Creative Destruction

I’m reading The Master Switch by Tim Wu, which was recommended to me by Jerry Neumann (side note: Jerry recently produced an awesomely useful VC bot which tracks announced investments as they show up on vc sites).  If you’re interested in the technology industry, you should definitely read it.   It addresses some interesting themes that are essentially timeless:

Theme 1: Information Industry Power Tends to Centralize

In The Master Switch, Wu reviews the 20th century and effectively makes the case that every American information industry started out free and open, but eventually became restricted, with power centralizing around a monopoly or cartel.  This theme rings out as alarming while today’s debate over net neutrality plays out.  Right now we’re seeing a narrowing of the competitive field for data providers (AT&T / T-Mobile merger) while all of our data is simultaneously moving to the cloud, becoming more dependent on the network.  From here, it looks like the Internet may be heading down a similar path as its predecessors; time will tell.

Theme 2: Innovation Causes Creative Destruction 

A related, slightly less ominous theme that the book touches on is the concept of creative destruction.  Economist Joseph Schumpter gave us the modern definition of the term, which refers to the idea that, when  businesses reach a steady state of maturity and future growth is unlikely,  entrepreneurship often unleashes an innovation that destroys the old industry and restarts the growth process. This process can be painful in the short-term for an economy, but is widely considered to be long-term beneficial.

Creative destruction occurs in all business sectors and industries, but at a high frequency in the technology business.   Typically, an innovation on an existing technology is adopted by an early set of enthusiasts, then it hits the mainstream when its value becomes proven, replacing the previous generation technology in the process.  For a leader to survive a changing of the tides, it often must release a new product that cannibalizes its current cash cow.  Because leaders are usually focused on short-term earnings to keep the equity markets happy, they rarely make the change in time.  We recently witnessed this with RIMM, but (to Wu’s point) this has been happening since Western Union refused to see the telephone as a viable threat to its telegraph business in the early 1900’s.

Aside from the tech industry,  innovation is the eventual cause of creative destruction in most large, slow growth industries.  As Chris Dixon has observed,  the Internet has been the agent of disruption in a many industries and will likely disrupt many, many more in the coming years.  Music was the first to go, but now news, politics, commerce, advertising, marketing, film & television, human resource management, operations and finance have all been disrupted by Internet-based innovations.  Predicting which industries are next, and how creative destruction will manifest is where the biggest opportunities exist.

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Taste Graph > Social Graph

There’s a lot of interest right now from advertisers, investors and entrepreneurs in social media marketing and advertising.  Using a person’s social graph to optimize where, when and how brands deliver their message is the hottest of topics.

There seems to be a general thesis on the topic that says something like this:

  1. Social Media Marketing: Social communities, while they experience scale and ROI constraints, are the most effective way to stay close to your core customer group and leverage it for word-of-mouth marketing and insights.
  2. Social Media Advertising: Social graph information (the online connections that I make with people, places and things) can be used to increase the effectiveness of an advertiser’s message and improve ad relevance.

For social media marketing, I believe this thesis has largely proven itself out.   Marketers have flocked to Facebook and Twitter to build communities that started out as experiments but are quickly becoming core to communications strategies for both top brands and small-to-medium-sized businesses.  When created and utilized correctly, social communities can help spread word-of-mouth messaging, help increase customer lifetime value by decreasing churn and offer qualitative, fast consumer insight data that was previously unavailable.

Social media advertising, on the other hand, is closer to its infancy. Different firms are experimenting with all different types of executions; some are proving very effective for increasing ROI on ads (improving advertising relevance and efficiency).

Existing case studies aside, I believe there is still some disconnect between social graph data and the real social currency of value; the taste graph.  For example, I have over seven hundred friends on Facebook, but not many of them can tell me where the best Yoga class is in Manhattan, or which digital camera I should order.  Lots of my friends on Facebook have digital cameras, but there’s almost nothing that aligns my tastes and needs with theirs.  We’re connected because of our shared real-world interactions, but those are pretty random and have zero correlation with our individual tastes about cameras.  Because we are not connected over our love of digital cameras, finding out what cameras my Friends on Facebook like probably isn’t that useful for anyone.

I’m more interested in taste graphs because they’re infinitely more relevant than my Facebook social graph.  Taste graphs are build around shared interests, likes and dilikes:  these are relevant when it comes to buying things.  Information about products and services work best when the following characteristics apply to that information:

  1. I trust it (experts in the category with expertise that I can verify),
  2. It’s about the topics that I’m interested in, and
  3. I have shared tastes with the expert.

This doesn’t typically happen with my friends on Facebook.   I think that until taste is solved in a scalable way, social media driven advertising will still have a ways to go before it reaches its full potential.  This is what Facebook’s Open Graph,  hunch and others are tackling directly, and where a lot of untapped value in advertising still exists.

Photos Are The Social Keyword

For most companies, there’s a gap between social media results and business results.  For example, growth of a fan page does not typically have a high correlation with an increase in sales, especially when you’re looking at short-term results.  I am not saying that a correlation doesn’t exist.  I think social media can generate business results, some of which are hidden on an income statement, but that’s a different conversation.  As a result of this gap between visible business results and social media activity,  companies often try to make sense of their efforts by benchmarking themselves against their competitors.

A company that I recently looked at had achieved some great results in terms of recent fan growth on Facebook, but wanted to get an idea of how they might better manage their social media presence moving forward to keep their growth rate up up keep their community engaged.

One of the drivers of both engagement and organic fan growth on Facebook is the fan interaction rate.   When fans interact with a brand’s content on Facebook, activity feeds on a user’s profile drive organic traffic to their Page.   I like to think of this as SEO for social.  When search became the emerging media, everyone wanted to optimize their websites for organic search results by dropping keywords and key terms on their pages in an effort to increase traffic from search engines. Fast forward to social: if you want to increase traffic to your social presence, getting your existing community to interact with your content is an effective tactic.

Below is a graph that shows what I believe to be a correlation between the amount of photo and video content that’s posted by a Facebook Page and the corresponding interaction rates for each.  This is pretty intuitive: photos get higher interaction rates then text alone when it comes to Facebook.

Here are the terms and definitions:

  • Page Size: Defined as the number of Likes on the Facebook Page, denoted below by the size of each bubble.  The biggest bubbles have the most “Likes” on Facebook, and the smaller ones less so.
  • Interaction Rates: [(Number of post likes + number of post comments) /  number of Page likes] *100.   For example, if a page has 10,000 Likes on Facebook and posts an update that generates 40 Likes and 10 comments,  that post would have an interaction rate of .5%: [(40+10)/10,000]*100=.5%.
  • % of posts that include photos: Looking back over a set period of time, finding the approximate percentage of updates that contain a photo or  video, not including link out thumbnails.

While I don’t think this is a particular shocking discovery,  I have been impressed to see that this correlation scales with Page size.   One would think that after a company gets into millions of Likes that interaction rates would fall because the denominator in the equation grows so large.   I’ve found that Page size has almost nothing to do with it.    Pages that post more photos in their updates tend to enjoy higher interaction rates, and higher organic growth rates as a result.

Entrepreneurship in Boston

The entrepreneurship scene in Boston is thriving, and it’s a great week to be here.

I attended a few events this week that have helped me learn, as an outsider, what a vibrant start-up scene Boston really has.  It’s exciting to be here to watch it all go down and I’m looking forward to seeing a number of the companies who have been showcasing this week grow into full-fledged companies in the coming months and years ahead.

Yesterday I attended the Web Innovators Group, which featured “main dish” presentations from Smarterer (online knowledge testing), Pintly (Pandora for beer), and Lockify (simplifies encrypted communications).  “Side dish” companies were also avaialable to check out; there were a few very exciting services and products in that group, as well (you can find them here).  A panel was also available, moderated by Dave Balter (CEO of BzzAgent), that featured Boston ad agency executives discussing about how startups should pitch to agencies.

Today was Angel Bootcamp, which featured some pretty incredible panels from leaders in the angel investing (and VC) space.  There were a lot of attendees tweeting some great quotes from the event that will give you a good idea of the content from throughout the day.  I thought some of the most colorful conversations came from a discussion on the interplay between VCs and angel investors: when they play nice and when sometimes competing interests can get in the way of a collaborative relationship.

Tomorrow I’ll be at Techstars Boston demo day.  This is a sort of a culmination event for the week and I’m very excited to see the products that are graduating from this program.  The New York Techstars demo day this year showcased some fantastic companies.  Based on what I’ve seen of Boston thus far, I’m confident that tomorrow will be just as exciting.

A Summer At Softbank Capital

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I’m pretty thrilled about a change to my normal summer this year. Starting this Monday, I’ll be spending the next eight weeks between New York City and Boston working with Softbank Capital.

I’ll be spending most of my time working with Nikhil Kalghatgi and @Joevc identifying investment opportunities that fit the fund’s thesis. I’ll also have an opportunity to work directly with some of Softbank’s existing portfolio companies on a project basis, learning about new businesses and the entrepreneurs behind them.

As Joe described it, the fund at Softbank is focused on entrepreneurs building socially-driven apps, services and content that are accessible across platforms and devices.  This is space that I spend a lot of time thinking about.  I don’t consider myself an evangelist of social media, per se.  One could make a compelling argument that social media presents marketers with more challenges than opportunities (ask just about anyone in pharma, news, or the record industry).  The fact remains, however, that social is not going anywhere.  Social media is as disruptive as it is inevitable, and the new opportunities exist in embracing it’s growth.

For as long as I can remember, I’ve been fascinated with entrepreneurship and innovation.  I have spent my entire professional career working directly with entrepreneurs in their quest (with varying degrees of success) to create real value. In addition to thinking about social, I’m looking forward to increasing my exposure to the startup landscape in New York and Boston.

Mostly though, I’m excited to have an opportunity to learn from the team of veteran investors at Softbank.

I will be keeping track of my experience on this blog and on Twitter, mostly from the startup perspective.  I’ll be dropping some Boston lifestyle bits on my Tumblr.

Twitter adds photos and videos to search

Twitter just announced that it’s integrating photos and video results in it’s search product. It’s also added a whole bunch of new search tools to help productize it’s vast 140 character, influencer drive, hashtag laden linking ecosystem.

I’m excited to see Twitter make this move forward. Besides the fact that it just feels relevant for the platform, it fits nicely into my thesis around photos and social (as opposed to keywords and search).

This morning we heard Eric Schmidt talk about a gang of four at the D9 conference: Apple, Google, Amazon and Facebook changing the consumer web. I wonder if this makes Twitter part of a gang of five, or at least 4 1/2.

Viva la content: