Focus (a.k.a. f(success) = M * (runway / burn rate) )

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Of all the characteristics and skills we consider when assessing the quality of a given entrepreneurial team, the ability to focus on the right things is probably the most critical.

Any given early stage startup probability of success can be expressed as the relationship between a key problem-solving milestone, the cost of taking a shot at hitting that milestone and the amount of shots you get.

I picture startups as being lined up at a one of those carnival attractions where you’re trying to hit a dunk tank bullseye.   The bullseye represents a real market problem that you’re trying to ‘fix’.  The amount of chances you get to hit depends on how much money you have in your pocket to buy beanbags, or balls, or whatever object you’re using to hit the goal with.

It turns out that, often times, you shouldn’t even be there because you’re not ‘solving a problem’.  In other words, even if you hit the target no one will care.  This is the problem for 60% of startups.

Assuming you are solving a problem, you need to have enough capital to trade in for shots at the goal.  That can come in the form of time or money.  Most first-time entrepreneurs get very few shots because no one is willing to give them tons of money and if they’re bootstrapped they can only survive or so long..

Then, the biggest problem that first-time entrepreneurs seem to have is that, assuming they get past the first two hurdles and they get to take a few shots at their target, they lose track of the bullseye because they become distracted by other things.  All of a sudden there are new people nearby, and other bulls-eyes pop up, and suddenly your goal doesn’t seem as interesting.  Before you know it, you’re out of chances.

Obsessive focus on customer problems allow great entrepreneurs to get closer to the goal by the time they need more capital.  Startups are just a game of those cycles – don’t waste yours.

eCommerce Hack Day & The NYC Startup Ecosystem


I had the great pleasure of hitting the demo session for e-commerce hack day ny on Sunday.  Anyone who doubts the power and legitimacy of the startup ecosystem in New York City should have checked this event out. A Sunday in August had over 255 attendees, media, a slew of vcs and a ton of great ideas from Hackers that descended from all over the country [and Canada!].

Hack Day was phenomenally organized and executed by Dwolla and Etsy, and hosted at AlleyNYC, an amazing space for early and growth stage companies in mid-town.

I was impressed with the show of force that the new york startup scene is capable of and inspired by the hackers I saw present. Big congrats to everyone involved in what was undeniably a huge success.

Experience > Spec

If you’ve read more than one of my posts, you’ll know that I’m an unashamed Chris Dixon fan, and seem to have trouble going more than a few weeks with linking to his blog. Well once again, Chris wrote a post on the The Experience Economy a few weeks ago that I highly encourage everyone reading. I was inspired by this thinking and what it means for product development in the future.

In the consumer world I grew up in, product positioning was driven by linear variables that made for easy comparison. Value propositions would espouse size or speed over the competiiton (now with 20% more!, more horsepower, cleans faster, etc.). Today there are very few products that I choose to buy based on linear metrics like size or speed. I’m also not a collector of goods. For example, I would prefer to buy a bottle of great wine than own a bigger television set. I think most people that I spend my time with would agree that experience is more important than specs in almost every product category. American consumerism seems to be moving from considering specification to considering integrated experience. We can observe this trend in the success of companies like Apple, Dyson, Sephora, Lululemon and Gilt. This tweak in consumer responsiveness has created opportunities across a number of consumer industries (it also means that disruptive advertising is going to continue to face challenges, but that’s probably another post).

This thinking also reinforces the notion that UX is truly king in the world of startups, and that the broadest definition of user experience should apply. Generally speaking, consumer-facing companies focused on end-to-end experiences will fare better than companies focused on doing ‘one thing better than everyone’, or those who pass their users off into a land they cannot control (I think airline booking engines struggle with this, as well as the AMEX platinums of the world).  If you can figure out a way to walk a customer through every touch point in a transaction, you’re going to have a much easier time reataining them.

In terms of metrics, I would argue that retention analysis, as well as pass along are the only metrics that reflect a great experience  –  when experience is great, people come back and tell their friends.

Creative Destruction In the Music Industry

I am a very happy Spotify Premium customer.

Everyone talks about Spotify  like it’s some type of new social media driven discovery engine, spreading new music through our networks like a happy virus of connectedness. I think that description hurts them because that’s not what makes Spotify great and it’s not what’s innovative.

I keep my account unhooked from my social profiles and I pay them ten bucks a month.  In exchange, I get cross-platform access to almost every song I want to hear, whenever I want to hear it.  As my friend Aaron Mandelbaum will confirm, I’ve been searching for this product for years but the previous attempts never quite got it right.  There’s not really any secret sauce here – what makes Spotify great is the same thing that makes Dropbox and Evernote great.  It just works every time across every device.

People talk about how the iPod and iTunes changed the music industry forever.  That’s true, but I believe that Spotify is the future of the music industry – the newly connected consumer doesn’t even think about ‘buying’ music.  The game is over, and ubiquitous access [and maybe curation] is the product when it comes to recorded music, the rest is just window dressing.

I started my career in the music industry and I can say that the oligopoly of record companies, despite having every opportunity to do so, could never have created Spotify. It’s almost tragic. On demand, cloud-based music’s inevitable success can be explained with Clayton Christesen’s framework in The Innovator’s Dilema.

The industry machine  was able to keep up with sustaining technologies.  For the changes from the vinyl record -> the 8-track -> the cassette tape -> CD, the industry  had no problem keeping up because the product and the economics were still the same: a bundle of tracks [and a small market for singles], delivered as a compliment to a device [e.g. a record player].   Sure, there was a little shakeup with cassette tapes because you could record with them, but that was a little bump in the road.  For the most part, the same players were able to keep up and drove innovation that improved the quality of the listening experience.

The first bullet wound came in the form of the iPod. MP3 players had been around for a while before the iPod [I had an Archos Jukebox in college], but it was a fringe market because they all sucked.  They truly sucked. The main market was still rocking CDs, buying them at Tower Records and playing them in their Sony CD players and discmen.

The iPod took MP3 player technology to the next level and it captured the market, but the really disruptive  innovation of the iPod was the integrated delivery system.  There was an ecosystem in place before Apple came into the picture.  There were record labels [content creators and marketers], cd manufacturers, distributors, retailers and device manufacturers.  Apple wiped everyone off the map with the iPod /iTunes system except the labels, who had to play ball or risk being shut out of the consumer market.  Only an outsider could have done this.

The second bullet, cloud-based music delivery systems, came in a similar fashion, albeit faster.  For a few years, there were products like LaLa and Rhapsody, but all of these services were a pain to use or lacked content.  The tipping point, in my opinion, came with the penetration of mobile smartphones. As soon as we had phones that acted like computers, we started to want to access our content across devices and Spotify built a great product to do it.  They beat out Apple for the U.S. market and they’re continuing to innovate [their iPad app is just awesome].   I can’t envision another disruption in the recorded music part of the industry, but who knows?

It’s been interesting thinking about how the music industry has evolved.  When I read Mary Meeker’s 2012 Internet Trends Report, I became inspired to think about how other disruptions are going to play out, and which companies are at the greatest risk.  I’m going to try to post a few predictions in the coming weeks.

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. 🙂

Lean Vetting

I’ve been spending a lot of time reading Eric Ries lately.  If you haven’t read The Lean Startup, you should get it and check it out.  Working in early-stage consumer-facing products, this book is as close to a bible as I’ve ever read and it helped me reframe the way I think about business-building.

In product, when you apply development resources towards a course of action, it can take a while to see if your strategic decisions were correct.  Any efforts you can apply up front to validate your hypothesis can help save time and resources. When it comes to new ideas, at K2 we tend to do this in a few ways before we even start the development process.  I like to think of this as lean vetting:

  1. Have a bazillion conversations with everyone you know, in the market and out of it: I never really understood why entrepreneurs bother to keep their ideas under wraps.  It’s one thing to be in stealth mode and not release your idea on the web for everyone to look at before it’s ready.  It’s an entirely different situation to not tell anyone what you’re doing because you’re afraid of someone stealing it.  Your current napkin idea is definitely wrong.  Not in the sense that it won’t succeed,  but if you are successful your final product will be entirely different from your paper idea. Speaking to people who understand the market is helpful for obvious reasons, but speaking to people who know nothing about the industry makes you zero in on the value proposition and simplify what you’re trying to do.  At the end of the day, technology is an enabling layer – the value proposition is the business.  You don’t have to write a single line of code to define a value proposition, so try doing more of it.
  2. Try selling it:  This doesn’t work for every idea,  but we’ve used variable ad copy and test landing pages to try out different value propositions and it’s given us interesting feedback.  For a few hundred bucks this is a simple test to do.  It may not net you any insights, but you may be shocked by what you find out.  Use your CTR, reach and conversions as a data point in your decision making.  Make sure to isolate your variables to ensure that you know what you’re testing.  For enterprise, sell to your b2b customers before you build.
  3. Take your thinking to its logical conclusion: At the end of the day, most successful companies must exit. Understand the three or four publicly traded companies that you look something like, or that you would be accretive to, and think about what has to happen for you to get there.  Again, you’re not going to get a ‘go / no go’ decision from this exercise, but this step is so valuable and too few entrepreneurs ever get past their first milestone goal of getting active users.
  4. Avoid fair fights: Everyone has a core set of assets: be it experience, a team, relationships, ability, understanding of a market, etc.   Try to figure out which of your ideas you are better suited than 99% of people to execute on and why.  Of note, building businesses that are completely dependent on big business development deals are super risky.  If your competitive advantage is a distribution deal, you  should heavily discount it.
  5. Don’t time the market: Market timing seems to have so much to do with success, but it’s also like the weather – impossible to control.  Try not to build businesses because they are what everyone is investing in.  When everyone tics, you should probably tac, or at least move in isolation to the market trends.  So much can change so quickly and you cannot control macro forces.  If you take any market timing into account, try to think about where your customers will be in three years and build for them,  otherwise you’re wasting your energy.

Rethinking the Tip Jar

I picked up some coffee the other day at Birch Coffee near our offices and encountered this tip jar (yes, I tipped for LOTR):

Tip Jars @ Birch

Aside from this being a creative way to ask for tips, I am willing to bet that this tactic is more effective than a standard tip jar.  Instead of asking explicitly for money, the staff here cleverly made tipping a game.  It was actually fun to tip the Brich folks, I got to simultaneously vote for my preference.  In it’s own way, this tip is about the tipper as well.

There are so many things in the world of business that are set up and executed without any creativity applied. This inspired me to try to rethink assumptions on monetization with some of our companies.

Retail is Dead, Long Live Retail

There’s a pretty good read in the Economist this week on ‘making it click‘ that convincingly makes the point that the Internet presents little opportunity for retailers.  This is an over-simplification of the point of the article.  The author also discusses opportunities to for traditional retailers to use the Internet and mobile in innovative ways to support their business, but overall it seems like the web is not a home for traditional retailers to make huge profits.

Terry Lundgren, the CEO of Macy’s, claims this isn’t true and that ‘omnichannel’ retailing will remain the future. He contends that catalogs, then tv selling, were both supposed to kill off retailers but never did.

Mr. Lundgren makes some good points, but dis-intermediating traditional retailers from the manufacturing chain is exactly what the Internet is made to do. People go to retailers because they can scoop up a bunch of brands and products from a single location.  This value proposition falls apart when moving from one store to the next is a click away.  I believe Amazon and Google Shopping are slowly proving this out.

I also think there are two contrary ideas when thinking about the web and retailing:

  • There’s no point in having retailers if manufacturers can reach customers directly through the web because there are no opportunity costs associated with moving from one environment to the next, however
  • There is still significant value in curating selections for customers and presenting products in an environment that helps them make good decisions. This was previously the roll of the publisher, but the current online advertising ecosystem doesn’t sustain great content.

There are billion dollar ideas buried somewhere in this sea change.  I think Pinterest is the closest to making a real play in curated commerce an I’m excited to see where it goes.

Segmentation and CRM

I recently had an experience with customer service at Apple that reminded me of lessons I’ve learned on segmenting customers.

My iPhone broke after a few months of use; the home button stopped responding. The last three months in my life have been hectic, so I just worked around the problem for a while.  By the time I got around to going to the Apple store, my warrantee had expired about a month earlier and the sales manager told me it would be $150 to replace it.

At the risk of sounding like a jerk, I spend a ton of money on Apple products. Between work and my personal computing, we have three Macbook Pros, two iPads, two iPods, two iPhones, a Mac monitor and a bunch of peripherals like keyboards, music, in-app purchases, etc. I’ve also been buying Mac products since the late 90s.  As I attempted to negotiate with the genius bar manager, I gave him the inventory list of Apple products that we have, to which he replied “well, we treat everyone the same”.

Really?!?

This is money left on the table in my opinion.  Every non-commodity supplier, not just service companies, should leverage some type of customer relationship management technology and/or processes to ensure that they don’t treat all of their customers the same.

Think about it from the Apple example:

A number of iPhone users purchase a single Apple product which is subsidized by a carrier.   A  lot of those customers will move to Android for their next phone.  Not all of them, but a bunch.  A one time iPhone consumer will gross $600 in revenue for Apple: $200 from the customer and $400 from AT&T. Apple runs a 26% profit margin, so for a one time apple purchaser, Apple will pull $126 in total profits from that customer, then say goodbye.

Assuming that I continue on my current Apple purchasing trajectory, I would probably get a new laptop every three years, a new phone every two, and a new tablet device every few years (let’s say four).  I’ll hopefully be around for a few more product cycles, but just taking the next 20 years that’s about six laptops that we can  round to $2,000 each, ten phones at $600 each and five tablets at about $600.

Assuming that prices don’t rise for 20 years (woohoo!), and using a discount rate of 8% (good luck finding 8% returns anywhere), then my present value in profits to Apple is about $3,000.  

Device
Laptop  $14,000
Phone  $6,000
Tablet  $3,000
Total Revenue  $23,000
Total Profit (26%)  $5,980
Discount Rate 8%
Present Value of me, in profits, to Apple  $2,942

 

 

I’m consistently perplexed as to why companies work so hard to treat everyone the same, especially when they have so much data to work with from existing customers’ purchase behaviors. I made this discount model in two minutes using excel.  Apple has all of this data and is the biggest tech company in the world, but doesn’t bother to do anything with it.

I unwrapped my first Android phone today. It wasn’t an effort to spite Apple, and the reality is that I’ll continue to purchase a bunch of Apple products. With that said, it’s surprising to me that Apple and lots of other companies don’t make better decisions with the ocean of data that they have on their customers.  I believe there are big opportunities for companies that leverage customer data in smart ways and learn to extract full lifetime value.

The Rest of the Story: Revisiting 2011 Predictions

Happy New Year, all.  Here’s to another twelve months of limitless possibilities in 2012.

A year ago I wrote a post on predictions for 2011 and listed five meta-trends that I saw transpiring in the world of tech and media.  I thought it would be a good idea to bring them back up and discuss what happened and what didn’t.  It looks like the obvious stuff happened (although I would welcome contrarian viewpoints), but some of the more nuanced predictions fell flat.  Later this week I’ll write some predictions for 2012, but for now here’s some analysis on how this past year panned out:

Prediction 1: Exponential growth in the U.S. smartphone market.

This was the low hanging fruit of predictions and to a large extent it’s safe to say that this happened.  According to eMarketer,  aggregate U.S. smartphone penetration jumped from 26% in 2010 to 38% in 2011.  That’s the biggest jump we’ll see as adoption slows YOY through 2015.  Of particular interest is the increased adoption in the 35-44 and 45-64 cohorts of the population.  A big question we should ask is how this group intends to use smartphones in the coming years, and what types of mobile services can we offer them?

Prediction 2: An increase in mobile gaming, but a decrease in pay-for-app models.

This prediction largely played out as well (don’t worry, I’m wrong about everything else).  I think this graph from Flurry is the best visualization of the sea change that’s happening in gaming:

Freemium Games

This graph came from a great piece written by Flurry’s GM of games, Jeferson Valadares,  who identifies why this strategy is useful to game developers.

Flurry data shows that the number of people who spend money in a free game ranges from 0.5% to 6% depending on the quality of the game and its core mechanics. Although this means that more than 90% of players will not spend a single penny, it also means that players who love your game spend much more than the $0.99 you were considering charging for the app.  And since you gave away the game for free, your “heavy spender” group can be sizable.

This ‘sizable’ group can drive the business value for your game, and the free-to-try model drastically lowers acquisition costs, keeping your funnel lean and activity high.  I expect this trend to continue for non hit-based games (think casual gamers) in 2012.

Prediction 3: Continued adoption of cloud-based productivity apps by businesses

2011 saw a number of companies make this bet in various industries, and I am confident that cloud-based applications will continue their adoption curve into 2012.  Was 2011 the breakout year for this change?  I think the jury is still out on that and I’ve had trouble finding hard data around this either way.  If anyone has real data on this in terms of customers or revenue I’d love to check it out.  The best piece I’ve found was this NYT article on SAP, but it doesn’t really size the market shift.

One observation that I had this year was that consumers are starting to bring their preferred apps into the workplace.  I didn’t see this as an entry point for enterprise businesses, but it looks like companies like Evernote and Dropbox are going to make their way into the workplace not through the traditional, long sales cycle that enterprise apps make to businesses, but through consumers just adding them on to their computers and demanding that they be permitted to use them.

Chris Dixon correctly points out that the user and the buyer in enterprise are different people, and I think that explains the drag in adoption pretty well.  We’ll see what happens in 2012, but this change is definitely on its way.

Prediction 4: Fragmented social networks

Last January I predicted that people would want more choice in how they share content and who they share it with.  This largely hasn’t happened yet on the web.  Facebook continues to grow at shocking rates considering the law of large numbers – I think they’re predicted to grow over 8% in 2012 according to eMarketer.  In defense of my prediction,  Google seemed to have thought the same thing and made a big bet on Google+ and the ability to develop ‘circles’, which are essentially micro-social networks.  We’ll see how this plays out in 2012.

Another note, when it comes to mobile I think we’re going to see an increase in demand for smaller networks.  Path reached over 1M users this year and released a beautiful iOS app.  Two mobile networks in the K2 Portfolio, Sonar and Tracks,  are both focused on unique mobile networks and are seeing incredible traction.

Prediction 5: Flat adoption of mobile coupons

This was flatter than most predicted, or hoped.  I think the best example of this lack of pickup would be Groupon Now: Groupon’s mobile solution. According to Yipit, when Now launched in May of 2011, Groupon predicted that mobile deals would represent 50% of Groupon’s sales within two years, but it has largely failed to deliver on that promise-  Now has been less than 1% of revenues in North america so far:

Groupon Now

I don’t think there’s a question of whether or not mobile coupons will become a driving force for consumer behavior in the future.  However, timing is everything an 2011 was not the year for widespread adoption.

That’s is for 2011. Overall the big trends that we saw forming up a year ago have largely played out as predicted.  I’ll put some predictions around 2012 later this week.