One of my favorite courses in engineering grad school was Marketing which was taught by a brilliant quirky professor. On the first day of class our professor wrote on the board this equation:
Innovation = Invention + Marketing
Addressing a group of engineers who prided themselves on their technical skills, this professor of marketing tried to instill in us that invention alone isn’t enough to create innovation.
The invention has to be coupled with a way of understanding the customer, speaking to that customer, educating the customer and ultimately convincing the customer to adopt the invention. Only when the customer base has adopted the invention at scale have we truly innovated.
Aside from customer development, the other the most important component of marketing is timing. Sometimes even the best inventions coupled with fantastic marketing still don’t achieve innovation. Because the market simply isn’t ready for them.
It’s not infrequently in the Valley that you might hear, “We built [insert successful company name here] three years before. We were just a little too early.”
Timing the market is one of the most difficult things to do. Sometimes entrepreneurs fall into the right place at the right time with the right idea.
Other times, they might need a few years working within an industry for to understand the long-term trends of a customer or user base and the opportunities the industry affords.
And then there are the exceptions, entrepreneurs clearly have a knack for market timing. Elon Musk, Jack Dorsey, David Sacks are all repeat entrepreneurs who have had success in several industries.
If I were to update the professor’s equation, I would write:
In the past 12 months, we’ve seen at least three major acquisitions of social networks by larger social networks. Facebook acquires Instagram. Google acquires Waze. Yahoo acquires Tumblr. And we are likely to see quite a few more given the dramatic growth of mobile messaging clients and social networks of all different kinds.
While each of these acquisitions has their own particular motivations, underpinning all three is the activity and user engagement the services offer to tens of millions of users. Engagement means activity which translates to advertising dollars. Additionally, it is not unreasonable to suspect that all of these acquisitions will one day be used to bolster the parent companies own social network: Facebook and Google+. Yahoo’s plans are less clear.
The success of these acquisitions boils down to one question: could a patchwork quilt of social networks succeed? How do you integrate two networks together without alienating the communities and destroying the value of the acquired company?
Acquiring a social network is not like acquiring another consumer business. There is an additional variable that increases the integration complexity dramatically: the community. Each social network is community with proprietary norms and manners. And often times these networks have very different cultures that don’t necessarily mix well together.
Google’s YouTube acquisition was probably the first major social networking acquisition that ultimately became a success. And by and large Google let the company operate independently in recognition of its dramatically different culture, both internally and within the community, melding the Google Plus and YouTube graphs over a few years. Facebook is following suit with the Instagram acquisition.
In a next 18 to 24 months, I am anticipating a flurry of social networking acquisitions. These might be gaming social networks, mobile messaging clients, professional networks. the key to the success of these acquisitions will be stitching the communities together.
Recently, hardware companies have been popping up in all kinds of places. Nest is building the next thermostat. Sonos sells seamless and beautiful soun systems. Thalmic Labs and Leap Motion are innovating in alternate forms of computing control. Electric Imp is building the platform-as-a-service to connect devices to the web via Wifi and so on.
Hardware investments are blossoming because software is reinvigorating the market. Hardware companies face deeper logistical challenges, greater likelihood of margin erosion, and more complex go-to-market strategies than their software cousins. But subscription revenue streams like streaming music services or device remote control breathe life into hardware companies, driving ultimately higher margins and more sustainable revenue streams.
In response to these trends, the hardware hacker community is flourishing. Winners at many Bay Area hackathons focus explicitly on hardware hacks using Arduino to commandeer electric devices. Others are building applications atop Raspberry Pi. These often teams comprise both hardware engineers and web engineer. Hardware represents new, exciting challenges to conquer.
It’s precisely this union of hardware actively communicating with software in novel ways that is electrifying venture capitalists. Hardware companies may always face additional complexity but the reward has never been larger: new markets, subscription revenue streams and phenomenal teams make for great investments.
In the center of Google’s campus lie a cluster of four buildings: 40, 41, 42 and 43. Contained within building 42 was the epicenter of product management: Jonathan Rosenberg’s office. Immediately next to his office stood a collection of three bookcases containing a library of different books on various topics that JR curated.
I used to pass that library every day on my way to meetings and each time I walked past, I would pause to see which new volumes had arrived.
Edward Tufte might have spoken at a Google Tech talk and left behind 15 copies of his work. Or a new shipment of linear regression textbooks may just have arrived. Or some new studies on machine learning might have popped up.
Of all the perks at Google, the access to continuing education is perhaps the one that receives the least press and most undeservedly so. Tech talks, negotiations seminars, sales training, all the education you needed was there.
It is a great feeling when someone takes interest in your education. Sometimes that interest can be a grand gesture but more often than not it is a combination of small ones, like a new book in a product management library or a ticket to a deeply relevant conference.
I firmly believe that every startup should have a continuing education program, formal or informal. As founders and investors, the best investments we can make are the ones in our teams.
Those investments provide compounding benefits to the company. First they engender tremendous feelings of goodwill. Second the education improves our performance and helps us better achieve our potential. Third they serve as fantastic recruiting differentiators.
A sticker graced the spine of each of those books: Property of the Google Product Management Library. I must sheepishly admit about a third of the books on my bookshelf at home today have that sticker. Those books have been permanently borrowed and put to good use: dog-eared and weathered and battered. And each time I look at them, I remember that bookcase outside of JR’s office.
Pricing is one of the most challenging decisions for any startup. One of the simplest ways of discovering customer willingness to pay is simply to ask them.
And while at first blush that might seem a reasonable and effective solution, it is prone to wild inaccuracy. Absolute pricing judgments are hard without reference points. For example:
How much would you be willing to pay for a new iPhone?
It’s a very challenging question to answer in the abstract. It all depends on what the phone can do and what sacrifices I would have to make to be able to afford that phone. That calculus isn’t any different for smart phones, expense management software, or flash storage. Every pricing conversation is a game of trade-offs.
Instead of asking what a customer might pay for your product, an absolute pricing question, it’s more effective to ask a relative pricing question:
Would you be willing to pay more for a new iPhone or a new Android HTC One?
How much would you be willing to pay for a mobile CRM compared to a desktop CRM?
If flash storage improves performance by 30%, how much more would you be willing to pay than a standard hard disk?
These comparative questions establish a point of reference for the customer and force them to make a relative value judgment by comparing a new product to an existing product where value and price are known. This is much more valuable data because the opinions will reflect more accurately the feedback you will receive in the market.
No decision is ever made in the abstract - they are always trade-offs because every customer’s resources are finite. Purchasing decisions are no exception. The hypothetical “how much would you pay for X?” question will always generate bad data because the decision is made in the abstract.
On the other hand, comparative pricing questions establish relative value between existing products. You will be able to quickly tell which products are more important and valuable. And in talking to your potential customers, you will better understand both the competitive solutions and the complementary solutions for your product.
Most importantly of all you’ll understand the pricing decision process for your customers. You may very well find a different segments of customers have radically different decision-making processes and your products features and pricing should reflect those differences.
I use relative pricing questions in researching the market opportunities for startups and on the whole they shed much more inside the customers' viewpoint than absolute pricing questions. I hope you can use it in your pricing discovery processes and find it to be as effective as I have.
Over the past 15 years, we’ve seen a wholesale migration of software development on the web towards cloud away from client/server models. The cloud offers many benefits: seamless upgrades, synchronization of data across different devices and lesser hardware requirements.
But the cloud centralizes all the data. All of our Dropbox files, Google documents, and emails are held within one or few companies' servers - which provides easy access for hackers and government.
It’s unclear whether or not the PRISM affair will dramatically change the American public’s view of cloud software. But should a large wave of privacy sentiment sweep the country, the natural response to cloud software would be an evolution towards peer-to-peer.
Peer-to-peer communication fragments data storage amongst clients without the need for storage on a central server. Instead, data is stored within one computer or across many different computers in a network, most-often encrypted.
A huge wave in the early 2000s, peer-to-peer communication has become less visible of late. But that doesn’t mean its use hasn’t grown. The same technology that Napster brought to the masses for music file sharing is also powers Bitcoin payments, Skype chats and privacy centric storage companies like AeroFS, Wuala and many others.
After a decade’s worth of investment in cloud technology, one might argue that a wholesale reversal from cloud to rich applications and peer-to-peer communication is unrealistic. But the rise of the mobile application actually makes this transition easier.
Many mobile applications are thick clients that use cloud services for synchronization but otherwise provide all their functionality locally. Swapping out cloud synchronization for peer-to-peer synchronization could provide a similar service to users while offering additional privacy. These rich clients could provide a huge installed base for peer-to-peer networks to bloom.
Popular opinion is a fickle creature and if the millions of Internet users in the US suddenly decide to prioritize data security, peer-to-peer consumer services will experience a tremendous revival.
Reading TechMeme and HackerNews this morning, you’ll find more stories about legal issues relating to technology than stories about innovation: the PRISM affair, the DoJ’s suit against Apple for anticompetitive ebook pricing, Samsung’s win of a sales injunction banning iPhones and iPads, Chinese hacking of US assets, patent trolling and reform and so on.
It’s frustrating. But this isn’t a trend that will reverse its course.
In the center of this firestorm is the user and his data, bewildered by the scale and magnitude of these confrontations.
Given the upheaval happening at the intersection of technology and government, the best thing we can do as a society is to educate the electorate and actively participate in the creation of legislation and regulation of the tech industry and work to create laws that reflect the values of the people.
But when 28% of Americans don’t use the internet and 32% lack broadband access and our elected officials lack the depth of knowledge to grok tech, we have to start with computer literacy. Only then will we able to move in the right direction.
And in the short term, it has to be tech community that takes the initiative because we have the most to lose.
The reason most startups go out of business is they run out of money. The CEO bears the responsibility for raising money, managing those assets and growing the business into profitability and ultimate sustainability.
But the CEO shouldn’t bear this load alone. To help defray that critical responsibility the CEO ought to have a consigliere, an advisor who helps plan, allocate resources, and illuminate the trade-offs between decisions. That consigliere is the head of finance and the most under-appreciated startup team member.
In my experience, there is a remarkable difference in the management discipline and organization between companies who have built a finance team and those who haven’t.
Typically, I recommend hiring a head of finance right after the Series A or when the team reaches about 10 to 15 people. At that point, the company undergoes an increase in financial complexity having to deal with 409A valuations, auditing, producing financial statements for investors, real estate decisions and so on.
In addition to tactical help, the head of finance is responsible for expressing the long-term vision of the company in numbers which is as important in the early stages of the business as during the roadshow for your IPO. A startup’s financial statements are the most succinct expression of the company’s intentions and goals and strategy.
Like a battlefield map, financial statements lay out a strategy for company. They detail the requirements necessary to ensure the business succeeds including the revenue model, the sales cycle, hiring plan, cash burn, and all of the assumptions underpinning the strategy.
Best of all, financial analysis clearly expresses the trade-offs made by different prioritizations. Scenario planning becomes concrete: if we hire two more salespeople, we can’t afford to hire two more engineers which would delay the product by three months but increase revenue in the short term and potentially put us in a better position to raise a follow on financing. Which is the right decision?
Those kinds of strategic questions arise often for startups particularly those undergoing fast growth or operating in competitive markets. In these situations having strong head of finance can be the difference between success or failure. Financial planning is all about ensuring the company has all the resources it needs to accomplish its goals and that’s priority number one for every startup.
We all type quite a bit. I’ve never measured how many words each day I type but I imagine it’s probably a few thousand each week between my laptop and my mobile phone and across emails and blog posts. And no one can deny the toll this takes on our wrists.
In the past week, I’ve been suffering from some carpal tunnel pain particularly as I’ve been coding more. Coding often requires all kinds of odd key combinations because of the varying syntaxes of CSS, Ruby, R, MySQL and the English language.
There are all kinds of solutions to this problem, ergonomics being the first. But I can’t imagine in 10 years, as the volume of indications continues to increase, that we will all still be typing away on these primeval keyboards.
So, instead I’ve adopted dictation. Initially, I used the built-in Apple dictation feature and then tried using Google’s. More recently I’ve switched entirely to Nuance’s Dragon. This blog post is entirely dictated and all of the posts for the last two weeks also.
I remember using MacSpeak 10 years ago which was Apple’s speech recognition effort. Who could forget the frustration that followed the initial hope of being able to control a computer through voice? Since then, huge leaps have been made. Today, accuracy is close to 99%. A good analogy to demonstrate the progress might be comparing Apple’s Newton and the iPhone.
In five years, I believe voice will be as common a mode of data input as keyboards. It’s more natural to speak to a computer rather than type because the computer can respond at the pace of your thoughts. I spend less time responding to emails because of dictation. It’s also much faster pen these posts because instead of focusing on spelling or typing or corrections, I’m focused on the content and the computer takes care of the rest.
Startups are taking notice and beginning to differentiate through voice. Roobiq is a CRM that solves the data entry problem through voice. Siri and Google Now are the more obvious examples. These will only become more common and particularly on the phone.
At first blush, it might seem that the smart phone ushered out the era of voice in favor of SMS and short form messaging and mobile application use. After all what fraction of time spent on a mobile making telephone calls? But a more accurate refinement of that statement that the mobile phone ushered out the era of synchronous voice.
The mobile phone will be the harbinger of the asynchronous voice-to-text era. And our wrists will be the better for it.
Do you measure your product’s time to utility? If not, you should.
The best products reward users as quickly as possible after installation and account creation. But it’s easy to forget about this and as a result, watch conversion rates from download/install-to-active fall.
CRM products have the longest time to utility of most software products. The end user, a salesperson, logs into a blank Salesforce installation. She must type in a bunch of data about a customer. If the customer account closes, great. But it’s not until twelve or eighteen months later when the customer considers renewal and she has to strategize how to best pitch the customer that this salesperson benefits from any of the data entered into the CRM.
On the other hand, sales managers' time to utility for CRM products is much faster. As soon as the team enters in current pipeline data, he can see the sales forecast for the current month.
This difference in time to utility is one of the causes of the tension in adopting CRM tools. It’s present in many enterprise tools that generate reports for management because there’s a time-to-value mismatch between the roles.
Consumer products tend to offer faster time to utility. Google search, Facebook news feed, Twitter feed. Immediately after searching or logging in, the user receives some value: the right results or some relevant updates.
But if you think about the most frustrating software to use, by and large, the time to utility will be long and the magnitude of that utility will be small.
Measure your time to utility for all your product’s segments and try to minimize it. You’ll see the impact at every step of the conversion funnel.