This Week – 01.13.13

– CES was this past week and everyone already wrote about it, streamed it and talked about it. I liked Tomasz Tunguz’s summary – it’s short but insightful. Read it if you’re looking for a quick recap of what happened and what to look out for in the next year. Link

– Someone hacked Snapchat and leaked 4.6mm names, usernames and phone numbers.  I was one of the users who had their info leaked, and I have to admit that it changed my attitude towards security on web services. Perhaps as breaches increase over the next few years, we are going to trust this info to fewer and fewer services, creating a defensive barrier for companies that already have much of it (Google, FB, Apple). Existing incumbents are pouring resources against increased security; strategically a great place to invest if you’re one of the early winners.

– Biz Stone (Founder at Twitter and Blogger) released his new ‘social search’ app Jelly (Link), which uses images, location and users’ existing social networks to deliver answers on visual questions. The product seems early and I haven’t gotten great answers yet, but I’m going to keep the app around to see how the community evolves.

– AT&T unveiled sponsored data this week, in a move that would subsidize data costs for users, and simultaneously took a swipe at the open Internet. (Link). Albert Wenger from Union Square Ventures also wrote a great editorial piece encouraging us all to work to keep the Internet and open place in 2014. (Link). I get the sense that selling money via free sponsored Internet sponsored is going to be a huge hit and a strong headwind against the open Internet. If the markets are allowed to evolve naturally, this is going to be the end state – great for business, but questionable how this works out for humanity at large.

– Aereo raised an additional $34mm in Series C investment, as the great unbundling of media continues. With Aereo, Netflix and a few other packages I have very little need for a full cable package anymore (HBO the obvious holdout). With that said, making the assumption, as many of my colleagues have, that cable operators are going to lay down and die in the content delivery space is a huge mistake – if anything I expect to see the better companies raise their game significantly in the coming years. My prediction: the next five years will be epic for consumers.  Link

Analytics Won’t Get You To Product Market Fit

all-you-need-to-know-about-big-data

In the new world of big data, everyone in the startup community seems obsessed with collecting data and making data-driven decisions. For the most part, this is a healthy obsession. New analytics platforms like KISS, Mixpanel and Localytics are providing great tools for product managers and marketers to better understand what’s happening inside their apps and web products.

We’ve also developed great processes for defining success from a metrics standpoint.  Aside from K-factor for viral apps and standard retention metrics for paid services, we have frameworks like Dave McClure’s Startupp Metrics For Pirates that help any startup with customers think about their product-market fit goals from an analytical view.

These innovations have been net positive for business building, but they can also enable a bigger problem:  they allow entrepreneurs to analyze  metrics as a replacement for talking to real customers.  in truth, it’s way easier to look at a Mixpanel screen than it is to talk to a person about your product. First, no one wants to face judgement directly, they’d much prefer to have it distilled into a bad retention metric. Second, talking to users is noisy – it’s really hard to pull actionable insights from a handful of conversations.

Analytics can provide us a window, but they don’t give us a narrative for how people think about our products, how they think about competing products, or even what they think of our value proposition (assuming they even know what our value proposition is).  The narrative around a given product will inevitably be the leading indicator of success or failure, but analytics will only give us a sliver of insight around it.

Depending on your product type (consumer and enterprise startups should handle this problem differently), there are a few tactics you can employ to get more narrative-based feedback on your product.  None of these will cost you much more than time, but they can save you months of incorrectly deploying your resources.

1. Follow Michael Margalis’ Quick and Dirty Consumer Research. Michael is a partner at Google Ventures’ Design Lab.  In this video, he offers a wealth of information about how to find and interview users. The video is 90 minutes and every single minute is worth watching. I cannot recommend this video enough for the discovery phase of your product development.

2. Have Users Test Competitive Products. If you want to build a great product, see where people are getting tripped up with your competitors’ products. The best part about this is that you don’t have to build anything to test competitors’ products.  Aside from identifying UX / UI opportunities, you’ll quickly understand how users feel about products in your category, and how they fit them into their lives. Most technology products are used to satisfy a need – understanding how people  think about their needs and solutions is as important as any metric in your analytics dashboard.

3. Talk To Your Existing Users.  There are two primary ways to get in front of your existing users –  phone calls and email surveys. I’ve found that both are great for different goals. Survey’s tend to get you ‘crowd-sourced’ style data points, general sentiment towards your product (e.g. satisfaction scores, net promoter scores, etc.). They can also help influence your product roadmap.  Interviews are better for the narrative questions – how do your users think about your product, when do they use it and what need(s) does it satisfy?

Get An MBA, But Not Until You’re Useful

As an MBA working in early stage tech, I’m ambivalent about the current conversation in the community about the value of these degrees. On one hand, I’ve met enough MBA founding teams to understand where the vitriol comes from, but I also believe that my graduate business education has been the most rewarding investment I’ve made to date.

Why Many MBAs Are Bad For Startups

An MBA education teaches students to analyze markets and assess opportunities from a high level [e.g. crowd-funding is going to be a huge opportunity and disrupt traditional business financing, an $xx bn. annual market in the U.S. alone!]. That thinking is fine, but it can only get you so far in the early stage.

The best consumer-facing products satisfy an unmet need. Consumers don’t care where a particular market is headed,  they often don’t even know how to articulate the problem that they want fixed. Nothing in an MBA program really equips students to develop products that solve real world problems, so MBAs tend to create products that wedge themselves into what they view as a market opportunity.  That approach often produces low quality products that don’t solve real problems.  The best products start with an acute, definable consumer ‘problem’ and grow into market-disrupting companies, it’s never the other way around.  While the difference in approach might sound trivial, it results in products that are usually worlds apart in execution.

Also, in the early stage there are very few day-to-day activities where having an MBA is actually useful.  At most early stage companies, people are either building the product or selling it.  Neither of those functions require an MBA, so the other skills become ‘nice to have’, but they don’t necessarily drive the business forward.

Why MBAs Can Be a Really Useful Tool

On the other side, I view MBA programs as a safe place in an unsafe world.  I think they’re safe in two ways:

First, MBA programs tend to lag trends in the business world and that can be a good thing for your career arc, especially if you’re working in an industry that’s very fast-paced.  Skills like strategic thinking, data-analysis and an understanding of the broader business world and global economy don’t run out of funding, they don’t exit and they don’t become irrelevant when the market is disrupted.  MBA programs have curriculum in place that helps students navigate the business world for decades.  That’s extremely valuable in the long term.

Second, MBA programs are a place to learn things that you’ve never understood and that the real world isn’t going to let you learn on the clock.  If you’re an engineer, there are very few on-the-job opportunities to understand option values, venture financing, accounting, macro economics or product marketing.  While it’s true that you can learn many of these things on your own, having a curriculum and a classroom are incredibly helpful aides to the process.  Just having to show up with your homework done will propel you forward.

MBAs Are Useful After You’re Useful

Everyone has a unique set of inputs that should drive their decision about a graduate business education, but my broad advice to most young people interested in early stage tech and considering an MBA is to go for it, but only if you’ve already developed practical skills that will make you invaluable an early-stage company.   An MBA alone will never be enough.

Signal In the Social Noise

Eric Schmidt famously said in 2010 that every two days we generate more data that we have up to 2003. To clarify:

  • dawn of civilization -> 2003 = X amount of data
  • this past weekend = X amount of data

That’s mind numbing to think about.  It’s also a huge problem, because most this data is pretty useless.  As we all know, Rick Rolling and pictures of people’s cats aren’t value add data points for most circumstances.  So what are we to think about the ocean of data that we’re producing? What are the high-value data points and how difficult is it to sift through all of that sand for a nugget of insights?

I’m noticing lots of companies trying to get early signal by ‘plugging social’ into their search results.  A good example of this type of integration is Tripadvisor:

Playing around with these integrations, I’m realizing how dissimilar I am from my Facebook network and how bad the signal is in most cases.

When I was working with an agency a few years ago, someone told me that commerce occurs at the intersection of segmentation and intent. That really stuck with me.  I believe that social media remains adolescent in the world of advertising and commerce is because it’s not great at segmentation it’s still pretty lousy at capturing intent.  In order to make social data useful and actionable, startups are going to need to do some processing and get better at personalization, or we’re all going to have to become a lot more thoughtful about who we’re friends with. 🙂

Creative vs. Data: An Autumn Smackdown

Mad Men

Digital marketing strategy is changing the way consumer brands and enterprises have to think about content.  That’s been true for some time, but there are two main reasons why ‘this time it’s different’:

  1. Like never before, data on the internet is so widely available with every activity, the desire to leverage it is (or should be) natural.  IBM released a study last week after interviewing over 1,700 CMOs globally.  The number one headache identified for their future?  The explosion of data that’s occurring in their worlds (incidentally, social media was number 2).  Over 70% of CMOs reported being underprepared to manage the data.  That’s a staggering percentage…
  2. Media consumption habits have changed so drastically that the volume of content a brand must create in order stay relevant in real-time conversations has gone up exponentially, but the relationship between creative spend and measurable ROI has decreased.  In other words, everyone needs a higher volume of less expensive content than they used to.

My instincts and training, and the above data points, scream that using data is infinitely smarter in the long-run than using hunches to produce content.

The contrarian point, though, has its merits. For one, we’ve been using qualitative insights to sell things for centuries.  So what’s wrong with good content ‘just being good’? After all, doesn’t the insistence of data in everything we do take some of the magic out of the equation?  The most eye-catching  ideas I’ve seen come out of creative agencies were less about data and more about bright shiny objects.

I’ve been teetering lately between the idea of ‘creative’ content development versus data driven decision-making.   I don’t believe these are mutually exclusive, and the best future content creators will leverage data to create content, but there are some differences. Having spent some time on this, here’s what I’ve come to learn over time:

  1. Bright shiny objects close deals.  Everyone wants ideas, a new hotness. Content experts with a high EQ and an intuitive understanding of  emotional pull have a tendency to win when it comes to meetings. There are a lot of biases in the way we present ideas that lend themselves to the ‘PRETTY-PICTURE-BOOH-MATH’ approach to marketing.  The first is that we’re still presenting creative concepts with meetings that we give titles like tissue sessions. Imagine walking into a pitch with a tissue covered board and unveiling a spreadsheet, then talking about segmentation.  Snoozer.
  2. Data keeps business relationships alive.  After the party,  when the bright shiny object wears off,  marketers are always struggling to grasp ROI.  As I was writing this, I stumbled across this article on Moneyball for the Consumer Web that talks about how Rent the Runway employed data to determine the 19 variables that are important to their customers, including color, designer name, dress length, time of year, occasion/purpose, age of renter, body type, neckline, model wearing dress, price.  Now, let’s pretend you need to manage a Facebook Page for Rent the Runway, or write a blog,  or create content to get into other bloggers’ hands to help spread the word.  Do you think that having those 19 variables would be helpful in developing your content calendar?  I would imagine that one could write a few articles on each variable and build a post per week that would be relevant and keep the content flowing (and relavant).
So, from a marketing agency perspective, both elements are important, but I would venture to guess that we spend a disproportionate amount of money on bright-shiny objects, and not quite enough on the data side of our businesses.  I expect this to change drastically in the near future.

Building A Thesis

Investing in startups is a phenomenally risky business. True, when compared to the current machine-driven equities market the asset class may not seem as crazy as it did last Thursday, but it’s risky nonetheless.  At the early stage there are very few corporate finance tools that will work for potential investments, which is why the industry typically puts money into team, market and idea, leaving the financial engineering for the later stages.  It’s not out of a desire to do so, it’s out of necessity because most of these companies have a prototype and a thesis and not much else.

Last week I wrote about why VCs may tell you no,  so this week I thought I’d talk about a few places where I think there is tremendous opportunity in the near and mid-term future.

1. Taste Graph and Real-time Data

This “sector” represents the convergence of two trends:

  1. The web is quickly shifting from search-friendly to social-friendly.  Any web user’s online behavior in Facebook, Google+, Twitter and on various web and mobile applications provides a tremendous amount of information about their likes and interests.
  2. Massive amounts of data: web clicks, social posts and other points, are now available in near real-time.  This makes the web a more dynamic environment than it was a few years ago.
I think these two trends present opportunities for startups in the following:

  • Digital Advertising Arbitrage: I wrote an earlier post about this, but it bears repeating because I’m really into it!  I believe that real time data can be used to improve inventory.  Current network CPMs are somewhere around $1-$2, but retailers will often pay very high prices for conversions or acquisitions (CPA, CPL).  I believe that wedging social graph data into the equation creates an opportunity to sell expensive CPA inventory and deliver it by purchasing inexpensive CPM inventory.  There are companies working on this, but I believe that the playing field is still open because media buyers have not adopted this model yet, but they will soon and it will scale.
  • Social Media Marketing:  I may eat these words, but I think this opportunity is less attractive than social advertising.  Analytics is becoming increasingly commoditized as social media monitoring vendors continue to pop up offering cheaper and cheaper solutions. There are also good free options out there for most SMBs.  The same goes for managing social publishing.  I think there are inexpensive options out there that are “good enough”.
  • Content Optimization: Publishers have not utilized social for optimizing content for visitors.  Using link-sharing and application data, publishers should be getting closer to building custom experiences for visitors based on their interests.  I believe there is room for companies that can help publishers bridge this gap and increase time on site and page views per visit.

2. Mobile Social Networks

I wrote about these earlier in the year, but I think that there is a big window that has been left open by Facebook and Twitter.  The mobile experience for these platforms leaves something to be desired:  they’re not addressing mobile experiences.  Instagram and Foursquare are the first success stories to come out of the mobile social network space, and I think that there will be others.  For example, why hasn’t a mobile dating application worked for the straight world yet?  Any solution needs to present a UX that makes people feel safe and that’s clearly been difficult to achieve, but when the straight version of Grindr comes out, it’s going to be a bit of a “duh” moment.  Of course, meeting new people isn’t the only opportunity here, but it’s definitely an obvious one.

3. Mobile Games

People have downtime in life and like playing games: simple premise.  I think the benefit (and risk) of the mobile gaming market is that its largely hit based.  Zynga was able to leverage its scale to create its own ecosystem in Facebook.   I have a hunch that mobile gaming is still in its infancy and that there is a tremendous amount of opportunity here.  The Zynga model of collecting payments in exchange for experience (virtual goods) is going to continue to win in mobile.  I think pay-for games with no trial won’t last and micro-transactions will be the way to monetize mobile games moving forward.

4. Online Education

It seems to me that there’s still a gap between how far the consumer web has come and how little the education industry has changed.  Last fall, I worked on an online tutor marketplace with a few entrepreneurs and in the research process we discovered that there seems to be a general consensus that the way we teach and learn in this country is ripe for disruption. Skillshare, Knewton and Tutorspree are all great startups in the space.  I think that there’s still room for new innovations and intend to learn a lot more about the business this year.  With that in mind, if any of you are in the education sector, I’d love to buy you coffee and learn from you!

5. Healthcare

Aside from energy, the $2.5 trillion healthcare industry in this country is the probably the biggest fish in the sea.  The information asymmetries in the U.S. healthcare system create inefficiencies that cost billions of dollars and thousands of lives every year.  New legislation is driving a change in the incentive structure of the business, the intention being that a payment structure can be built to incentivize value over volume (if you want to know more, check out this guest post from Dave Chase on Techcrunch). New legislation often opens up new opportunities, and this space seems ripe for disruption.  I look froward to seeing new startups in this space.  As with education, this is an industry that I’m interested in learning more about.

That’s about it for now.  Regarding education and healthcare, I believe that much of the opportunity still exists because the sales cycle in these industries is long enough to make the most well-funded company with the best idea run out of money.  As Keynes said, “markets can remain irrational a lot longer than you and I can remain solvent”.  I think this holds true in early stage investing, especially when you’re dealing with industries with large leaders that make plenty of profit keeping things as they are.  However, I believe that the impending  federal spending reform will wedge some opportunities in these industries,  making investments in startups more attractive.

Changing With the Market: Netflix

I read this headline from CBS (“Netflix Socks Subscribers With 59% Price Hike“) and I thought it was good inspiration to think about adopting to a changing market.

Netflix is a fascinating success story; a company that continues to defy the laws of business physics, or at least manages to bend them in their favor. Starting in 1998, Netflix built an online ordering platform and got so good at turning a disc around in the mail that it essentially wiped out Blockbuster; a very large and formidable competitor. Timing the company’s inception with flooring prices of DVD players, Netflix was able to flip the traditional rental model on its head by offering a no-late-fee, subscription-based service, growing to over 9 million subscribers between 1999 and 2008 and exploding to 23 million subscribers today.

But times change.

The DVD rental model was a transition business, and the DVD rental business is dying. Netflix’s long-term play has always been streaming content. It used its powerful customer base and its online DVD selection platform to draw users into their streaming service (a competitive advantage that was brilliantly leveraged). After years of this practice, the company has now effectively established a two-segment market: subscribers who order DVDs and subscribers who consume online content. It’s probably true that many of us get both services right now, but I think that this pricing segmentation will put most of us on one side or the other.

Aside from the fact that the economics of these two businesses (rentals by mail and online streaming) are different, the customers are now different. Netflix is formally recognizing this and is in the process of killing it’s legacy business and doubling-down on the future. Under the new system, most of the current DVD-only subscribers will move to the online service or go to Redbox. Either way, Netflix is building on the future and moving itself away from being a DVD company. There isn’t a sustainable future in renting DVDs.

I’m not entirely certain that this strategy will work for them in the long-term (sitting between the cable operators and the studios makes them a middle man), but I applaud the company’s willingness to commit to the change and adapt to the new marketplace. I discussed this in an earlier post about creative destruction, but I think it takes real leadership on the part of Reed Hastings for a company avoid killing the new business in an effort to save the legacy cash flow business.

Besides, if the whole segmenting thing doesn’t work out, they’ll still have tech writer, musician and Netflix aficionado Kyle Monson, who probably speaks for a lot of Netflix’s current customer base:

The ever-brilliant Kyle Monson
The ever-brilliant Kyle Monson on Twitter

That’s some serious brand loyalty.