Internet businesses have finally arrived, says Michael Lazerow, CEO and founder of Buddy Media, a Facebook marketing company.Unlike in years past, we finally have multiple private web business earning hundreds of millions in dollars.
At we’re only getting started, which is why it’s not crazy for Zynga to have a $10 billion valuation. Or Groupon to be valued at $15 billion, or Facebook to be valued at $60 billion.
While many people want to talk about a “frothy” market, Lazerow argues the highly liquid market is allowing companies to hit their true valuations.
We sat down with Lazerow in his rather large new offices to talk about Buddy Media and the web at large. Below is a transcript of our talk. It’s long, but interesting.
If you’re in a rush, here are some highlights:
- Twitter will not become a huge business like Facebook. It’s just a distribution platform right now. “They’re the phone company without a business model in many ways,” says Lazerow.
- The Facebook platform is the best one to be on right now. Unlike Twitter which is snuffing out companies in its ecosystem, or Apple, which has yet to produce a massive app company, the Facebook platform has generated at least one nine billion dollar company, and could produce more billion dollar businesses. At least, Lazerow hopes so since his company relies on Facebook.
- No, we’re not in a bubble. Some investors are making bad bets, maybe, but as we wrote, the Internet is producing real viable businesses. Some valuations might seem high, but there’s a reason for it. Goldman isn’t stupidly investing in Facebook.
- People on the outside are too focused on IPOs. Maybe Zynga never IPOs, maybe it just starts reporting its numbers. Startups are just thinking about the best way to raise capital.
And here’s the full interview:
Business Insider: The last time I saw you guys, you were in a much smaller space. What’s changed in the last three years?
Michael Lazerow: I think we had 35 employees last year. Now we have over 130 people. I think what has happened is the same thing that has happened across social media in general — Facebook, specifically.
We need to engage our audience where they are versus build really expensive websites. And so the world’s companies have turned to Facebook first as kind of, like, their home. And you’re seeing 3 million pages and growing. That’s the last number I saw, you might want to check that.
But millions of pages and their ad business going from 0 three years ago to $2 billion of revenue, of which, I think, three quarters is advertising. Every company really has jumped onto the social bandwagon because the ability to grow an audience, an owned media audience that you can connect with at any time, is really powerful. And so we’re the go-to choice for companies that want to build it out.
It’s software, it’s service. Instead of a large cost up-front, it’s a monthly pay as you go subscription to our software. And we’ve proven we’ve been able to help companies really grow their fanbases and engage their fans on Facebook and the difference in working with us and not using a solution is significant. So being able to change content, doing fangating — “hey, become a fan and get this exclusive content or event” — we’ve been able to holistically let them build their business on Facebook.
BI: When I saw you last time, a lot of people were sceptical Facebook could ever become a good business. At that time you said they could just start selling water and they’d make a lot of money. I think they’ve proven you right. Now, the same sort of question dogs Twitter. Do you think they will have the opportunity to make a lot of money like that?
ML: I think Twitter can do really well long term. It’s not as guaranteed as Facebook. So Facebook is here today, scaling like crazy, 2,000 employees, great management team, great product team, a great sales team. They have brought in vertical specialists, so they hired someone to run partnerships which is really important for business.
Twitter’s just early. A few hundred employees. They have a pretty big engagement, in terms of people not necessarily tweeting — they do see a lot of people sign up and bounce — but using it for an information network. And I think their big issue is how do they solve this kind of creative crisis they have, which is how do you scale a brand on Twitter? Right now you can send out 140-character tweets, so a sentence and maybe a link.
But there’s not much you can do on Twitter. So it’s looked at as just a distribution system and not necessarily a place that you set up shop and develop as a hub. I think that will probably change. You’ve seen the redesign of Twitter.com. I don’t have any specific information around it but they’re going toward integrating- – they’ve already integrated with Instagram and some of these photo apps where they just appear right on the site or right in the stream.
So I think advertising’s going to be part of their business or most of their business, unlike Facebook, which could be anything. And so I think it’s gonna be a great business. It’s not going to be a Facebook. It’s not going to be a Google or an Apple, but it could be supporting its current valuation.
I did say on your site, and I encourage you to go look at the interview, that Twitter will be bought for $2 billion or more right after they raise one of the rounds of financing. And people said, “$2 billion? That’s crazy.” And a year and a half after I said that and we’re at whatever the valuation is – $4 billion? $5 billion?
BI: I think it’s $4 billion from their last big raise.
ML: Yeah, so can it support the current valuation? Yes. Will it be a $50 billion company? I don’t know. It’s just too early.
BI: One difference between Twitter and Facebook, from our perspective is that no companies rely on it to stay in business. Facebook has companies like Buddy Media, or Zynga —
ML: Groupon relies on it.
BI: Right, Groupon. All these things are built on Facebook’s platform and it can figure out a way to tax them, whereas Twitter doesn’t have that kind of thing.
ML: I tweeted this weekend that it’s kind of sad to see the leading companies in the Twitter ecosystem — I mean the top of the top — TweetDeck, CoTweet, who are bigger than these companies that get a lion’s share of the coverage? They’re selling for $30 million, CoTweet for $10 million.
Zynga’s out raising money at a $9 billion valuation. So the scale for developers — if I’m gonna allocate my resources, as a businessperson I have a dollar to invest. Where do I invest it? We’ve been able to show a very steady return off of Facebook.
We have a real business with real revenues off of the Facebook platform. Having said that, Twitter’s growing and I assume it will create some big businesses. I don’t know how. They’re not going to have the gaming players. We all look at Twitter as a distribution mechanism. They’re just kind of the cable channel that lets us broadcast out without taking any of the fees for distribution. They’re the phone company without a business model in many ways.
BI: Circling back to what you do, how have you seen brands change their attitudes toward Facebook?
ML: It’s just bigger. When I started this business, Facebook had 20 million people on it. So when we would show up and say, “You should really pay attention to this site called Facebook,” they were kind of like, “Yeah, I’ve heard of it. It’s big. I know it’s kinda big on campus.” And at the time, over 70% of the users were underage. We knew that because we did a lot of the first alcohol apps and sponsorships on Facebook.
Now they have over 650 million people. And of those 650 million people, 70% who come in from the US log in every single day. 150 million people, according to their latest numbers, coming in from the US, over 50% of the US population, and 70% of those people — 110 million, 120 million — are logging in every day. There are some segments, like mums, who are spending double the amount of time as the average Facebook user. When you have the world’s mums or travellers or any of these incredible advertising groups on Facebook, the dollars are going to flow.
And so we have clients who are at a million fans and want to get to 20 million. We have clients at 20 million and want to get to 200 million. We have clients who are just starting and want to get to a million. And so wherever you are, you’re saying, “I’m investing in Facebook because it’s going to be an asset that I leverage for as long as I’m in business.”
BI: Does it bother you that you’re reliant on Facebook?
ML: I love it. If you’re gonna be hitching your horse to a company, you’d much rather be behind Facebook right now than Google or Microsoft or Apple or Twitter or anyone else. The size of the ecosystem is huge.
It’s a great time to be a publisher on Apple’s platform, but are you gonna create the type of companies that we’re seeing on top of Facebook? We have yet to see it. We have yet to see the billion dollar app company.
I think where we are today is that there are a few companies that are dependent on Facebook, but Facebook has been in many ways dependent and appreciative of us. Like if Zynga goes away, so does a whole portion of content that obviously 250 million people on Facebook a month care about. Deeply. It’s the only reason they’re using it. The numbers don’t lie. If people didn’t like their games, they wouldn’t be a big business.
On the business side, Facebook appreciates what we do. They need us to onboard clients. I’m not going to say that they’re dependent on us because they’re not dependent on us. They have a huge business and can do whatever they want. But they see where we play in the ecosystem and they kinda want to protect that.
Facebook has shown no hostility to any of the big businesses on the platform. And to the contrary, they’ve created the Preferred Developer program. They’ve done partnerships with the game companies. They reach out, bring us into their garage and bring us under the hood.
Twitter’s bought some companies that pissed off the community. Apple is always in a heated back and forth with their developers and content providers, whereas Facebook has always made it very clear that if you screw around with our users you violate the terms. We’re not gonna play nice and let you go. As long as you follow the rules you’re gonna do well with them.
ML: Do you think a company like Zynga will IPO, are they waiting for a Facebook to IPO? Is everyone waiting for Facebook?
ML: I don’t know. Listen, when you’re doing $400 million of profit at 50% margin, so $850 million of revenue last year, you do what you need to do as a business. Buddy Media, we’re building our business, we’re not a $9 billion business yet. We’re just focusing on building great products and supporting the product. I think Zynga is the same way with games — build great games, distribute great games, support the games.
If there’s an opportunity for them to go IPO, they may. But you can also have over 500 shareholders and not go IPO. Just report numbers publicly and meet the minimum reporting threshold. I don’t think any of those companies really look at what the others are doing other than the general frothiness in the market right now.
BI: Do people on the outside get too hung up on the idea of IPOs?
ML: I think everyone outside the company does. I’ve been involved with an IPO in my company, I’ve been involved with different circumstances that come — I started this company with the founder of Zynga, Marc Pincus. Peter Thiel on the Facebook board is a big investor and a partner here.
And as entrepreneurs we don’t think about the public markets or private. It’s basically, “what’s the capital we need to grow?” It’s such a regulatory nightmare to become a public company. If the only way you can realise the value from your business is to tap into the public market, then you’ll do it. But it’s a really high hurdle. Typically, as a founder, if you go public you’re locked out of selling. Not only in the first six months, but as you, the founder, start selling, the stock tanks many times. Most of the great companies are started by people who want to build great companies. And that’s it. If public markets make sense, they’ll obviously approach it.
BI: Are you saying it’s easier in private markets if you’re a founder to sell some of your shares?
ML: When I started selling businesses, I didn’t know anyone who sold in the secondary market or who could get liquid. I think part of that was there’s a system in place to keep founders so incented to grow their business that it actually backfired in many ways. Companies would sell because there’s no other way for the founder to take money off the table.
You look at the Groupon deal and they raise a billion dollars at a very hefty valuation. The management team takes most of that off the table, so if you’re Andrew Mason and you take whatever that number is — $100 million, $200 million, I don’t know — you’re set for life. Whether you have $100 million or $100 billion, you’re probably not gonna spend it all. It’s now taken that pressure of getting immediate financial benefits in the return. It lets you build a business. Typically companies who sell have no other options. Either no other options or just so great of an option that it forces them to do it.
BI: When you IPO, how much does the pressure from your investors affect you? I’m just thinking of Pandora, which just filed. They’re not making money, and the founder doesn’t own much of the company.
ML: Pandora’s interesting because they obviously went from losing a lot of money to almost breaking even in the last year. I think they’re going public at the absolute perfect inflection point for them. They’re scaling, they need to turn up the volume so to speak and scale faster. I think for them they’re gonna get a very healthy valuation through this IPO process. It’s a consumer name, a lot of people will want to buy in, a lot of institutions will want to get in. It’s a great way to finance the business. They’ve also been at it a while. Facebook’s only been around for five or six years. They’ve only been trying to make money for a few years. Whereas Pandora has had a very well-documented rocky dozen years. 10 years? At that point the investors are like, “We don’t just want to bring money to the business, we want to create liquidity.”
BI: And the founder of that company on has like 2% now because of the troubles he had raising money.
ML: The worst place to be is needing money as a founder. Then your valuation’s going to go as close to zero as possible. You can usually raise money, it’s just a matter of valuation. Raising $10 million on a $1 million valuation is a little different than raising 10 on 100. For you as a founder. One, you own 2% at the end of the day, the other you’re only getting diluted by 10%.
BI: What do you make of all the talk of bubbles? And all the money being thrown around by VCs lately?
ML: There’s a lot of money in two pots right now. And the market is kind of separated into two distinct pots, which now the investors kind of see that and they’re trying to create these opportunities to let them play in both pots.The two areas are, like, really early. So sell the promise. “Hey, we’re gonna build the greatest thing you’ve ever seen. Let’s raise $5 million on a five million valuation or two or whatever it is.” And so there’s a lot of money there, just funding ideas.
And then there’s a lot of money in the late stage, “we have a business, we have a hundred employees, we have $20 million in sales, we need to kinda hire out people at market and pay for these servers.” You’ve got real scale issues. There’s tons of money there. There are a lot of funds out there that will say we’re not smart enough to figure out which ones are gonna work. But once they work, game on.
For us, we had both. We had both great supporters early on who were funding an idea that’s evolved. The original idea they funded isn’t the one that took off. And then we had a very competitive process. Multiple term sheets. We had, I think, half a dozen term sheets on our last one and we got to the market valuation, which was — I can’t say that it was high or low, just that’s what the market would bear.
The interesting thing about the frothy market is that everyone says these deals that get done — ours was a 9-figure valuation — are kind of big frothy deals, but you look at the DST-Facebook deal and the LinkedIn deals and the Groupon…they raised an early round of $250 million which people thought was crazy, then they did a billion.
Twitter did a billion valuation, what, 18 months ago? Not even 18 months ago. A year ago. So what’s frothy today once you have the revenues to support the business are like, “Oh yeah, that was a good price.” Zynga, $9 billion, people laugh at. But it’s only times earnings in a very competitive marketplace. So I think frothy lets us get to the real valuation.
It lets you get closer to what these things are worth versus inefficient markets where you don’t have liquidity, you don’t have enough people in, there aren’t enough companies in there, and so you don’t know what things are valued at. As an investor you get a great deal or a bad deal. As an entrepreneur, you may have to raise money at a really low valuation. People aren’t in the marketplace.
When I hear about frothy, I think about systemic risk and are there risks here to anyone? And whether VCs pay 10% or 20% more or less, it’s just equity investing. Some will make money, some will lose, but the revenues are real now.
The last time around, show me a business that was doing $400 million in earnings as a private company. And now I can show you multiple ones — Groupon, Facebook, Zynga, and others. So to me, we’ve never seen this in the internet space. When I started in the internet space, there was no money out there. No ads being bought. No virtual currency. No e-commerce. So now that we’re at whatever it is — half a trillion dollar internet economy — I think it’s still early. And the smart investors agree as well. That’s why Goldman was like 10 times oversubscribed for their Facebook deal. These aren’t people who just want to own Facebook. They think it’s going to be a massive business.
BI: Why doesn’t Facebook own you guys?
ML: I don’t know. Ask them. I think I know. They don’t own applications. They don’t own the application layer. They put out a platform. They want to own their platform, they want to own the monetization of their platform. So self-serve ads and direct sales force and the credits product and whatever else they release.
There’s been no precedent of them buying a company for the application. And we’re not a company that can be bought for the team. Facebook’s not gonna go and pay $9 billion for Zynga for the team or whatever they’d have to pay for Buddy Media for the team. It’s like a real business. We’re valued based on who we are.
The brilliance of Facebook is they have been so focused on what they do really well. They have 2,000 employees. Google has 30,000. I think the goal of Facebook is how can you kind of create, in the same way that they’ve encouraged frictionless sharing, how can they create a really efficient, frictionless business? And we’re in the business of talking to clients and onboarding them onto a platform. It’s SaaS, software as a service. And the software is kind of the easy part. How do you service the platform? Our platform, that is a key part of the SAS model? And Facebook, they just want to be a consumer platform. I don’t even think it crosses their mind to go out and buy individual applications on their platform. Which is what we are. An individual application on their platform.
BI: With you guys helping bring more clients and business online, you’d think that would be something they’d want…
ML: You can make an argument they should own a game studio. I think in each vertical where there are big businesses, like — they should own a Groupon. They haven’t tried to buy a Groupon. Each of these areas, it fits. And that’s the power of Facebook. Facebook will find a way to make money from every area. It’s not that they’re saying they don’t want to make money in the advertising market that Buddy Media plays in, they’re just saying “We don’t want to be a social marketing platform. We want to sell ads and sponsored stories and everything we’re doing.”