December 8, 2023

Case Study: When Your First Company Is Working, but Another Is Beckoning

THE CHALLENGE Founded by Aseem Badshah, Uptown Treehouse creates campaigns employing elements for Facebook, Twitter, LinkedIn, StumbleUpon and Outbrain. It helps companies introduce new products and initiatives and has worked, for example, with both Guess Jeans and the television show “Breaking Bad.”

While building the company, Mr. Badshah and a programmer, Kevin Yu, created software that searches social media and other Web sources to generate sales leads, and that software has taken on a life of its own.

In fact, the lead-generation software was so effective that Mr. Badshah and Mr. Yu created a separate start-up, Socedo, to develop and sell the software. Thus far, however, they remain uncertain as to how to finance the start-up and how to divide their time between the two companies, which are in different cities. They believe Socedo, based in Seattle, could earn much larger profits, but with much greater risk.

THE BACKGROUND Mr. Badshah, 24, graduated from the University of Washington in 2010 with a business degree. He moved to Los Angeles with the idea of starting the marketing agency that became Uptown Treehouse.

As part of the promotional campaign for the agency, Mr. Badshah started looking for ways to find sales leads that might turn into clients. His team created software that scanned social media for words that would identify potential customers. Then they used those words to start a conversation with the target customers through social media channels.

When the Microsoft development team was looking for people to create Windows 8 or Windows phone apps, for example, Mr. Badshah’s software scanned social Web sites and public forums for people who were commenting on mobile application development and let the development team contact them, offering links to Microsoft resources and connecting them to others who could help them develop new applications. Mr. Badshah found this new referral system more effective than cold-calling for customers.

Inspired, he teamed up with Mr. Yu, a former Microsoft engineer he had met during a University of Washington entrepreneurship event, to start Socedo, choosing the name because it was a combination of social and succeed, and because they considered it short and “brandable.”

Over the last year, the programming team has continued to develop the lead-generating software, which is now being tested by some 200 companies — mostly small outfits but also a couple of big names in Mr. Badshah’s Seattle hometown, Zillow and Microsoft.

Thus far, Mr. Badshah said, the testing has indicated that some 20 percent of the sales leads Socedo generates for its clients are of high enough quality for those clients to include them in their sales pipelines. With about 10 percent of the companies indicating they are ready to pay for Socedo on a monthly basis, he now hopes to introduce the software for sale in the next few weeks.

THE OPTIONS Torn between the two ventures, Mr. Badshah has come to a decision point. He could continue building the Uptown Treehouse business and invest all of his time in that. There would be less financial risk because it is up and running and requires less investment in technology, but the company offers a linear growth curve based on the number of customers served and the number of employees that will have to be hired.

Option two is to sell or close Uptown Treehouse and use 100 percent of his time to raise capital to build Socedo. This option would be the riskiest because it is an early technology start-up, but it also offers greater potential rewards because he would be selling a software product, not a customized service.

The third option is to delegate the running of Uptown Treehouse to a general manager and use its profits to finance Socedo. Mr. Badshah would try not to spend much time on Uptown Treehouse but concedes he could be distracted by it.

There would be a risk in tying together the two companies financially because the loss of a client at Uptown Treehouse could affect cash flow at Socedo. Also, there are other software companies with similar ideas, and they may be able to grow faster than the Uptown Treehouse profits would permit Socedo to grow. If those competitors grow faster, they might capture the market first.

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DealBook: LinkedIn’s Surge Sets Stage for More Internet I.P.O.’s

Reid Hoffman, LinkedIn's founder, on the floor of the New York Stock Exchange as his company made its trading debut.Mark Lennihan/Associated PressReid Hoffman, LinkedIn’s founder, on the floor of the New York Stock Exchange as his company made its trading debut.

It’s not 1999, but the big Internet I.P.O. is back.

Shares of LinkedIn, the professional social network, more than doubled on their first day of trading, a surprising debut that both echoed the giddy exuberance of the last tech boom and heralded the coming of several multibillion-dollar Internet companies, like Facebook, that are expected to go public in the next 12 months.

The initial public offering, the largest by a United States Internet company since Google’s offering in 2004, was a major test of investor demand for the new wave of fast-growing social Web companies. Valuations for start-ups like Groupon, Facebook, Twitter and Zynga have been surging in private secondary markets in recent months. Thursday’s market action was an indication that investors’ appetite for these businesses had not waned despite questions of whether sky-high valuations were justified.

Linkedin’s shares opened on the New York Stock Exchange at $83 — up from its I.P.O. price of $45 — and rose as high as $122.70 before paring their gains. The shares closed at $94.25, giving the company a market value of roughly $9 billion — more than four times the value of an early Internet king, AOL.

But this Internet boom is different in many ways from the last one.

The companies going public have more than just “eyeballs” of Web users; they have businesses that report earnings and revenue. LinkedIn, for example, which makes money from advertising, subscriptions and recruitment services, made $15.4 million last year on $243.1 million in revenue.

And unlike the late 1990s, there is no flood of new companies coming to market. Much of the enthusiasm for LinkedIn can be attributed to the small number of shares sold and a pent-up demand by investors who have had to wait out the financial crisis to put money in a sizable American Internet start-up. In its offering, LinkedIn sold 7.84 million shares, less than 10 percent of the company, with the option to sell an additional 1.1 million. Roughly 95 percent of the investors who wanted an allocation did not get their full allotment, said a person close to the offering who was not authorized to speak publicly about it.

“Today, there are a limited number of players in social media,” Lou Kerner, a Wedbush Securities analyst said. “There’s incredible investor demand for everything social because of its potential growth.”

Still, Thursday’s rally was particularly stunning because few expected LinkedIn to be a blockbuster I.P.O. The last United States company to gain more than 100 percent on its first day of trading was Nymex, the commodities market operator, in 2006, according to data from Renaissance Capital, an I.P.O. advisory firm.

Before this month, the company had attracted modest attention compared with its high-flying peers Facebook and Groupon, which have wowed investors with billion-dollar funding rounds and surging valuations.

In the first week of May, LinkedIn set the target range for its offering at $32 to $35 a share, which valued the company at about $3 billion. Then the company raised the bar 30 percent on Tuesday, to a range of $42 to $45 a share. The market rally on Thursday is now causing investors and entrepreneurs to scramble and adjust their calculations upward.

“If LinkedIn is worth $10 billion, you got to think, what is Facebook worth?” asked Peter Falvey, a managing director at Morgan Keegan.

“Not that long ago, LinkedIn was seen as the fifth major social Web company — behind everyone else.”

Facebook, which is widely expected to go public next year, has soared on the secondary markets, with shares trading at an implied valuation as high as $80 billion in recent months. The social buying site Groupon, which raised nearly $1 billion from investors in January, is said to be talking to bankers about an I.P.O. with a valuation of possibly more than $20 billion.

By far outpacing expectations on Thursday, LinkedIn is seen as positive harbinger for these businesses and smaller start-ups with I.P.O. aspirations.

Tony Zingale, the chief executive of Jive Software, a private company that provides social business software, said that he was tracking LinkedIn’s performance to gauge the markets.

“We’re excited,” he said, “It appears to be going well, there seems to be tremendous pent-up demand, for finally, a social media offering.”

Indeed, the euphoria around LinkedIn appeared to be spilling back into the secondary markets — exchanges where private shares are traded — bolstering demand for other start-ups. Second Market, one of the largest of such exchanges, said activity on its Web site and the number of sign-ups doubled on Thursday, compared with an average day.

Yet as more investors clamor for the shares of these popular social media companies, there is also a growing concern that valuations have become unhinged from fundamentals.

With a valuation of $9 billion, LinkedIn is now trading at 584 times last year’s earnings and 37 times last year’s revenue. The site, which has about 100 million members, offers a “freemium” business model: users can create free profiles or they can pay a subscription fee for a premium account with special features. LinkedIn also offers hiring solutions for businesses and recruiters. Although the company is still growing at a rapid clip, it is facing stiff competition from other online sites, like the job listing services Monster and CareerBuilder.

“The quality of their information is very good,” said Cem Ozkaynak, a co-founder of the financial research firm Trefis. But, he added, “LinkedIn will have to maintain the significant fees it charges to corporate and business customers while growing its corporate and business customer base significantly from a few thousand customers today to tens of thousands over the next few years.”

There’s also the concern that a strong valuation in the public markets — while nice for LinkedIn shareholders — could ultimately be an albatross for an eight-year-old company still struggling with profitability.

It was profitable last year, but it posted losses in 2008 and 2009. Now that its financial statements are being publicly disclosed, LinkedIn may come under pressure to meet the expectations of fickle shareholders who are looking for numbers that justify a $9 billion valuation.

That could be a significant challenge for LinkedIn, which has repeatedly expressed its commitment to investing in its platform, at the expense of short-term profits. A rich market capitalization may also make it harder for the company to retain and recruit talented engineers — a precious resource in a booming Silicon Valley.

“They will now have to make numbers, every 90 days, forever,” said Mr. Falvey of Morgan Keegan. “And, if you achieve huge one-day gains, existing employees will make so much money that they may not have to work again, meanwhile, you’ll have to prove to prospective employees that the stock is still attractive.”

LinkedIn’s executives, who were at the New York Stock Exchange to witness the opening of the stock, were exuberant over the market debut. Still, the chief executive, Jeff Weiner, sought to temper the significance of the gains.

“It’s an exciting day,” he said in an interview. “But we’re not focused on where the stock is. These short-term fluctuations are not going to be meaningful in the long term.”

The New York Times

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Filtering the Social Web to Present News Items

A Web start-up named Storify, which opens to the public Monday, aims to help journalists and others collect and filter all this information.

Using the Storify Web site, people can find and piece together publicly available content from Twitter, Flickr, Facebook, YouTube and other sites. They can also add text and embed the resulting collages of content on their own sites. During a private test period, reporters from The Washington Post, NPR, PBS and other outlets used the service.

Storify, based in San Francisco, is one of several Web start-ups — including Storyful, Tumblr and Color — that are developing ways to help journalists and others sift through the explosion of online content and publish the most relevant information. Investors are also betting there is a market for filtering the social Web for high-quality posts. Khosla Ventures has invested $2 million in Storify.

Even though journalists may not be the first on the scene, they select the most reliable sources, digest loads of information and provide context for events, said Burt Herman, a founder of Storify and a longtime Associated Press reporter.

“We have so many real-time streams now, we’re all drowning,” Mr. Herman said. “So the idea of Storify is to pick out the most important pieces, amplify them and give them context.”

Al Jazeera English introduced a talk show, “The Stream,” which appeared online last week and will be televised in May, that collects perspectives from social media using Storify. A recent item on the fear of Islam in the United States, for instance, included YouTube videos, Twitter posts and paragraphs from essays on Web sites and blogs.

“Storify is essentially our script,” said Ahmed Shihab Eldin, a producer and host of “The Stream.” “We knew we basically needed to capitalize on the reality that the industry is facing, which is that we no longer have exclusivity on sharing and publishing information.”

Andy Carvin, NPR’s one-man encyclopedia on Twitter for the uprisings across the Middle East and northern Africa, first used Storify to cover the shooting of Representative Gabrielle Giffords, when he realized that the reaction to the event was a story itself.

“It quickly evolved into looking at how people were discussing the media coverage surrounding it and its potential political impact,” said Mr. Carvin, senior strategist on NPR’s social media desk. “There’s a big need for tools that allow people to collect bits of social media context and organize them in some fashion.”

The tools will remain free, but Storify will consider selling ads or charging brands to use the service, said Xavier Damman, a Storify founder. Levi’s and Samsung have already used it for marketing campaigns.

Mr. Herman started Storify with Mr. Damman, who is an engineer. Mr. Herman also founded Hacks/Hackers, a group for journalists and engineers with chapters worldwide.

“We’re really trying to put together computer science plus storytelling and journalism to think creatively about how you can blend the two worlds,” he said.

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