Tracing the arc of Facebook’s user sharing model is to identify the biggest case of frog boiling in history. Contrast Facebook’s origins as a dating site limited to students attending a particular college to an exhibitionist’s dream syndicating every detail of a life across of 1000+ friend networks and potentially many more followers.
The question for users is: what is the quid pro quo? What value am I gaining in exchange for my data. Is it a fair swap or a bait and switch? What do you think? Message me on twitter with your thoughts
In my view, the data-by product created by users is enormously valuable and fuel for innovation. Facebook’s billions in revenue is the most direct proof and the ecosystems built around the data stream are at least as large. Max Levchin’s newest company Affirm, Kaggle, Lending Club, Lyft and others use social signals to build credit and trust signals for potentially billions of dollars worth of transactions.
Pointing to the revenue of these companies as examples of corporate raiding of personal data is flawed. Consumers benefit from new forms of credit and lending, market places with less friction and increased trust on the web.
All web services evolve, their value propositions will change and the use of user data will morph to rise to the demands of the users and customers. The challenges in privacy occur when a web service’s users and customers are different, eg the case of users and advertisers. We’re still figuring out to to properly handle those potential conflicts. It’s a work in progress.
For a compelling counterpoint, read Juile Cohen’s paper in Harvard Law Review called “What Privacy Is For?”. Cohen argues privacy is a fundamental right of a functioning democratic society and today because of our love affair with Big Data and innovation, we have cast aside any regulation or oversight of privacy. Nor do we have the tools to properly understand the type and extent of data usage.
This privacy/innovation debate is fascinating because it exists at the intersection politics, ethics, innovation and societal values. No one wants to be a frog, slowly boiled, who realizes one day all privacy is gone. But the value created by Big Data is unquestionable. There’s the rub.
Amazon operates its businesses at very close to break-even, zero net margin, to win the greatest share and prevent competition from undercutting them. This is as true for their books business as their infrastructure business, AWS. Bezos has explicitly stated this strategy and it’s the one that has led to Amazon’s massive success in many different lines of business.
Over sushi, a friend explained to me that this strategy might also extend to the way the company views acquisitions. If Amazon’s strategy is to run most of their businesses at break-even including acquisitions, then the value of a profitable and fast-growing startup to Amazon is decidedly less than to a another acquirer who will run a business at greater margin if for no other reason than the startup will spin-off less cash under Amazon’s low-margin strategy.
Many acquirers will pursue attractive larger, revenue generating startups with an aim to keep running the business as is (without changing the economics of the business). Ideally, acquisitions increase the revenue and profitability of the the parent company, increasing stock price and enabling the parent to raise capital more easily in the public markets.
After that speculative conversation about Amazon’s M&A strategy, I’ve been wondering whether, all things being equal, the acquirer who pays the most for a startup is the one willing/capable to run the business at the highest margin. Of course, I’m setting aside all strategic considerations (technology ownership, brand, sales synergies, etc).
“Blades square,” the coach yelled from the Boston Whaler as he increased the speed on his outboard motor, pursuing the eight man boat as we gained speed. I sat in four-seat, right in the middle of the engine room, the place for the taller, heavier rowers. The eight man team reluctantly complied with the coach’s order and rowed across the Long Island Sound, NYAC jerseys on our backs and the muggy, humid early summer morning sun reflecting in the water, practicing for national championships.
Most of the time, oarsmen feather their oars - rotating the blades to be parallel to the water as they move through the air, helping the boat run on an even keel. Holding the blades square decreases the margin for error from a few inches to a few quarters of an inch. If anyone in the boat splashes their oar in the water, the delicate balance of the boat is upset, teammates grumble and the boat slows dramatically.
In college, we rowed blades square only infrequently. It was a difficult technique drill. At NYAC, blades square was the norm. The coach demanded blades square all the time. Before races, after races, at 5am when we pushed off the dock to start practice and and 8am when we returned, dog-tired.
The blades square mentality pervaded the rest of our practices. Coach held us to standards higher than we expected to hold ourselves. Because he demanded blades square, we demanded it from ourselves. And it became a matter of pride.
I’ll never forget those first days rowing blades square, my knuckles bloodied from hitting the gunwales each time an oar touched the water and the boat balance collapsed to one side. Nor will I forget the rest of the summer when blades square became routine and eventually second nature. Or the weight silver medal hanging around my neck as I stood on the podium.
One of the entrepreneurs I’m lucky enough to work with has an expression for this idea that I love: “every damn day.” It’s the battle cry for 2013 for his company. It’s a refrain for excellence day in day out, through the dark cold winter and the lazy dog days of summer.
Whatever you call it, rowing blades square or every damn day, the idea is the same. Leaders have to demand excellence from their teams and drive teams to expect excellence from themselves. Every damn day.
Marketing is one of those words without meaning. Or at least a consistent meaning for most people. Recently, I met a very bright marketer who broke down a few of the different marketing disciplines and matched them to a freemium sales funnel. His framework is a stroke of genius. I’ve drawn it below.
The Four Disciplines of Funnel Marketing
The triangle on the left is a standard freemium customer conversion process. First customers become aware of the product, then they use the free version of the product, then they convert to paid either by themselves or with the aid of an inside sales team, and finally they are retained as customers.
The rectangle on the right contains the marketing disciplines used to grow and optimize customer acquisition metrics on the right. The list isn’t meant to be comprehensive but does get the gist across.
At the top of the funnel PR, word of mouth and reach marketing are the tools to drive more awareness. Examples include press mentions, viral product features, app store promotion and features, web page optimization, and so on.
Second, engagement marketing draws freemium users into the products. Engagement marketing includes product tutorials and videos, welcome emails and support.
Third, content marketing closes accounts. Content marketing includes blogging to targeted segments within the user base about useful product tips and social interest posts like customer testimonials. Additionally, content marketing inside sales collateral, like the scripts used over the phone by the sales and support reps. Data science also fits in this stage when customer segmentation, remarketing, direct marketing and online acquisition can be most effective.
Last, lifecycle marketing retains customers by reinforcing the value proposition of the product customers pay for. Customer success teams may call customers with low usage to educate them about the product. Managed support communities build trust into the customer base. And of course email drip campaigns can be quite effective.
Mix and Match
You’ll notice that the tools used in each of the stages isn’t unique. Email, blogging, customer interaction might be used in all or just one of the steps. It depends on the product and sales cycle.
But the goals of the customer interaction change during each step. It’s the responsibility of the marketing team to first understand the objective at each stage in the sales process and best equip their teams with the tools in product, eng, and sales with the various marketing disciplines to maximize success.
This framework really helped me understand the many different disciplines of marketing and when to apply them. I hope it’s helpful for you and your business.
In 2008, when I first started in venture, a$500k seed was sizable. A $1M seed turned heads. Today, those amounts are routine, if small. In the past year, micro-VCs have doubled the capital they invest each year to $1.6B. In addition, traditional VCs also have continued to participate actively in the seed market. As a result of these two pools of capital entering the market, seed rounds are approaching Series A sizes. Lacking accurate census data to illustrate the trend, I’ll use an extreme case to prove the point: Virool raised $6.6M last week in a “party” seed round.
CrowdFunding and MarketPlaces Bring New Viable Forms Of Seed Capital
No one can argue with the success of fund raising campaigns on KickStarter and Indiegogo. Ouya effectively raised a $8.6M Series A in the form of early orders on Kickstarter. In addition to crowdsourcing sites, Angelist (in partnership with SecondMarket) and FundersClub attract $1k+ investment sizes from non-traditional angels looking for exposure to startups. As a friend pointed out to me, it all feels a bit like the 1999 bubble, when everyone can and wants to invest in a dot-com. Instead of using the public markets to buy shares, private markets have blossomed to meet this demand.
Mezzanine Seed Funds Have Entered The Market
You don’t often hear the word mezzanine in the valley. It’s much more common in private equity conversations. But with the boom in seed investments, driven by the capital flooding the asset class, mezzanine seed funds have taken root. Mezz seed funds target startups who have raised a seed round, but haven’t been able to achieve the milestones to attract a Series A investment. So they seek a second seed round, a mezzanine seed round, for a bit more runway and a second chance to raise an A.
Rising Labor Costs Increase Burn But Fuel The Acquihire Trend
As infrastructure costs plummet, labor costs are soaring because of a talent supply/demand imbalance. These labor costs require larger seed rounds to achieve the same runway. In fact, for most of Redpoint’s portfolio companies, labor is the single biggest line item on the P&L.
On the other side of the coin, the overwhelming demand for top talent drives the acquihire market. Every major technology company has a talent acquisition strategy based on M&A. Acquisitions by FB, GOOG, YHOO, EBAY and others provide a landing place for struggling seed companies looking for strategic options and a non-zero return for investors.
The New Bull Market
The seed market feels like a bull market: lots of capital rushing in, new asset classes being created, and a ton of opportunity for entrepreneurs looking for some early capital to change the world.
NB: Thanks to Sundeep Peechu and Chris Gottschalk who inspired this post. And thanks to Mike and Victor for inviting me to the panel discussion.
If asked to describe the characteristics of a successful freemium business, I might highlight three things: effective community marketing, command of new distribution platforms, and a paid product users love that is priced by usage.
Look no further than ZenDesk, Evernote, Expensify, Dropbox. Each of them has built a vibrant user base using freemium products.
But what if instead of pointing to SaaS companies as the vanguards of this movement, I lauded The Atlantic, The New York Times and the Financial Times? In fact, SaaS companies can learn quite a lot from the marketing efforts of content companies. In both cases, a great product alone is not sufficient to maximize growth. Marketing plays an essential role.
In addition to staff blogs, several publications have adopted the contributor model, the newest wave of community marketing. The WSJ Accelerators Program co-opts key members of a community who write on particular topics and bring their own audiences to the WSJ.
Leveraging new distribution channels: Publishing great daily content isn’t enough. Customers and potential customers need to read it. BuzzFeed is the canonical example of content reverse-engineered to succeed on social networks. The power of social networks for content syndication is enormous. Ride the wave.
Similarly, the lion’s share of Expensify’s users come across the application through mobile app stores. Because these users are free, no one can compete with Expensify’s cost of customer acquisition, creating a big moat for competitors.
Free content creates a marketing base: All that great content published by news organizations invites users to learn more about the publication, participate in conversations, download mobile apps, share content and so on, generating data. This data is fuel for marketing to build customer sales campaigns to drive content subscriptions, eg the FT’s dynamic paywall which decides how many free articles to permit a user based on that user’s propensity to pay.
Freemium SaaS companies are no different. The goals of the freemium product are to create prioritized leads for a marketing or sales team to close with much greater efficiency than an uninformed outbound calling campaign.
The tactics of content marketing companies apply equally well to freemium SaaS businesses who can leverage content, community and data to great success.
This data screams survivorship bias. Of course the startups who navigate hostile waters deftly in their first year will have a higher likelihood of success. These startups' management teams have already proven they can develop marketing and sales competencies while bringing a product to market.
The takeaway from this study shouldn’t be any new insight about whether a startups should enter markets with our without competitors. There is no question startups should choose markets or market segments without competitors. Less competition implies more time to figure things out and ultimately better margins.
Instead, the data shows the importance of focus on a differentiated and defensible value proposition in the face of competition and the importance of building a team who can manage a company in the face of great odds. Without either, startups fail faster. Whether tested early in their development or much later, great teams building differentiated products win.
Successful startups are money machines: they ingest a dollar of investment and produce more than a dollar in revenue.
There are three steps to build a money machine:
Find or create a product many people will use.
Convince customers to buy the product.
Mechanize the two processes above, reducing costs and increasing profitability to finance growth.
Startups repeat these three steps many times during their lifespans. In a team of seven people, there may be five engineers building the product, one product manager marketing the product and one salesperson. But to grow to be a big company, all those teams and functions must be continuously reinvented, tuned and refined.
Whether working with ThredUp, an online consignment store, or AxialMarket, a market place for private capital, or Electric Imp, the infrastructure that powers the internet of things, the progression through these steps is similar. And one of these disciplines is always the limiting factor.
When evaluating the priorities for your business, frame your startup’s progression using this framework. Your goal is to identify which of the three steps currently limits the growth of the business so that you can systematically eliminate the current bottleneck, the friction to limiting greater output from your money-machine.
For sales people, social proof is one of the most powerful forms of influence, as Robert Ciadini proved in his seminal book on the topic. It’s no secret that the best leads are referrals. Second best is the friend who is a customer in common: “Oh, Peter chose Salesforce for his CRM. Maybe I should consider them too.” Social proof confers the trust of a relationship to the salesperson improving close rates.
But social proof is entirely absent from sales software. Salesforce which generates $3B in revenue and has amassed a market cap of $25B is the most successful CRM software of our era. But neither of the two innovations Salesforce brought to market, CRM delivered over the web and a bottoms-up sales process, help salespeople close more business. In fact, if you speak to Salesforce users, many will complain the data entry slows them down.
The startup that disrupts Salesforce will be worth much much more because instead of simply recording leads and sales, the next CRM will create business for its customers leveraging social proof.
It won’t be enough for a CRM to inform a salesperson which potential customer to call the way Salesforce’s task list operates today. This new CRM will scour the web to find potential customers, discover points of social proof with potential customers increasing close rates and finally record the transactions in the system. Today, Salesforce only solves the last problem, which is by far the least valuable of the three.
Imagine if you could log into a system each morning, see a list of potential customers, understand how you are connected to those people through friends of friends, work colleagues, college affiliations, common interests. Once on the phone with a prospect, you might inform them of friends who use your product or even competitors. Your close rates would skyrocket because of the social proof at your disposal.
To call this software customer-relationship management would be describing only a fraction of the value such a product would create. Salesforce’s disruptor won’t be a CRM company. It will be something much, much bigger.
[We are living in an era of] cautiousness far too satisfied with incremental improvements. Our ability to do basic things such as protect ourselves from earthquakes and hurricanes, to travel and to extend our lifespans is barely increasing [since the 1960s]. The genuine progress in IT from the 1970s up to the 2000s masked the relative stagnation of energy, transportation, space, materials, agriculture and medicine.
Blue ocean opportunities like asteroid mining and commercial space travel will attract a certain type of personality. And efficiency innovations will attract another. There is room and a need for both. Though they pursue innovation in different ways, directly and indirectly, these entrepreneurs do change the world similarly.
Banging on the wrong pots and pans
While it may be true that an increasing number of people are focused on efficiency innovation as the field of entrepreneurship grows, the claim that we’re not pursuing significant problems is inaccurate.
Below is a list of advances made in various fields from a few Google queries. Significant innovation is occurring in fields like healthcare, transportation and agriculture.
There’s no doubt, we could always be aiming higher, funding research and new ideas to a greater extent, relaxing H1B visa restrictions or reducing barriers to entry for new companies.
To his great credit, Thiel is a contributor to this effort. He has many initiatives to finance progress: the Thiel fellows programs, his numerous investment vehicles and working with his colleagues from PayPal who have built SpaceX, Telsa, Yammer, LinkedIn and other disruptive companies.
But to question the progress and changes we’ve seen in the past 50 years and the innovations that we’re on the cusp of commercializing is a misleading way to build a groundswell. Even if the cause is laudable.