Brian Feinstein

Try it– http://www.20q.net/

Then read about it– http://en.wikipedia.org/wiki/20Q

A colleague handed me a book the other day called A Little Book That Beats the Market. I won’t pretend to know much about public equities investing but was impressed with the book.

The premise of Greenblatt’s “magic formula” is to identify companies that are both good and cheap. Good is characterized by prior-year return on invested capital. This metric acts as a proxy for growth by finding businesses that have invested their own money at high rates of return. Cheap is characterized by prior-year profit yield per share. This is like an E/P ratio and acts as proxy for value by finding shares that earned more relative to the price that was paid than other shares. Choosing the 20-30 companies that have the best combination of prior-year return on capital and earnings yield allows us to find what Greenblatt calls “good companies at bargain prices.”

The “magic formula” makes intuitive sense as an strategy (some have grouped it wit a growth-at-a-reasonable-price or GARP approach). In a study, Barron’s found that Greenblatt’s formula averaged 28% annualized returns, dramatically outperforming the returns of the S&P 500 (12.4%) and the universe of stocks that the “magic formula” was applied to (12.3%). Another analyst found average gains of 10% from 1996 to 2002 rather than the 16.4% reported by Greenblatt but still better than the S&P average of 4% during the same period.

As I mentioned, I don’t know much about public equities investing but see a few immediate issues with Greenblatt’s approach:

1. Sample Bias - There is no way for us to tell if the period Greenblatt tested (1988 to 2004) was a secular bull market and no way to tell how the formula would fare in a secular bear market relative to market indices.

2. Country Bias - Similarly, macroeconomic factors will dictate whether US equities as an asset class will continue to perform as well as they did in the 20th century and Greenblatt’s formula is exclusively focused on US equities.

3. Rear-view Mirror Bias - As Seth Klarman writes in his seminal Margin of Safety, “Just as many generals persist in fighting the last war, most investment formulas project the recent past into the future. One simplistic, backward-looking formula employed by some investors is to buy stocks with low P/E ratios The idea is that by paying a low multiple of earnings, an investor is buying an out-of-favor bargain. In reality investors who follow such a formula are essentially driving by looking only in the rear-view mirror. Stocks with a low P/E ratio are often depressed because the market price has already discounted the prospect of a sharp fall in earnings. Investors who buy such stocks may soon find that the P/E ratio has risen because earnings have declined.”

Greenblatt’s system requires minimum horizon of 3-5 years so a serious commitment is required on the part of the investor. For more, buy the book or check out the Barron’s article.

My friend Jeff recently posted his thoughts about emerging forms audience measurement. At the end of his post, he mentioned IMMI (Integrated Media Measurement Inc.) which, in my opinion, is one of the most exciting media measurement startups to have emerged in the past year. Despite positive press and a $25M Series C, IMMI somehow escaped my radar until Jeff’s post.

IMMI takes Arbitron’s Portable People Meter one step further. By sampling 10 seconds of room audio using special cell phones given to panel members, IMMI identifies media exposure with over 99% accuracy. This technology works across all forms of audible media– TV, radio, film, music, etc. and does it in a passive way without any recall bias.

Nielsen is getting its feet wet with a co-branded Nielsen/IMMI service to measure out-of-home TV viewing habits. It’s currently being bundled as a separate offering from Nielsen’s in-home measurement but given Nielsen’s acquisitiveness, increasing demands from agencies for stronger cross-channel metrics, and interest in performance-based metrics on the part of the TV networks, it may only be a matter of time before Nielsen IMMI is in business.

Now all we need is a cheaper way to measure the brand impact of brand advertising. If anyone has any insights or leads (particularly cheaper alternatives to Dynamic Logic), please don’t hesitate to leave a comment.

Having spent the past year both on the agency side and the publisher side, I like to think that I’ve developed a somewhat sober view of the online media landscape. Let me start with the positives:

1. Online media consumption is both increasing and fragmenting. To put it simply, online media is resting comfortably in the fastest growing part of the pie. Out-of-home would be another, more capital-intensive angle to take, which brings us to the next point.

2. There’s no more capital-efficient way of building a sizable company. Online media properties that can leverage SEO, viral loops, click arb, network effects, and other highly scalable user acquisition strategies to build a business on the cheap. This is what makes consumer Internet both such a sexy and somewhat crowded space.

3. There’s no faster way of building a sizable company. The same factors at play in point #2, give us companies like Facebook, YouTube, LinkedIn, Yelp, Kayak, eBay, etc. No need to worry about enterprise sales cycles or expensive infrastructure plays.

But this will come as nothing new to entrepreneurs with media-driven consumer Internet businesses:

1. No one is relying on low-CPM remnant inventory from ad networks to pay the bills. Most online media businesses should expect to build a direct sales team or some sort of proprietary ad network in order to get their RPMs to a profitable level, unless they’re driving substantial revenues from transactions or lead gen.

2. Despite the online media upstarts’ high hopes, nearly 90% of advertising dollars are going to the big 4 publishers. As Jeremy Liew points out, 92% of 2006 online ad spend went to Google, Yahoo, Microsoft, and AOL. He writes:

“For companies in the broad reach/$1 RPM bucket, this probably doesn’t matter much. Ad networks owned by the big four sell a lot of their advertising anyway. But for companies that target endemic advertisers, this is sobering information. To be able to realize RPMs in the $20 range, companies will need to have their own sales force. And if these numbers are to be believed, this sales force is actually competing for a share of a slightly shrinking pie.”

3. It’s not easy to build a proprietary sales force or ad ops team. Experience online ad salespeople are expensive, difficult to find, and require a property to have reached a certain level of scale before agencies will even pick up the phone. This presents a bit of a chicken-and-egg problem that can sometimes be remedied by rep firms (e.g. Gorilla Nation) but more often results in startups needing to raise more money. Moreover, once you start dealing with agencies and multiple networks for your remnant inventory, you’ll need a good ad ops person, which also poses similar issues.

4. It’s not easy to cut through the noise (particularly if selling non-IAB standard units). Jeremy Liew further explains that until there are standards across ad formats and properties, each purchase is like a business development deal rather than an efficient market transaction. “The problem with new forms of advertising is that they are often not represented in the media buyers’ spreadsheets and models. And if it’s not in the model, it doesn’t get allocated any ad spend,” he writes.

Needless to say– there is an ecosystem developing to help online media businesses ramp up without breaking the bank. Companies like The Rubicon Project and Pubmatic are helping publishers manage remnant inventory without an ad ops team. Vertical networks make it easier for small, endemic sites to monetize at higher CPMs. And it seems like it will only be a matter of time before novel ad formats and smarter networks will emerge to further monetize long-tail publishers.

I’m still working my way through the Churchill Club’s Top 10 Tech Trends event (check out posts by Eric Savitz and Philippe Botteri for more detail). As Jurvetson points out, by 2025 the entire country will look like Florida does today. The aging Baby Boomer population will present both a tremendous market and an opportunity for technological change.

Some thoughts on how technology comes into play:

1. Health and safety. Geriatric care will continue to grow, creating a whole ecosystem of software and devices to help senior living facilities function efficiently. Moreover, for seniors who remain at home, technology will push advances in monitoring, alerting (next-gen LifeAlert), telehealth (e.g. Viterion, Hommed, etc.), and drug safety aids (MIT Age Lab).

2. Media geared toward Boomers and their children. As Jurvetson points out, cognitive media (such as Dakim) will grow in market share. E-learning for Boomers, long tail archived media content, and content for children of seniors to manage the complexities of senior care all have the potential to benefit from demographic shifts. Marketing also gets more complicated.

3. E-commerce as the shopping channel of choice. Big-box retailers appeal to seniors because they offer low prices and make it easy for seniors who have trouble walking to make the most of each shopping trip. E-commerce will continue to proliferate for very much the same reasons.

While the demographic shift presents opportunities for new businesses, technologies, and services, there’s no way to get around the fact that more U.S. spending will move toward geriatric care (senior will need to be nursed, driven to doctor appointments, etc.)– tasks that are incredibly difficult to automate. From what I understand, this is likely to push per capita productivity downwards as consumption shifts toward labor-intesive services unless technological advances in other areas makes up for the shift.

This week witnessed the latest wave of Twitter-bashing following news of a large fundraising round. I am frequently asked what I think of Twitter, as though it were a litmus test of my consumer Internet knowledge. In the interest of full disclosure, I am skeptical of the service’s potential to become a significant ($100M+ in annual revenues) company.

1. Mainstream adoption. At the heart of the Twitter debate is an argument over whether the core use case of microblogging will appeal to mainstream users. Let me begin by saying that I have never been a regular user of Twitter nor have any of my friends outside of the tech community. There are arguments to be made about changing norms of information sharing in a wireless world– but most people I know lack the urge to push out a constant stream of activity information to their friends. The blog is a poor analogy because blogs are vehicles for publishing and self-expression rather than a means of answering the question “What are you doing?” This not to say that Twitter doesn’t have useful secondary use cases– such as communicating with the tech community, fighting forest fires, staying in touch with fans, becoming a micro celebrity, etc.

2. Negative network effects. The positive network effects of mainstream Twitter adoption may be outweighed by the negative network effects of having to censor one’s tweets to an ever expanding audience of followers. After all, the barriers to comfort are much higher when one is sharing detailed information about their day (as opposed to photographs, notes, or the type of biographical information one shares on Facebook).

3. Monetization challenges. For the time being, communication is notoriously difficult to monetize because it rarely captures intent. This is the reason why you have probably never clicked on a Gmail advertisement and why Twitter is going to be extremely difficult to monetize.

Needless to say, these are not insurmountable problems. Negative network effects can be rendered moot by more careful managing of Facebook and Twitter friend lists and privacy settings. Someone will likely crack the monetization nut just as Overture figured out how to monetize search engines years ago. However, I am still skeptical that Twitter will develop the kind of mainstream scale necessary for it to become a significant technology company with $100M+ in revenues. Take my thoughts with a grain of salt– as I was the guy who never had an IM away message.

I had the opportunity to drop by the AlwaysOn conference in Boston this past week. As an entrepreneur you become so laser-focused on your market and your technology that you tend to forget about how the VC world tends to think about things. The ability to listen to VCs talk about their business, coupled with excellent food at the Four Seasons, made for a great experience.

Here are some observations that stuck with me from the conference. None are particularly insightful for those of you in the VC world but may prove interesting to the casual observer:

1. Cleantech is both crowded and exciting. A lot of VCs (both specialists and generalists) are going after this space with tremendous war chests. There have been relatively few home runs so far and everyone seems to agree that it is an industry that could take a while to deliver substantial exits. Nonetheless, the magnitude of the market opportunity keeps some of the smartest VCs hungry (Dooer, DFJ, etc.) The fact that two of the younger VCs that I know both entered the VC industry with strong Internet/software backgrounds and made the choice to focus on cleantech opportunities says something about the long-term opportunities in the space.

2. Consumer Internet is losing its luster. I picked up on a bit of a backlash against the consumer Internet space. High valuations, monetization problems, small-scale ideas, and a looming recession has weakened the hype. Kara Swisher’s panel pretty much said it all– “Too many ad-based business models?”

3. Investment outside the US is becoming increasingly attractive. Last year, the quantity of VC investments in Indian and Chinese companies exceeded US VC investments. More interestingly, Europe saw 20% of the investment activity that the US had last year (in $ terms), yet the number of $100M+ European exits was 60-70% that of the US. This seems to suggest that European VC is an under-capitalized market.

I used Netflix’s “watch instantly” technology for the first time a few weeks ago and was very impressed. Minimal buffering, great streaming, well-designed interface. My first film choice– Helvetica, a documentary by Gary Hustwit (of Wilco fame). He’s pretty good with the urban interstitial shot set to mood music (think Koyaanisqatsi) and throws together a nice tribute to the most ubiquitous font in contemporary America. I’m not sure this is mission-critical material for the entrepreneur who is thinking about company branding but is an important consideration that is not easy to reverse.

As you quickly learn, Helvetica marks the corporate identities of 3M, American Airlines, American Apparel, Jeep, Lufthansa, Panasonic, Knoll, and Target, among others. As a graphic designer in the film points out– “It’s hard to evaluate Helvetica. It’s like being asked what you think of off-white paint. It’s just there.”

The font becomes the means through which the filmmaker exposes a deep-set argument between modernist and postmodernist typographers, as told by the famous font-makers themselves. For example, the great modernist Massimo Vignelli (designer of New York’s subway signage and the American Airlines corporate identity) explains that Helvetica is only one of three fontfaces that he uses. For Vignelli, type should communicate content in a neutral way. In this regard, Helvetica strives for legibility and rationality– not expressiveness. For Vignelli, the composition rather than the font do most of the talking, which is why American Apparel and American Airlines can contextualize the font to arrive at completely different emotional expressions.

The documentary becomes most interesting in its final third, when the postmodern typographers start to fight back against Helvetica. By the 60s, the font’s novelty wore off and its ubiquity made it become a symbol of conformity– leading postmodern designers to strive toward what the called “ABH” (Anything but Helvetica). Paula Scher describes her reaction to Helvetica in the 1970s as a reaction to corporate culture and the Vietnam War. She drew her inspiration from the expressive typography of record albums and underground newspapers (the publisher of Raygun shares similar sentiments).

Today, Helvetica remains popular in brick and mortar businesses (Crate & Barrell, American Apparel, Target, etc.), but it seems that web services have decided to adopt custom typefaces. Amazon.com went with its own sans serif, as did Facebook and Digg, and very few websites use Helvetica in their identities. Analysis of typography is outside of my comfort zone, but the cynic inside of me points to a desire to distance one’s startup from Microsoft– whose logo is, of course, an italicized Helvetica.

What can I say? I continue to be blown away by Amazon’s product extensions.

1. Fulfillment by Amazon. A couple of weeks ago, I talked about the opportunities for long-tail outsourced inventory management and fulfillment. Companies like eFashionSolutions and Onestop handle e-retailing for established brands and plenty of local and national logistics firms work with larger manufacturers/retailers, but I had not been able to find a relatively automated solution for small retailers. My partner, Adam Katz, suggested that Amazon.com would be in a perfect position to this. Adam proved prescient and Amazon unveiled Fulfillment by Amazon a few days later.  Fulfillment by Amazon quite elegantly address the inventory management and fulfillment pain point for small retailers and has the potential to be a real game changer for niche e-retailers:

2. Amazon Print-on-Demand. TechCrunch reported that Amazon would be flexing its e-commerce muscle and only selling print-on-demand books printed through BookSurge. I imagine that a fully integrated Amazon print-on-demand service that leverages BookSurge printing, Fulfillment by Amazon, and Amazon’s destination site is not far away. This is good news for authors and bad news for Blurb, Lulu, myPublisher, Sharedbook, and the other players in the space (who I got to know very well in my business development role at TotSpot).

3. Amazon Web Services. Much smarter people have written about AWS but it goes without saying that AWS (particularly S3 and EC2) has changed the consumer Internet landscape by transforming many fixed costs associated with web applications into variable costs.

Bezos and his team understands the disruptive power of transforming fixed costs into variable costs, particularly for SMBs and individuals. I hope that Amazon continues to build a powerful variable cost ecosystem for entrepreneurs in the years to come.

I had dinner with the guys behind Bonobos last night (disclosure: one of them is my roommate) and came away feeling very excited about their prospects for a building a direct-to-consumer apparel brand. The premise behind Bonobos is that they are disrupting the traditional wholesale/retail model by selling directly to the consumer, passing on savings to the customer and retaining more favorable margins.

I’ve recently been thinking about ecommerce and am optimistic about the space for a few reasons:

1. There are vertical opportunities in ecommerce. Plenty of single-channel ecommerce merchants have done well by focusing on narrow verticals. Despite the size and branding clout of larger ecommerce players like Amazon and the major multi-channel retailers, companies like Zappos.com, Diapers.com, and Backcountry.com, have been very successful.

2. There is an ecosystem developing around vertical ecommerce. Vendors in the ecommerce world are increasingly operating on a variable cost basis, allowing ecommerce players to rapidly deploy affiliate programs (e.g. Linkshare), SEM efforts (e.g. Clickable), shipping processes (e.g. PayPal Shipping Center), recommendation engines (e.g. Aggregate Knowledge or MyBuys), and customer service operations (e.g. LiveOps and Elance) without incurring significant upfront costs.

3. There are opportunities to develop a brand through performance marketing. Zappos built a brand by running a strong SEM effort. University of Phoenix built a brand by being smart in their CPC efforts. Diapers.com runs great direct response campaigns through print media. Lester Wunderman has been saying it for over 50 years, but the Internet has made it clear that smart online marketers can build their brand through their performance marketing efforts and retain a positive ROI.

4. People are more comfortable shopping online. Before Zappos, everyone thought that selling shoes online was impossible. After all, you’ve got try shoes on to make sure they fit! Zappos encouraged customers to order multiple sizes and return the ones that don’t fit. Now people are even comfortable buying shoes online.

5. There are revenue opportunities on top of transactional revenue. Savvy ecommerce merchants can supplement their margins by leveraging data about their customers, such as lead generation for other retailers, selling in-box advertisements, and charging manufacturers for preferential product placement on their websites.

So far I’ve been talking about e-commerce. Bonobos is a little different. The disruptive idea behind Bonobos is that you can build an apparel brand through online, affiliate, and viral channels and effectively cut out the retailer.

Vertical e-commerce players like Zappos had it easy because they never had to build a brand initially– they simply bought search ads against Nike, drove customers to the Zappos site, and the Zappos brand developed as a consequence. Similarly, Diapers.com had it easy because they never had to educate the consumer about their product– moms know all about diapers and Diapers.com is selling a known product. Bonobos will have to build a brand and educate the consumer about their brand without retail support. But if they pull it off, they could end up with the fattest margins in the history of men’s apparel.