Syntagma never says “I told you so”. It’s an irritating phrase that adds nothing to a debate. It’s also a pyrrhic victory when the bad times roll.

We’re talking about the American economy, of course — now in recession, as we’ve been predicting for months — and the British and European financial positions, which are trailing some way behind the U.S., but about to implode too.

We’ve been on the case since last June when the ominous tag “credit crunch” started to be bandied about in response to falling American house prices.

As online publishers we are partially protected from the ravages faced by bricks and mortar operations. Even so, Google responded to the same data last year by dumping lots of small publishers using its AdWords/AdSense programs and its range of offshoot partnerships.

ZDNet Editor in Chief Larry Dignan believes that “the dip in Google’s paid clicks was intentional, part of a strategic plan designed to deliver better, more-precisely targeted ads” and tends “to reflect macroeconomic conditions” — an acknowledgment that suggests Google isn’t recession-proof.

The knock-on effects lowered the earning power of a whole raft of mid-sized publishers who operate below the glass ceiling of scalability needed to challenge the giant press barons of the print media.

Given the power of this pincer movement, how should internet marketers and publishers ride out the troubles ahead, which may even include another dotcom crash?

Here at Syntagma we are developing two new business models which don’t depend exclusively on Google rankings and big investment in assets. We have also moved to conserve cash, now the most sought after commodity in global financial markets. Forget equities, bonds and angel lending. Asset-backing is truly out of fashion. Only cash and gold will do during the next two to five years, or maybe even longer than that. Japan took more than a decade to haul itself out of its banking crisis and the profound deflation of the 1990s.

I really don’t see how mid-sized businesses, with heavy debt, and/or lots of equity in the hands of VCs, can get through this otherwise.

The Fed’s dramatic easing of monetary policy, which still has some way to go, is barely making an impact, although the usual lags apply. In the 1990s, Japan found that zero, even negative, interest rates could not persuade its reluctant public to splash out in the shops. Longer term rates in the U.S. are already close to zero.

Ben Bernanke is apparently studying the Japanese experience of zero rates right now. Surely a sign of what’s to come.

The game now appears to be out of the hands of the authorities whatever they decide to do. Bernanke deserves credit for at least trying. His next move will surely be to throw the kitchen sink at the problem and let the Devil take the hindmost. This is no time for musings on “moral hazard”, the hazard is not inflation but deflation and slump. Massive U.S. Government loans to individual defaulters can’t be ruled out and may be just around the corner.

Compare that to the lethargic approach of the Bank of England and the European Central Bank. Still holding rates at 5.25 percent and 4 percent respectively, although the BoE has little room to manoeuvre thanks to Gordon Brown’s obsession with public-sector spending.

The first casualties could be some major institutions in America and monetary union in Europe, where the euro currency is looking very vulnerable. At least Brown got that right.

Syntagma predicts we are going to be amazed by developments in the not too distant future. The world may look a very different place when we come out of this, and it won’t necessarily be all bad news. Bubbles have to burst. Nature demands it. And the end of the eurozone would be a big plus for European freedom.

Nearly a year ago I wrote a post called These are the good times. They were and still are, uncomfortable though the ride may be.

Banks are pulling back from the industrial securitization of risk that has blown up so spectacularly in their faces.

So called collateralized debt obligations (CDOs) are the supermarket sausages of the financial system — nobody knows what’s in them, and most prefer not to.

In the old days, banks took the risk of lending money on themselves and ensured that borrowers would be able to pay it back over time. Securitization means that they can lend to any Tom, Dick or Harriet, package up the debts into large parcels of small slices from many borrowers, and sell them onto other banks and finance houses.

When house prices are rising fast, and rates are low (thanks to the Iraq war — see yesterday’s post), there will be no problem. How quickly the weather can change.

Now there’s a rush back to caution and traditional virtues — and not before time.

The Private Equity industry is currently holding its global jamboree in Germany. What a difference a year makes. Just months ago (pre-August 9, to be precise) the Private Equity barons were borrowing billions to take over all manner of companies, many blue-chip, and some national strategic giants. Now the sources of funds are drying up and the world has become a much more anxious place.

Not so long ago, securitization of talent was the goal for what HG Wells called “originative intellectual workers” — the kind of people who work from a laptop and a cell phone, hot-desking from place to place. They were advised to raise money on future earnings by selling shares in themselves. Specialized markets were to spring up, something like the London Stock Exchange’s AIM market, to flog these things to admirers with more money than sense.

I suppose if you turned into a Bill Gates or the Google guys your investors would be happy — but how many of us do?

The whole notion of securitization is targeted on bypassing the present reality in favour of an unknown future, using other people’s money — often their pension funds or insurance pots. In essence it’s no different from betting on racehorses.

Now the bubble has burst and cold realism has dawned, even for the godlings of private equity and their blood brothers, venture capitalists.

The beneficiaries will be China, and the sovereign wealth funds of Asia, including the Middle East. Western financial centres have permitted power to pass from settled democracies under the rule of law, to the potentates of totalitarian regimes whose oil deposits or cheap, exploited labour will soon allow to rule over us in many covert ways yet to be revealed.

And why? The abandonment of risk management in the cause of easy pickings.

Who will hold the banks to account?

Nobody — it’s too risky.

This is the third and final segment of a recent interview I gave to Gerry Reynolds, a retail analyst, and which is published in Syntagma with permission. Read the other two parts here : #

Gerry : I’d like now to look in more detail at the essence of the business, its income, i.e. advertising. What are the main parameters of online advertising?

John : Online advertising is relatively new, so it still has more than a shade of the Wild West about it. It’s improving all the time, though, and growing very fast.

For small publishers, the breakthrough was Google’s Adsense, which is a text-based system aimed at generating clickthroughs, which in turn produce income linked to the market price of certain keywords sold by auction as “Adwords”. You can see examples of Adsense at the foot of each of the first three posts on any of our sites.

If that sounds complicated, it boils down to “pay-per-click” instead of pay-per-sale. The pay you get per click varies from a few cents to more than $10, depending on the product or service involved.

If you think of Adsense as plain old classified ads with an electronic counter attached, you’ll get the point.

Gerry : But Adsense is going out of favour now, isn’t it?

John : You do need high trafficked sites for it to work, which is why it’s the darling of the Google gamers, the SEO wizards who seed their sites with high-priced keywords to generate traffic and clickthroughs.

Most decent blogs will have traffic of between 10,000 and 50,000 page views a month. That’s not enough to make useful gains from Adsense. Significantly, though, it’s enough to generate hundreds of dollars a month from “text-link ads” which are paid for in advance by actual advertisers. There are now agencies which sell the ads for you and take a 50 percent cut for their pains.

Gerry : Does Syntagma use these agencies?

John : We do, but we also sell our own text-links off our inventory. They tend to give better value to the advertisers because we can be flexible with discounts, especially where a lot of space is available.

Gerry : So text links are the most important form of advertising for you?

John : In our first two years, they have been. The cumulative income from hundreds of text links over 40 to 50 sites, can be very impressive indeed, especially compared with affiliate shareouts, which depend on sales, and CPM ads which give small sums for each ad impression.

Gerry : What other systems have you tried?

John : I’ve tried them all. On high traffic sites, Adsense and affiliate links do well, because they are a numbers game. But the bulk of sites will be below, say, 100,000 page views a month. These need to be monetized in a different way to bring home the bacon. However, if these sites are in the right topic areas, they can generate good monthly incomes from text links.

Gerry : What are the right topic areas?

John : Click through our inventory contents list in the sidebar of Syntagma and you’ll see those that sell out on text link ads positioned below the header.

Gerry : So anyone can do this?

John : In theory, but not quite. Many “blog” networks have closed because the owners didn’t have the stamina to see the job through. Syntagma has a good reputation in the space, which we’ve earned over two years, and is seen as a mature player. That attracts advertisers to us.

In our first year, income was sparse and I funded the operation from my credit card. In the second year, when I had learned the lessons of profilgacy, oneupmanship and other money-draining practices, I slimmed the whole shebang down to an optimum size and reach, which now makes money.

I don’t want to beat my own drum, but it does take tenacity and a great deal of shrewdness to stay in the game when you’re losing funds every day. The secret is to stay in the mainstream in terms of market niches, but to do it differently from everybody else, so you stay ahead of the crowd.

Gerry : You don’t mind giving your secrets away?

John : I’m always glad to help anyone who’s starting out or who is currently not succeeding. There’s enough money in online business for everyone who wants to claim it. Each success story expands the envelope. It’s not a finite pot. It’s a very dynamic marketplace, and we’re all pioneers here.

Gerry : What are the other forms of advertising that you may use in your third year?

John : I’m always experimenting, sometimes below the radar and on sites not part of our list.

Sponsorship of sites by substantial corporations is a possibility, and I’ve had talks with a few such players. Also, Google is developing an ad network with the aim of filling neglected inventory all around the internet with their ads. It’s a great concept, especially if it gets away from the necessity of hosting dedicated ad serving software, which is a nightmare for relatively small operations. That’s the Next Big Thing in the space, and all the other majors are following suit right now.

Gerry : You seem to have an aversion to spending one penny more than you have to on anything.

John : I operate a “blood from stone” policy. In a low margin business, you need to find the sweet spot where profits are generated from minimum costs. So far, I’ve been successful in this. I don’t intend to overreach the limits imposed by basic cash-flow techniques, nor make assumptions that I can’t nail down.

Syntagma’s motto is Dr Johnson’s phrase : “Example is more efficacious than precept”. Which can be translated as “successful actions speak louder than words”, or “A warehouse full of bacon is a better investment than a forestful of wild boar”.

Gerry : What about subscription models of funding?

John : They have been tried, mostly on crack information sites, and usually with disastrous results. The New York Times is coming off a part-sub model right now, and so are many other newspaper titles.

People expect their online experience to be free, for the simple reason that when they click away from a page there’s nothing left, unlike with a newspaper or magazine. It’s fairly simple psychology. That’s why we sell the fleeting use of their eyeballs. There’s nothing else to sell online that has real value.

Gerry : I love that, “the fleeting use of their eyeballs”. Are people aware of what you’re doing to them?

John : Good God, no. Everyone’s very protective of their eyeballs. If they thought we were renting them out, they’d shoot us.

Gerry : And so on to year three.

John : From October 20, yes.

Gerry : Is it going to be a good ‘un?

John : The best so far, undoubtedly, but the words “chickens” and “hatched” loom large in my consciousness.

Gerry : As ever!

John : As ever and a day.

I’ve been writing about venture capital here for some time. While I recognize it’s an important driver of innovation, I often wonder if it truly serves the purpose of many entrepreneurs and other business operators in creating companies that work for them.

The problem is, companies backed by VCs are no longer dedicated to the best interests of business creators. So what are the basic rules of the game when dealing with these slick intermediaries between private investors and startup hopefuls?

Paul Graham has written an excellent post on this rather arcane subject. #

If a venture capitalist offers you a certain sum of money in exchange for a shareholding in your startup, what are the rules governing these deals and how much of your business should you part with?

According to Graham’s analysis, the answer is : 1/(1 - n)

Whenever you’re trading stock in your company for anything … the test for whether to do it is the same. You should give up n percent of your company if what you trade it for improves your average outcome enough that the (100 - n) percent you have left is worth more than the whole company was before. For example, if an investor wants to buy half your company, how much does that investment have to improve your average outcome for you to break even? Obviously it has to double: if you trade half your company for something that more than doubles the company’s average outcome, you’re net ahead. You have half as big a share of something worth more than twice as much.

If you were in this scenario, you would already have jumped through a lot of hoops to get there. You should bear in mind from the outset that a VC company like Sequoia, for instance, gets about 6000 business plans a year and funds around 20 of them.

Face it, you’re going to have to be good to get the cash, so you are entitled to drive a hard bargain. According to Graham, Sequoia will allow you to do so.

There are many other options available. Whether VC funding is for you is just a little simpler to answer after reading Graham’s interesting piece.