Almost Everything is Unprofitable

Mar 6th

Clowning Around

There is a saying in the bond trading market that if you don't know who the clown in a deal is then look in the mirror because it is probably you. Business is the same way. Almost everyone gets taken for a ride at least once.

What is Ignorance?

Ignorance is often viewed as a condescending word, but it is how we are all born. It is only through learning and experience we are able to do much more than survive. Any time you enter a new market or use a new strategy you start out from behind. You are the sucker who is losing money. Rarely does the new guy win just by showing up, or just by copying someone else's existing strategy. There has to be some point of differentiation.

A Brutal Uphill Climb

The leader has more data, more connections, more links, more capital, higher visitor value, and the algorithms have another layer of karma built over the top of them as well. Matt Cutts described part of the Panda update as "we actually came up with a classifier to say, okay, IRS or Wikipedia or New York Times is over on this side, and the low-quality sites are over on this side."

Roadblocks & Pot Holes Are Everywhere

Based on those sorts of disadvantages, why would anyone want to try SEO? Well in almost any other business model similar roadblocks and pain points exist, and SEO allows one to build momentum over time without it being an all or nothing risk. The slow buildup can lead you toward success in ways you may not have anticipated. And the cost of failure is often little more than time. Plus you gain knowledge even when something fails.

Is SEO Really Any Different?

I think Chris Dixon is one of the smarter entrepreneurs and angle investors out there, but was disappointed to see him write a post titled SEO is no longer a viable marketing strategy for startups:

I talk to lots of startups and almost none that I know of post-2008 have gained significant traction through SEO (the rare exceptions tend to be focused on content areas that were previously un-monetizable). Google keeps its ranking algorithms secret, but it is widely believed that inbound links are the preeminent ranking factor. This ends up rewarding sites that are 1) older and have built up years of inbound links 2) willing to engage in aggressive link building, or what is known as black-hat SEO.

A similar blog headline flipped around might read like "Most VC funded companies fail & founders get hosed on equity dilution, so getting funded is no longer a viable company formation strategy for startups." Of course something like that would be laughable, but it is no less absurd than saying SEO is no longer viable.

Sure coming from behind is hard, but the above misses that

  • Google has grown more aggressive in monetizing their search results through increased verticalization and navigational aids
  • many of the most profitable SEO plays are reinvesting into growth
  • most people who are successful with SEO do not like to attribute their success to it because doing so creates additional risks & more competition

Unique Market Approaches

Even treading water in a market where competitors are reinvesting profits & the market maker is tilting the table is quite respectable. If you want to come from behind and exactly clone someone else's business model, it won't likely be profitable. But that is why people attack markets from different perspectives. This is no different than why there are many different graphs. Chris isn't trying to beat Google in creating another link graph, but is looking at different signals.

Tectonic Shifts in Relevancy

Likewise marketing strategies can be vastly different between different companies and different projects within a company. Certain types of pages & certain types of websites rise and fall as the algorithms are adjusted to close down opportunistic loopholes. But as they make certain things harder they make other things easier. The whole content farm model was only enabled by an excessive weighting on domain authority & the introduction of rel=nofollow.

That opportunity may have fallen by the wayside. Many content mills just got hit pretty hard.

Was The Pain Really That Bad?

But for all the bluster about how it was one of the biggest changes in years, most of the content farms are only down maybe 20% to 50% in terms of traffic & revenues.

Sure that is a lot of revenue to disappear, but when you are operating at 80% net margins you can do that without it destroying your company. And this doesn't even take into account that many of these sites had a clean double over the past year. So if you grow 100% then lose 50% you are still even year on year, in spite of being penalized. Not bad in an environment where tons of businesses are going bankrupt offline.

And of course those sites getting whacked create opportunity for other folks, who build sites using different strategies.

A Cautionary Tale

About a half-decade ago a CEO of a start up contacted me & had us build a few links for them. Then they had to get their VCs approval for doing a full in-depth strategic review because it was going to cost well into 5 figures. Their VC investors didn't believe in SEO!

So that killed the project.

This company had a multi-lingual site where their leading market's content was only accessible through a drop down form where the URLs did not change. Fixing that issue to make the site crawlable would have produced more revenues in the first few months than the cost of our contract. But the VC didn't think SEO was valuable. They never got that tip. And for businesses which have network effects built in, losing $x today can easily be $10x or $20x a few years out.

Current Market Leaders Were Yesterday's Gray Area Marketers

Mr. Dixon also highlights how established TripAdvisor is, but when they were founded they were once the small dog just starting out. His article also fails to mention that TripAdvisor was Text-Link-Ads largest customer. In other words, they came from behind, took a calculated risk, and won. They backed off from the risks when the risks started to exceed the opportunity.

Not long after TripAdvisor started collecting consumer reviews, eHow was sold for $100,000. That turned out to be quite profitable for the buyers! And eHow was also known for aggressive & spammy link building against Google's guidelines. In fact, one of their largest competitors highlighted the lack of this information in their S1 filing:

The entire 250+ page document is devoid of any discussion of incoming links which is the cornerstone of search engine optimization. By reading through the lines, it appears that they have two primary sources for link development for their owned and operated sites: (1) from their “undeveloped websites” and (2) from their content partner sites. Although these two initiatives alone are generally not financially profitable, they are successful approaches to maximizing the incoming link equity in their owned and operated properties.

The point is that start ups shouldn't avoid all risk, but they should pick and choose their spots. The above sites are billion Dollar enterprises because they worked in the gray area to catch up & build a lead, and then pulled away from risk after they had a strong market position.

As time passes the opportunities change, but they don't really disappear.

Published: March 6, 2011

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Comments

March 6, 2011 - 6:54pm

Personally I think that Chris Dixon is getting a hard time over this for little good reason. I believe that SEO for SEO's sake should not be the priority of a startup - and many startups who have focussed on that have found that they don't get anywhere near as much traffic or traction as they'd expect. Instead, a good SEO strategy for a startup is to be SEO-aware while carrying out other marketing techniques - such as social media, digital PR and traditional PR. All those other forms of marketing create far higher quality links for SEO than most 'pure' SEO techniques anyway, and also have the added benefit of bringing in lots of traffic.

Very few companies these days (rightly) say "hey, our strategy is to dominate the search results because we're smart and have lots of good content". SEO should be built in to the daily routine of being a startup, but it is no longer your sole route to your cashcow, like it could have been back in the day. It is now a nice bonus on top of the other traffic you need to acquire.

March 7, 2011 - 2:08am

If SEO + Marketing = SEO, then how can SEO be dead?
The fact is the Internet is getting crowded. There is not enough room for all the competitors. They all cant rank number one. Unless you divide them up by region or locality. Right now Google and to a lesser extent Bing make all the rules. The only way to compete is through marketing and SEO. But that means you need expertise or hire someone who has it. There are many business that operate without very much marketing talent. But not on the Internet. The Internet pushes those business's to the back of the line.
There is a business revolution going on. Some people like it, others don't. But I don't see any way to stop it. It requires new talents, new thinking and new organization. The biggest barriers are existing talent, the old way of thinking and a existing organization.

March 7, 2011 - 2:26am

All those other forms of marketing create far higher quality links for SEO than most 'pure' SEO techniques anyway

So now we are excluding high quality link building strategies as being part of SEO & redefining 'pure' SEO as to not include some of the best categories of links? You may do that, but I don't. ;)

The only way to compete is through marketing and SEO. But that means you need expertise or hire someone who has it. There are many business that operate without very much marketing talent. But not on the Internet. The Internet pushes those business's to the back of the line.

That is how I see it as well. For all but a few platform companies, solid SEO strategy is a requirement rather than something that can be thought of as a bolt on that is nice to have.

March 7, 2011 - 4:12pm

Despite years of development and algorithm changes, marketing decision makers look at SEO as it has been for years. The biggest problem is decision makers not knowing enough to put the kind of required emphasis on SEO. Search engine algorithm changes is a given, technologies evolve and they have a business to run as well.

Search engines may change their algorithms but the end user's usage pattern remains quite steady; marketing strategists need to take this into consideration and add and remove tactics and not completely abandon the idea that algorithm change means SEO isn't practical anymore.

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