Feature or Product or Business or Defensible Business?

Sanjay Anandaram posted a great article in Plugged.in, and I suggest that you read the full article, though to get his full perspective.  The money quote for me is:

Today I know that a feature doesn’t make a product. A product doesn’t make a business; And most importantly, a business doesn’t make a company. A company is a means of organizing a business.

People who know me know that one of the first filters I apply when looking at a company is whether the offering is a feature, product or business.  It is the talent of management and the nature of the revenue model that converts it from something that can easily copied into something that can start to be defensible.  Being defensible is key.  Why?  Well, because let’s say that you have discovered a new market that others have not yet, and a way to extract profits from that market.  What stops others from following and dominating the market you discovered?  Financial services are full of new markets being discovered and where the margins are fat enough Goldman Sachs would move it as a fast follower, and often dominate.

So, how do you stop a fast follower?  Often you cannot.  You are left with two scenarios.  Either you have a structural advantage from being first.  eBay is a great example whereby the network dominance from being first sucked out the opportunity of others to catch up.  It was not that it was eBay that allowed them to dominate – personally I feel the site was designed by a sixth grader – but by being first with a sufficiently functional product.  In Japan they were second and lost to Yahoo Japan.  Alternatively, you simply have the best execution, which can involve a decent amount of luck at the right time.  Execution is a bit like pornography – tough to define but easy to identify.

So, if you are an entrepreneur think carefully if you have a defensible business model (when you execute) or not.  If not then the profits you could make will not be yours.   If you have a product then work out how to get it to be a business and if you have a feature, well, go back to the drawing board.

Life Mechanics

As a child I read books about Transactional Analysis and OneUpmanship, probably at the prompting of my mother.  I found these interesting in the way they described bow people play games in life and expect a reaction for every action.  Have you never been in a crowd and someone waived to you?  You probably waved back, even if you had no clue who there were.  Even so, I have generally thought that only part of society really runs with this quid-pro-quo mentality, and only for part of the time.  It is an interesting analysis but not core, mainstream or how we all live our lives.

It was not until I saw Inception with my wife that  I thought about these ideas again.  Inception for me was an indication of how far game mechanics have now infused society, and game mechanics are simply the modern-day representation of these ideas I was exposed to in my formative years.  What was it about Inception?  Well, my wife is not a gamer, and yet the movie was not “strange” to her.  It was just another romantic, thriller.  The plot, however, revolves around not just a gaming structure, but with rules espoused throughout the film.  This was not jarring as more and more of our experiences, online and offline are becoming rule-based with prizes, points, quid-por-quo built in.  We used to say that gaming would change computer interfaces and impact reflexes, and though that might still happen is it is the logic of gaming that is changing us first.  Some of the fundamentals of games are working their way into society at large.

Given that I am a VC does this perspective change how I look at companies?  In some way it does.  Game mechanics can affect adoption and are built into the business models of hashable, Identified.com, Klout, Livefyre, OfferIQ, ORCAone, and Phone.com.  I suspect that more will be built in in these and other companies over time.  To link buzz words from not to a decade a god: Game mechanics can increase the stickiness and viral adoption of your site as we are and have been trained, or re-programmed, to think this way.  Like Pavlov’s dog playing Wii.

Raising Money? Easy? Investing? Easy? – Why Not?

A few days ago Dave McClure posed this:

This was the consummation of a heated debate on Twitter regarding a blog posting by Niki Scevak entitled Angel Index Funding Bullshit.  Niki argues that Ron Conway and Dave McClure by investing in a large number of startups leads to them being more passively involved than if they focused on a smaller number of companies.  He goes on to argue that “handsome returns” will not be forthcoming due to high fees, the increasing number of startups, that if you invest in the market then you get market level of returns (i.e. median returns), and that if involvement leads to higher returns you ultimately will not get them as you are spread too thin.

This is an interesting discussion as it ties in closely with an increasing amount of capital being deployed in the early stage VC space, be it by funds like ff Asset Management and  even some larger traditional VC funds.  Entrepreneurs that have oversubscribed rounds are then forced to allocate, and when the allocate they then should carefully examine what is the motivation for the investor to invest in their company, as well as what is the quality of the money?  Many startups will not face this dilemma, but as the capital drought of early 2009 has been replaced by the glut of late 2010 more and more startups are having this “problem”.  This is despite the withdrawal of funds by angels themselves.  In 2007 $26bn or so was invested by angels.  In 2009 this fell to, perhaps $12bn.  This has recovered in 2010, but not to the 2007 levels.  VC’s, on the other hand, because of the long-term nature of their funds still have plenty of capital to deploy.

All funds are managed for return (or should be!), and return is a function of the size of investment and time devoted to the investment for any actively managed VC portfolio.  I personally think that if the fund is investing well less than 1% of the total fund’s size in an investment then there is a risk of misalignment of interests between the investor and the entrepreneur.  Remember, the investor is buying an option to participate if the company is successful, and walk away if not.  That is generally fine, but it can pose a risk for the startup if it is a large traditional well known VC where people will care if they do not re-up.  If the investor’s fund will end up with well north of 50 investments in the fund at maturity, then there is the question of whether the startup will get sufficient attention from the fund’s principal(s) for the money to be treated as “smart” money and not “dumb” money.  Finally, if the fund is spread too thin, then the fund will not have the capital for follow on investments, and new relationships will need to be developed at the next round – not a real problem, but something to understand.

Bottom lime, if you have an oversubscribed round then understand the motivation of each investor and their fund:  If there is alignment, great; if not, then think carefully if you expect your investor to invest not only money but also time.

If you are not oversubscribed then consider this article (which like most “news” overstates the situation):

One person we know who has a startup trying to raise money was floored at how easy it was to get a small slug of cash. It was basically a short phone call with a potential investor who said, “I’ve heard good things about you from people I trust. When you’re ready for me to invest, just call me back.”

The Internet of People

Since the mass adoption of services such as LinkedIn and Facebook people have increasingly come online using their real names.  There has been a shift from representing yourself as angrybear101@aol.com to using your actual identity.  This phenomenon is culturally more important.  I like to refer to it as the Internet of People, compared to the the original Internet of Data or The Internet of Things.  It is significant: it involves people that have rights, emotions, intentions, and other attributes that toasters, phones, and databases do not.  It will lead to a changed understanding of information rights, privacy, and what is creepy and what is acceptable.

At its core I see four fundamental pillars: Identity, Trust, Reputation and Influence.   Yes, social networking is part of this, but this perspective gives a different, and I would say more informative, way to look at the space.  Here are a few thoughts:

• These four pillars will become increasingly important to two different constituencies: advertisers that want to reach consumers, and individuals themselves;
• Game dynamics can be applied to “manipulate” or “guide” people into certain behaviors that can then be measured in real-time – shopping and flash-deals come to mind;
• Regulation will have to play catch up – this is not longer cookie tracking it is stalking;
• People will be rewarded for the data  they surrender: a better table at a restaurant, front row seats, free goods, if they can influence others to follow their lead.

Companies will grow up over the next few years to address these needs.  Watch this space as it is going to be very, very interesting.

My Love Hate Relationship with Google Docs, and by Extension Google

I have been a strong proponent of using Google Docs to create off-line storage of your important files.  No more.

What happened?  Simply put: it worked until it stopped.  I do not know if that is because  I reached 96% usage of the 1 GB of non Google Docs formatted files, or something else, but I found that it started to behave inconsistently.  Strange, strange things would happen.  For example: (1) a document would show in one view, but not another; (2) the number of documents in folders plus the number of documents not in folders were less than the total number of documents; (3) I would delete a document but it would reappear a few days later.  This opened doubts in my mind regarding if I would be able to recover my files when I needed them.  Doubt and critical file storage do not make good bedfellows.

The obvious solution was to see if buying more space would eliminate the problem.  But, you cannot do that.  You can buy more space for email by going pro, but that does not impact Google Docs – coming soon?  The next step was to reach out to customer service – oh, yes!  There is no customer service.  So, I went pro, found out via email over a day or so that they could not solve any of this and downgraded.   This might be a way for Google to run its business, but it was increasingly clear that it was not the right way for me to run mine.  I started to work out alternative solutions to Google Docs.  Fortunately, they have added a download feature recently so that I could extract my 1,000 or so documents.  The question now was where to transition to.

I spoke to some folk, researched on the web, made a few calls and decided to go with Box.net.  It is different, but has some good features that will help us share and run our business better.  It costs money, but also has customer service.  I also get the sense that the profit motive will encourage them to ensure that their service works and improves over time.

The key insight is that Google by giving products away for free does not have the same customer relationship as someone who sells their products.  As long as the area is of interest to Google (for their business needs) they will offer and enhance the service, but they are not offering the service for the sake of servicing customers with it.  They are offering it for other objectives, and ultimately that means that the service might need to be OK, but not great.  When you sell a service, for profit, you listen to your clients, you find out their needs and you meet them.  You work to ensure your customers are happy and you find ways to enhance the service so that you can up-sell features.  You worry when things do not work and you are scared about the competition.  I am not sure that this is the case for all the free products that Google offers.  It is free to use some of them, for some of the time, when they care.  If Google decides to end a service, well they can do so and lose no revenues!  Though customers might want a Google Voice desktop product, but if Google decides that this is inconsistent with its everything-in-the-cloud philosophy then it will not happen.  The profit motive is a powerful tool to align customer and service providers objectives – Google does not have that in may of its offerings.

So, do I love of hate Google Docs?  I am not sure.  I have replaced a lot of Google interaction with Box.net, but still love some of the sharing aspects of Google Docs.  Does this make me feel less positive about Google?  not yet as I rely on Gmail and it works great (until it doesn’t).

“I Don’t Use Twitter” – Huh?

I hear this from a lot of very intelligent people.  In fact, when I ask someone if they tweet I generally know the answer before I even ask it.  I do not then proselytize, but it is instructive how many people do not understand the benefit of using Twitter.

To me Twitter is the digital equivalent of broadcasting.  This allows me to take a very simple view re users: there are two types – those that “broadcast”, and those that “listen”.  Broadcasters and those with something to say: celebrities, brands, news organizations, and folks like me that like to share curated information with other.  Listeners, are, well, the rest of us.  Twitter provides a listener some of the best dynamic aggregation of relevant content out there.  How to find interesting content?  Well one way is to use Klout’s BirdBrain took (full disclosure: Klout is a portfolio company and I sit on the Board), but there are many ways.  For those that do broadcast Klout provides great tools to measure your influence, even it it is as pathetic as mine, and ranks my influence vs. everyone else’s.

I suspect as time goes on more and more people will listen into Twitter, and find it a great source of relevant curated content from their favorite news and entertainment sources.  A few simple souls like me will continue to broadcast into the ether with a belief that in some small way they are helping humanity, as well as increasing their ego via the Klout Score:

The Internet is a Black Hole

I think most epiphanies are trite as soon as they are discovered.  It might be pithy, or simple, or even “elegant” as we used to say at college, but ultimately it is trite and obvious once it is stated.  The Internet is a black hole.

There is a great giant sucking sound, and it is of everything that was physical in my childhood being virtualized, vaporized, digitalized and dematerialized;  News, newspapers, magazines, books, books-on-tape, cassettes, records, CD’s, DVD’s, home movies, theater movies, televisions, telephones, mail, junk mail, voice mail, shopping, dating, researching, reviewing, trading, banking, gaming, you name it.  Moore’s Law, productivity, capitalism are all drivers here, but in the process we replace physical interaction with objects with pseudo-interaction via keyboards, mice, and “touching” images on screens.  The human mind is so malleable that it is able to ignore the difference between what is real and what is its representation:

Microsoft: No Plans To Offer Office Version For Apple iPad

This headline from Barron’s again shows why Microsoft’s market cap is about to be eclipsed by Apple’s.  The just do not get it.  But they will after it is, perhaps, too late.

Apple has dominant market share in high end PC’s and nominal share in PC’s below $1,000.  The iPad is a mainstream low cost PC – thus the mainstream media promotion on Letterman, Modern Family, and other mass audience shows.  That much is obvious.

What I think is more subtle is that it can also create a strong beachhead in the education and corporate markets.  These markets are full of people that create content on the fly, and if they are willing to do that on an iPad then Apple will have taught them to be comfortable with Pages, Keynote and Numbers.  Once they are comfortable, then they might just feel comfortable using the same programs on their desktop…and the rest, as they say, is history.  Microsoft by not being present on the platform allows Apple to gain desktop market share.

To me another indicator of Apple’s push to the education and corporate markets is the removal of the camera from prototype versions – a camera would be cool, but it takes away from what might be appropriate in these serious settings.  Time will tell, but I can see many notes, dossiers, and text books being replaced by this 1 1/2 pound device.

Apple takes the risks, and so deservers the rewards.  Microsoft can try and be a fast-follower, but that is becoming a riskier strategy in tech.

iPad Pre-Release Thoughts

FOur quick observations:

1.  Take a page from a color magazine and fold it until the screen is the size of the screen on an iPhone.  Do you think a magazine this size would be as compelling an experience?

2. Think of the iPad as an attack on the education market.  No more heavy backpacks, 10 hours of battery.

3. Think of the iPad as the un-computer (no mouse, and keyboard optional for 95% of uses) – ideal for kids, grandparents, and the rest of us.

4. Thank you gene Roddenberry.

Online Reputation

[Okay, this post refers to a portfolio company, and hopefully is not seen as a shameless plug]

During the due diligence for a recent investment in Klout by my fund, ff Asset Management, we have been thinking about  online identity and reputation and trying to understand what is changing here.  Recent posts by Fred Wilson and other are scratching at the surface.  It is clear to me that something changed with the mass adoption of Facebook, LinkedIn and other real-name social networks.  Facebook Connect has further extended it to the non-social web.  People moved from being anonymous to leaving real footprints on the web.  People are no longer hiding behind “anonymous” or “cutiebear107@aol.com” but are leaving traceable marks as to what they think, who they know, who thinks what they have to say is important.

This real-name web will lead to a host of services that connect-the-dots and help manage their identity, reputation and influence.  We are moving from the Internet of idea to the Internet of things to the Internet of people.  Clearly privacy, gossip, reputation, influence, trust, all are relevant here.

We invested in Klout as they are working on the influence aspect of the influence of people.  They people-rank tweets real-time and give people, for the first time, a measure of their influence on the web.  Fred Wilson has a Klout Score of 70, I have one of 12 - so you can clearly see who carries more weight on the web!

Over time we think that people will want to know who they are dealing with on the web in a simple manner, knowing their influence and their reputation.  In the same manner there will be companies that will work to help people manage them.  This is an evolving space and one which will be of increasing interest to venture capitalists and the media at large.  Thank you Facebook.  Thank you LinkedIn.