Where Insights Come From

eHow circa March 2004

I’ve always learned by doing things. Trial-and-error may not be the best way to learn a known answer, but when you’re inventing (as entrepreneurs must do), you gain insights as you go and change the plan accordingly. One of the tough challenges in moving from entrepreneurship to VC is that my actual operating and market experience decays over time. You get a lot of new knowledge from seeing hundreds of presentations from entrepreneurs, and to some extent from the investments you have made, but you don’t accrue a lot of experience from hands-on activity. And there is no pivot in VC: I have to commit upfront to an investment, and back that entrepreneur come what may.

Nevertheless, I think you can learn from experimentation in this job. So I’m going to deliberately try more of it, and try to share some of the things I learn here.

My best example of experimentation leading to insight this is buying eHow, one of the two biggest decisions in my career to date. Jack Herrick and I were able to buy the largely defunct site for a low price in April of 2004, and sell it for a significantly higher price two years later. The reason we were able to turn the value of that property over so quickly is we were able to increase traffic to the site 30-fold in a matter of less than a year, and probably 10x the monetization of the pages shown in a matter of months. As an entrepreneur, if you can find this kind of market disruption, you’ve found gold. Here’s how we found it:

In 2001, my good friend Rich Chen was working at Google, and tipped me to the launch of AdWords, telling me it was a great product and I should check it out. It’s hard to take a mental trip back to 2001, but the idea of a self-service ad platform where you could have a campaign running just minutes after signup was extraordinary and revolutionary. I signed up, deposited the $5 minimum, and was immediately impressed. Of course, I had nothing to advertise at the time, so I bought an ad for the keyword search of my friend’s name, and the title of the ad was “Rich Chen is a dork.” (yeah, pretty lame joke.) I bid $0.05.

With $4.95 left in my account after Rich clicked on the ad (“har har”), what to do with my remaining funds? I decided to open an Amazon Associates account. I bought an ad with the title “Amazon: Books, Music and More”, and bought the keyword Amazon. (back then, you could do this.) I bid $0.05. And for the next three months, I printed $0.22 of profit for every $0.05 click, and made $30,000 of net profit that Christmas season for a couple of hours work a week. This arbitrage then went away due to a variety of factors, but I was super impressed.

In late 2003, Rich sent me another email: Google has released a product called AdSense, and I should give this one a try. Having made $30,000 on his last tip, I was inclined to give this one a try, though here you had to actually build a website to try it out, and that was a real test of my skills. What should have taken an hour took me most of a day, but I built and launched this beauty: DataRecoveryFAQ.

I knew nothing about recovering your lost hard drive, but I summarized some generic advice I could find on the web, tilted up this site, and bought some traffic from AdWords to it. Viola, I was making $100 a day!

What I’d discovered through this experimentation was a trend that was nearly invisible at the time, but was a seismic shift in the web that would play out over the next 7 years: content was now valuable again. I see three eras of internet advertising:

1996-2000: You could make money from ads but it was all recycled VC and IPO dollars, and the ads were not economic by any traditional definition
2000-2004: There was no internet ad market to speak of. Consequently, no content was created exclusively for the web, by pretty much anybody.
2004-today: Rich variety of reviews sites, blog networks, content farms all fueled by ad money

We bought eHow right on the precipice of the second era. And we realized the opportunity by being lucky, with a mindset towards experimentation and seizing the opportunity aggressively once we spotted it. Venture Capitalists, by and large, did not recognize and invest behind this trend for another 18-24 months — if you waited for it to walk in your door, or one of your portfolio companies to share the insight, it was largely too late.

Had I been a VC at the time, there would have been many investments I could have made on this hypothesis. For example, About.com was a neglected asset within Primedia, which we considered pursing more than six months before the New York Times acquired it, and had we pounced in May/June 2004, the price would have likely been significantly lower. Even at the price the New York Times paid, I think it was a bargain, and I think we could have done a lot more with it.

So how do I find another eHow? I think experimentation is still the way. If you wait for an entrepreneur to come tell me about it, I risk waiting too long.

My first experiment is going back to advertising: with new social channels emerging, how will these transform businesses on the web today? I’ve seen a few businesses leveraging Facebook advertising to build big customer bases (Zynga being the obvious leader), fewer still on Twitter. I’m curious how readers think these ad platforms will create disruptions (and opportunity) in both new and existing markets. And, I’m going to try them out. Look out for me (both Matrix and portfolio co’s) on Twitter promoted tweets and accounts, and Facebook Ads — I’m going to see what this is all about. I’ll report back with what I learn.

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Written by Josh Hannah
Josh Hannah joined Matrix Partners after a career as a serial entrepreneur (Betfair, eHow, wikiHow.) Read more about Josh.
  • http://twitter.com/abiekatz Abie Katz

    Great post. You definitely found and capitalized on a great trend.

  • http://twitter.com/Investorgoodies InvestorGoodies

    Thank you for the great post

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