax (only) enabled devices that are perfect for SMS, IM, sharing pictures and video, and VoIP calls. They’ll be available in vending machines and a quick password entry (or biometric signature) will instantly customize the device for your personal use (as all your information will inevitably be in the cloud). Ok – I know it’s a bit out there and I don’t think that happens in 2007 (probably not in 2008 either) but as I said, I’m excited about the possibilities that come with ubiquitous, ultra-high bandwidth.

4. Innovation for international markets. Is 2007 a watershed year in the sense US based companies start thinking about developing technologies primarily for international markets? The $100 laptop? Clearly there has complete acceptance of the idea of leveraging international talent and labor to build products for the US market (first), it will be interesting to see how global market demands influence innovation here in the US.

As always, I look forward to hearing from you. Feel free to drop me a note anytime (john@lightspeedvp.com)

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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 think that there is a risk of a conflict of interest in touting stock picks, although if people are truly your “friends” and not just people you met on the site, this might get mitigated. Otherwise, it seems like a happy hunting ground for stock tip spammers.

The best remedy for this to my mind is to use real data. Stockpickr lets you see Warren Buffet’s actual portfolio – not much opportunity for “gaming” that system!

If there were a way to verify people’s “stock picks” – say by tying into brokerage accounts with permission to verify that they really do hold those stocks or really did make that trade, then you’d have some very interesting data. As Seth and Fred have said in the past, implicit data is much more interesting (as well as painless to collect if given permission) and truthful than explicit data.

Imagine being able to see other users’ actual accounts and trading history, and being able to tell the real trading superstars from the ones who weren’t willing to put their money where their mouth was. Would active traders be willing to pay to get real time access to the transaction flow of the top traders? People already do this for Jim Cramer. A subscription model like this would potentially generate enough money to incent top traders to open up access to their real time trading and their portfolios. They would be able to earn a nice secondary income stream and it actually HELPs their positions if others follow them. But if these active traders start gaming the syste,, people will stop following them and they run the risk of losing their own money.

I’d like to see someone take a shot at this!

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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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I joined Lightspeed on February 28, 2006. Since then a few people have asked me how I got a job in Venture. As with most of my career, it was mostly serendipity. However, as a number of others have recently …

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The Cleantech Venture Network this week unveiled its Q3 cleantech VC investment results. Total equity capital invested in North America reached $934M, representing a 11% increase from the $843M from Q2 and capturing 14.3% of the $6.5B invested in VC …

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HOPKINTON, Mass. – November 1, 2006 – EMC Corporation, the world leader in information management and storage, today announced the signing of a definitive agreement to acquire privately-held Avamar Technologies, Inc., a fast-growing provider of enterprise-class data protection …

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