The NY Tech Meetup has become the venue for presenting new start up ideas in NYC. Here is a distillation of a few learning moments at last nights event (August 3, 2010).
www.marketpublique.com
Market Publique is an excellent example of a “long tail” strategy, coupled with a passionate entrepreneur. It’s a winner. It carves out a nice clean market from the “head” of the long tail, or the established market leaders in the category. In this case the category is person-to-person online sales, like eBay. Market Publique adopts an already well-understood methods from online stores and then applies it to vintage clothing. There is no learning curve for the new user; they simply see eBay on steroids for vintage clothes – if vintage clothes are your thing, you’re sucked in. The site offers sophistication unique to vintage clothes, a personal vetting process for sellers (“no Dudes”) and superior product presentation. All of these simple features are beyond what generalists like eBay could offer. Market Publique is a simple retail play and potential big winner.
TurnTo: Keep it Simple
www.turnto.com
TurnTo offers social shopping, which should be simple. Kinda like Facebook meets Yelp meets CNET. The basic idea is consumers personally advise each other on purchases in a social network. Social shopping should be so simple that it’s transparently part of Facebook or whatever social application the user has — and I think that may be the intention. However the demo presented was overly complicated and it’s not clear why consumers would reach outside their current social network to engage with a new tool.
Social shopping has a certain Holy Grail aspect to it and gives this company momentum. Just a small audience of loyal users could make it a valuable company with a nice equity multiplier, simply for gathering and selling data on consumer shopping behavior at the store level. However, as a mass-market application, it’s way too complicated. I would also be afraid of the prospective liabilities of recommendation engines, like Yelp’s recent problems with accusations of extortion. This looks like it could be a system that is easily manipulated or abused. Disclosure: This business was previously pitched to me.
Philo: Originality is for Suckers
www.playphilo.com
Philo reminds me of the early AOL chat applications that simply followed along with TV. The difference with Philo, 15 years later, is that the same application has all sorts of slick graphics and gameplay built into it. Somehow those features make this social TV watching – it’s still not new. The tenuous state of television production and distribution presents a good opportunity for Philo. Philo is a natural application for a TV distribution play, like integration into a cable company or Hulu. There’s plenty of possible upside for this company. The idea is simple and executable. Is the idea protect-able?… that could be the big question.
Indaba: Know Your Market
www.indabamusic.com
Indaba gave a demo that was like drinking from a firehose. There are so many rich features in this application that the demo deserves a much longer look. Indaba allows for collaborative music production and joint publishing online – that’s a lot to ponder right there. What made this demo most special was the Q&A. An audience member challenged the business model based on their extensive personal market experience. The CEO threw it right back at the questioner with detailed examples of successes, not only answering the objection, but also nailing home to the audience that “these guys know what they’re talking about.” What I saw: Indaba is already doing deals in a treacherous market, has cobbled together some great looking software, is talking to the right people, and has serious momentum. What more could you ask for when given your 15 minutes of startup fame?
Microsoft: Sometimes Innovation Doesn’t Matter
www.bing.com
At the end of the event, a product manager from the Microsoft Bing group gave a demo of new features available in Bing mapping. The most important thing to understand about this demonstration was that this is not a startup. This is a venerable 800 pound gorilla of tech companies, fighting to not be made into a distant memory by a new class of 800 pound gorillas, namely Apple and Google. An audience member asked, “why doesn’t Google do this?” The answer may be even simpler than anyone imagines: maybe they’ve already determined it’s not a good business. This is obviously fodder for a longer post, but the point remains: just because you can do something that gets people to “ooooo” and “aahhh” doesn’t mean you have a product or a business. But if you’re Microsoft you can still blow millions seeing if you actually have a product and sending shockwaves through the market.
A recent post on Inside Facebook reports a decline in Facebook usage by women between 26 and 34. The author presumes this is caused by negative media coverage of security issues. The security story didn’t register strongly in major media, but it did get some coverage, or at least generated some more personality profiles of Mark Zuckerberg. Most Facebook users don’t read TechCrunch, Mashable, MediaPost or even the specialty digital media sections in the New York Times – this is not news to most users. Facebook book doesn’t only have a PR or media problem, to quote my mother in-law: ” it has more problems than a goose at Christmas”. The inside baseball of the digital media press is not the cause of the problems.
Media on Media
The Inside Facebook post is obviously written by a person who exalts media reporting and either is, or really wants to be, a highly considered member of the media. The report only considers media reporting as a causal effect for the decline in usage. It clearly never occurred to them that something else could be driving the phenomenon – like a million silly mistakes managing the user experience and community — or intrinsic problems with the entire product.
Could it be a Product Issue?
The problem from a product manager’s perspective is one of inconsistency and random changes. Facebook baits its users into an emotional investment with their product, lulling the user into a sense that they own or control their Facebook presence. And then sews bad will with its user by randomly changing Facebook with no warning.
In this case, users found out about the alleged security problems first hand. Users watched, yet another, unannounced user interface change on their Facebook pages. Some were warned about various changing privacy settings by other users. For the most part these settings are totally abstract and far removed from where users typically interact. I’m sure that had a chilling affect on many, and could have a causal relationship to the decline of use in this demo; but that’s still different from what Inside Facebook reports. And again, this is probably only a small minority of users, mostly the ones that do read Mashable and Techcrunch. This is how the story broke in the Facebook community, not by CNN or the NY Times.
Like, Facebook, ew!
As a middle aged fat guy in a hyper-consumerist overly-sexualized society, I can attest that females between 26 and 34 are the most easily socially annoyed demographic. I have about 50 years of supporting data, and none of that is all that interesting (at least without the video to support it). I’m sure somewhere in my files there’s a bunch of analysis of the demo that also says they aren’t the ideal target for Facebook.
Then of course, there’s the bluntly obvious part of social networking. Women 26 to 34 are susceptible to digital stalking. Women see that same creepy guy they were trying to avoid in high school trying to friend them and surely their interest in Facebook wains. Again … nothing to do with media reports: it’s a phenomena intrinsic to the product.
The Inside Facebook conversation is like watching Cable news babble inside-the-beltway minutia about politics; it’s not something that registers with the general population. Consumers may care about security and privacy, but most are totally dialed out of the machinations of the new media press or the details of their privacy settings. Facebook’s failure to hold momentum of are many, PR isn’t one of them.
The iPad and iPhone are game changers for personal computing – even a paradigm shift. Apple once again faces the “Mac problem:” figuring out how to maximize revenue from lightening in a bottle. The big question is: will Apple translate its current smart phone market domination in into domination of the new iPad-like category it is creating? Apple could do what it did with the Mac, educate the market to the consumer temperament and slide backward in a losing battle for market share (insert John Scully jab here). It appears that Apple is setting up the market for a very similar scenario. However this time, Apple has learned a few things and has some new tricks up its sleeve. It is possible for Apple to take the high ground with the sexiest most expensive hardware, proprietary software andstill have inferior market share with superior revenues through more lucrative services.
The same conversation about “proprietary” vs. “open” frames the Apple market share conversation, again. What’s different from the Mac’s launch is that PC clones weren’t really open, and opensource UNIX has been gaining momentum for a decade. Opensource will continue siphon off proprietary innovation into competitive open products. Google could completely fail with Android, and yet another variant of opensource UNIX could take its place as the phone/tablet OS of choice. Apple doesn’t have the luxury of Redmond’s fumbling arrogance as it did with Windows v. Mac. This time they have to content with the juggernaut of Google and/or the whole opensource universe at large. This may prove their biggest problem: it’s Apple against the world.
In the next few posts I will examine the factors that control Apple’s fate in creating a market strategy to maximize its revenue and shareholder value for its new category. I boil the conversation down to three factors:
Preservation of Apple’s unique user interface intellectual property.
Ability to maintain a market for proprietary apps to the Apple iPhone OS, as opposed to HTML5
The constant pressure of the “race-to-the-bottom” for knock offs or competitors.
Each one of these is a separate autonomous force that will slowly erode Apple’s current dominance. If Apple’s dominance today is measured in marketshare for phone hardware sales, tomorrow its dominance will need a different measuring stick. Since hardware is not a great business with all the pitfalls of inventory, support, moving parts, it’s not in Apples interest to plan to build “dominance” through hardware sales, but shift to other more profitable sales of soft goods and services.
Facebook has a rare opportunity to breakout as the next Fortune 500 Internet superpower. As much as I personally am addicted to Facebook, I don’t see it making the transition from fad to a viable large corporation. One simple stumbling block stops Facebook: it has not cultivated consumer trust as a brand. It has demonstrated a certain odd tone-deafness to understanding its audience, easily fooled by some very impressive statistics. The consumer perception is one of a Facebook that’s itching to exploit its massive user base in a feeding frenzy for advertisers. I remember Steve Case trying to change the Wall St. perception of AOL by recasting user numbers as a “surrogate measurement of the company’s value.” Facebook is in a similar situation of being lost in statistics and could suffer a similar rapid decline users as AOL.
One of Facebook’s true beauties is its exquisite simplicity. By creating a simple web-gathering place for “user presences”, Facebook has created a holy grail of “universal messaging” or “personal directory services.” This is an accomplishment that has eluded entrepreneurs and major media brands for over a decade — it’s insanely valuable. Facebook could transform its business into a powerful directory services utility – the digital phone book for the 21st century.
To not be a blip in the history of techno-fads, it needs a clever approach to get beyond being primarily ad supported. It must engage a far higher level of consumer trust. Advertising may make Facebook profitable today, but ads create no loyalty, and create a sort of a digital ghetto where parasites leap from every dark alley to steal your identity.
“Personally identifiable information” is a currency, serious equity, on the web. Unfortunately for Facebook, much of its appeal is that all its services and benefits are totally free. There is no reason for users to pay for anything, and no incentive to expose any financial information. Stranger than fiction there is not a means to pay for anything. Users don’t even have an incentive to be who they actually say they are. Personally, I never give out my birthday for what I see as a free entertainment service, and never will — I am not what Facebook says about me. While Facebook can get a lot of mileage with targeted advertising with freebee-self-characterization and user activity; it’s still doesn’t translate to user trust in a Facebook brand.
In fairness, Facebook is doing pretty well with revenue, advertising is working. No one is asking how they’re going to survive; somehow it’s going to work out. I’m simply asking Facebook step up to be what they could be — because I am a big fan.
Facebook has a massive appeal that crosses every demographic of Internet user. While Facebook may have magically captured marketshare and mindshare in a way never before imagined, its only appreciable revenue model is advertising. The opportunity for the company is much bigger than an ad-supported business. In my next post, I will discuss what I see as a bigger problem, Facebook’s ultimate opportunity, and something near and dear to me: its developer program.
Note: Immediately after this post, Facebook radically changed many of the policies and user interface issues I was about to address. I still have all that commentary and analysis in the can, but since Facebook is still dynamically changing, pretty much on the fly, I am going to hold off publishing it, at least until they’ve finished making changes on the fly. Fortunately, for me, my assumptions and analysis still holds.
I spent years deconstructing other people’s financial models for M&A departments. It helped me have something substantial to support my cynicism of ideas that would likely fail, and an excuse to like the ideas I liked. And that’s about how everyone uses them to make a case. In the end that’s all a math exercise — the bottom line revenue shows the truth — all the assumptions and models in the world can’t change that. A business case is actually either made by real financial performance, or it’s just a model.
Far more often then not, models are wrong — they are based on assumptions. It’s just as reasonable to assume that some assumptions are conservatively wrong and that the business may met or exceeded revenue expectations — not necessarily that the model was correct. From a purely statistical point of view, all pre-revenue investing can be reduced to a full on crap-shoot — there just is no real way to know. That’s why when markets trend down, investors want to see “revenue traction,” or basically real numbers, to understand the real business based on as much data as possible.
I love this post at Steve Blank’s blog and wish I though of it: No Accounting For Startups His hypothesis is that you need set expectation with VC’s about the model so you can make adjustments as you start to build a business. This is very sound advice for an entrepreneur working with VC’s. In my mind it validates the reasons to NOT use VC’s, or more specifically Angels. To manage VC’s, companies are required to spend a lot of time on building models, creating phantom variables, to adjust assumptions, and manage financial expectations. The other option is to stay lean, and run hard at revenue and adjust the moving parts in real time when you KNOW what business model works! (But if you need a revenue model; I can build you a beauty.)
Steve suggests that when the model is disproved, that the startup “pivot” to a new model. The problem is that pivoting instantly implies that some assumptions were wrong up to that point. When the supporting set of assumptions start to fail, it could create a total implosion of the entire model. Even without a full implosion, when key assumptions fail and management was depending on the model as a guide, they are forced to go into rescue mode. It tends to get super ugly figuring out what to jettison.
Arguably, this is why the Angel model fails, and VC’s are hard to manage. My new millennium approach is to start with MULTIPLE SCENARIOS, instead of having one “be-all, end-all” model and attempting to “pivot.” To have many approaches to the business argues for the kind of fluidity that requires the single control of a strong CEO. To make that work the CEO has to keep the majority equity, majority control and enough sense to take the risks and know the options. Interjecting pools of investors with voting rights on the board undercuts that true ability to pivot; the one where the leader has to suck it up and take it on their shoulders. Otherwise the conversation about what do when the model fails, is a toothless CEO in a room full of finance guys. The same finance guys who believed bad assumptions in the first place and look a little foolish.
The best way to start a business is to focus on the business, keep majority control as long as possible, at least to being cash flow positive, and most important not get distracted into managing investors.
Google’s Chrome OS very nicely addresses what I have been talking about on this blog. It provides the simplicity and compactness to work on many devices while offering the ability to do the kind of memory management necessary so high quality HD video and audio can be widely distributed. While there are many good reasons to be cynical of Google’s marketing; I whole heartedly applaud the idea of restablishing the PC operating system in the mind of the consumer.
There’s been a lot of banter about Chrome OS. I even took the time to respond to an opinion piece in the NYT. I generally deplore hype and have something cynical to say about it — and Google often begs for it with its arrogance. But today Google is spending it’s mindshare-capital to do us all a favor. It’s about time that Windows death grip on the consumer psyche be broken. Certainly Apple is not Apples to Microsofts Oranges.
PC OS’s are now ubiquitous. The few flavors are all a slightly different twist on the same bad idea of perpetual license one-size-fits-all computing with this crazy notion of one giant hairball universal configuration for every possible services available at all times. Today’s PC’s boot up like someone packing to go the winter Olympics to compete in every sport in a single carry on bag. They’ve always been a big mess of stuff inappropriately slammed together — each piece at a slight detriment to the next. It’s always been overkill to replace a typewriter and not quite enough to replace your TV and stereo. Now they’re used for business everywhere. Worst they’re inherently impossible to maintain. And that’s what Chrome OS is all about, use what you need, and don’t load what you don’t need. I hate to say paradigm shift … but it’s what the market needs, and Chrome OS, at least architecturally, is a worthwhile approach to creating that change. Who knows if Google can or will succeed or completely screw it up, but the game is afoot.
The classic rejoinder to this argument is “what about the mac?” The mac still basically follows the same broken perpetual license model with a less cumbersome implementation of an OS. Ironically some of the ideas in OSX reflect the advancements made by Jobs at NeXT, where boot configurations were tuned to specific tasks. NeXT was a victim of being too successful selling into the National Security Administration — which has an odd way of consuming a company and stifling commercial efforts and so it folded back into Apple. To me it’s the NeXT piece that makes OSX superior to Windows. The Mac advantage is it better memory management for graphics, which make it radically smoother for most of the things people notice — and that’s because it’s UNIX under the hood, like NeXT. I don’t particularly see any advantage to the current Mac user interface — that argument is a nonsense big-endian v. little-endian conundrum. People forgot that Microsoft and Apple spent years fighting each other over who stole what from whom first. The irony of course being that Apple pinched a lot of the clever interface ideas from Xerox. Apple is to Windows, what BMW is to Chrysler, but their both still internal combustion cars, one performs better and cost three times as much.
I hope that Chrome OS provides the kind of prodding the consumer electronics market needs to mature to be able to deliver devices that can drive video convergence. I’d be happy to have PCs as we know them go away, fading into our TV sets. Chrome OS is a massive step in the right direction — is it real? Who knows.
The NY post reported Sergey Brin is worried about Bing …
Surely Google has room for improvement and needs a little rattling to tune up its offering now that a competitor with some financial means to fight is in the game, and not just a startup they can roll over. The fact remains consumers don’t actually care about the features in Bing and have learned to distrust Microsoft for many good reasons. Much of the points in this article are inside baseball for techies that are entirely irrelevant to the actual market drivers. The whole basis of Bing is “me too, only a little bit better” and that bid is a dollar short and a day late from a company that rarely gets it right (with the exception of X-box it’s been been a pretty disastrous run). They immediately demonstrate that they don’t understand many of the consumer critical nuances for success — like making the search page have all sorts of weird misleading visual queues. I think Google has as much to worry about as Apple did with the iPod …
The view of the future of the web video market is described by what is called the longtail theory. This idea is pretty simple, it states that a market is established by a market leader at the “head.” The head is characterized by offering very general features that define the market. The tail that follows the head is characterized by the specialty offerings that emerge once the market is established. The clearest examples of this is relationship between major networks (ABC, CBS and NBC), which formed the head, and specialty cable TV channels– for example ESPN, BET which are the longtail. In considering web video, YouTube is the major network and the emergence of specialty web-video channels will be the long tail.
The conventional thinking from the established television industry in response to the web-video long tail is that web video is nearly impossible to monetize because advertisers won’t see the same volumes of viewers as TV broadcasting. That assumption is naive, and assumes that the market is fundamentally the same and simply just moves over to new transmission media. The argument implodes because a web viewer is an active user that seeks the content and therefore is more likely to take interest in some related form of monetization. That still begs the question what the monetization is, but it’s clear that instead just having the TV on the background, the viewer is actually fully focused and determined to view the video. Therefore even the simple forced viewing of a lead-up interstitial ad has more chance of being viewed than ignored — and that viewer is by definition the ideal target. This is in contrast to the new age TV paradigm where the DVR makes it very easy to skip ads. While monetization is important, that 70’s vintage TV programming thinking illustrates the myopia of the TV industry which only has one monetization model: adverting. The longtail is very real for web video, and it may not have a lot to do with trying to shoehorn TV monetization into web media – there’s a lot of creative approaches to building the market.
It is important to note that monetization is a function of the viewers interest in the content. The TV industry created copious amounts of filler entertainment, notorious for insulting the audience’s intelligence and trying to seek a common denominator for the broadcast. Since the web is by definition narrowcast to those seeking the content, whole new realms of content programming to target specifically more focused and intelligent viewers will emerge. Therefore, pure entertainment is not the best, or the ideal starting point, for pursuing web video content; so called “info-tainment” or entertaining information with a message becomes both powerful and drives a purpose; this directly addresses monetization.
Whatever the content, there is always a party with a vested economic interest by the viewer and the veiwee. That could be as simple as the performers self-promotion or the viewers interest in being like the performer. Rarely is there no prospect for product placement of infotainment value. There is always some way to create some monetization model and it simply can’t be the same thing that is was for TV.
The longtail of web video will emerge as brands see the value of creating their own promotional materials, as BMW already does. Initially BMW tried to make these videos very entertainment focused but the brand message was lost, they’ve dramatically matured their approach and continue to be the market leader in developing web video for their brand:
As the investment in TV advertising become more and more fleeting and the confusion of Youtube continues to dilute its appeal, new video outlets will begin to emerge. Today, we are somewhere between the head and the emergence of the first parts of the tail, however with the decline in TV advertising revenue and the fierce demand for video viewing … a long tail will emerge.
Suggestion engines are the holy grail of interactivity – they provide the “smarts” in smart interactions. They exist in various forms today, but not in the form necessary to drive the evolution of the video market, either for convergence of divergence of TV and web video. To be competitive web video has to be ultra simplistic and allow for the same type of passive viewing as television where people “just turn it on and watch.” The ideal system is a combination between what Tivo and Amazon already developed and the application of tagging in blogs or YouTube. For digital TV to evolve, it’s necessary to have more advanced features to suggest viewing in order to flesh-out features like parental controls and on-demand viewing.
Search Engines from then to now …
The basic idea of a search engine with intelligent suggestion is not only just a good idea, it’s arguably been vital to the advancement of the web for just about everything. Suggestions engines are familiar to the web; the most famous suggestion still in use is Amazon’s. There were a slew of super hot startups in the space in the 90′s that came up empty – none of them had any genuinely original technology. Worse it was one of those spaces that became cluttered with confusing claims that further frustrated the advancement of the right tools.
The many efforts to master suggestions have done little more than create various profiling systems coordinated with search terms to help refine search processes. The main problem is that the web cookie metaphor doesn’t define who is searching; it only defines the specific web browser on a computer. The cookie uniformly stores all the information on historical activity for that browser with the same relevance; therefore the engine collects an aggregate of searches jumbled together. There is no way to discern the relevance or the relationship of unique search queries.
In my case I am often a Dad looking for family things, but often I am wannabe college boy again looking for trouble – two totally different personas. To get around this, the search tool would need to know the searcher’s identity, and that starts a whole new set of requirements and restrictions on UI behavior.
Case Studies
My strongest memory of how a suggestion engine can be a disaster is my own experience around the time my first child was born. I was (and am still) convinced Lamaze was a scam, a way to get people to pay for classes they don’t really need. So I set out to find a video Lamaze course so we could check out Lamaze for a lot less than paying for classes in Manhattan. I also at the same time was collecting hard to find music that I figured would go out of print and disappear (I have never been a fan of filesharing; I wanted the CDs). The result has been that for years Amazon has been trying to sell me anything and everything related to Paul Anka. I suppose in the over simplified perspective Paul Anka is a musician who wrote a song about having a baby, but in my mind the association was downright comical – especially considering the genre’s of music I was searching. That’s the danger; the associations made by computers are not often reasonable, reliable or realistic.
The most legendary example of suggestion engines gone awry is the old riff “Tivo thinks I’m gay.” In this case the suggestion engine is “too fuzzy” in its associations. Here, the suggestion tool works with very general descriptive tags about something and associates them too stringently to the searcher. The key design issue here is that the searcher doesn’t know what tags are being associated with their choices, or most important: why that’s the description. For instance the “Tivo thinks I’m gay” pattern probably arises from the consumer picking subjects that have common tags, like “romantic comedy” for watching reruns of “Friends.” It’s not actually a legitimate assumption that the person viewing choices are specifically because of an interest in romantic comedies. There interest could be uniquely “comedy,” or any number of reasons completely not associated with the fact that what they are viewing what someone else considers a romantic comedy.
The must-have feature: profiling
It’s easy to see how a collection of unusual circumstance could radically foil any effort to make sensible associations. The conclusion is that for suggestion engines to work, there has to be some form of profile management for unique users; it becomes unavoidable.
For the web, I would like to see a suggestion engine with a short memory that I can turn off or on. This would not require me to establish my identity to the search engine, what is established is the profile for a search session. This would allow me to associate a sequence or set of searches. Ideally, I could have some sort of universally portable “light profile” that allowed me to keep my search interests and biases, and even gave me the option to edit them. This way I could mix aspects of searches as I refine them, or call up old searches, save them and continue to refine them. This is a missed opportunity for search providers.
Why this hasn’t happened
Search providers have all launched their ships into being “portals.” In their vision of a portal they are all things to all people and diving into mail, calendars and business collaboration, each asks the consumer to walk deep into their web, changing the brand message from being the leaders in search to being everything web. Their approach is surely more lucrative, but the value of offering superior search is not served.
Enlightened self-interest … of course
My professional interest is as someone building video blogs. I’d like the see the creation of a system that allows the searcher / viewer to view a sequence of short videos – going from the first video they select and seamlessly flow to the next video in a logical sequence. There are a few sites that already do this. At the end of each video there is a delay and the next logical next video is queued. YouTube sorta does it, but its more random than programmatic. The logic of ‘what’s next’ is based on criteria considering other viewer’s previous viewing and search criteria. For instance the first video might introduce a concept, and the second video would queue to elaborate on the next logical question that most people would ask, and then play that after a few seconds. During that short intermission the user could also presented a handful of options of alternative things to view, like follow up videos that may answer their unique or different questions about the first. This could be a very potent tool for corporate sales and dramatically advance video … and yes, I have a developer working on it.
Some people call this non-linear entertainment, but I don’t think the real value is in entertainment; its for business use. The idea is that the viewer has the control to change a storyline or the sequence of viewing. This would be a game changer for video blogs and YouTube. YouTube would be hard pressed to overlay such a custom system onto what it currently operates – its tags are too general. This sets up my upcoming post on the longtail and the future of web-video.
Conclusion
The web is all about choice and knowing how to navigate. It’s too easy to make the wrong choice – with TV it’s just too simple to hit the channel button. TV has too much filler and with so many competing entertainment options for consumers; it needs to modernize its offering. The suggestion engine feature must be evolved is to help TV survive as well as create web-video mass adoption – converge or diverge doesn’t matter both media; need it. As Tivo proved, solving the profiling issue for a DVR is even something people would pay for – it’s my opinion all DVR’s need something like this. With the web … this isn’t that hard to implement technically; it’s the content that’s the hurdle.
Sometimes your best idea is just too big to work. It’s not uncommon to fall in love with your idea and miss the big picture that you have a biten off too much. It’s possible for everything to be buttoned up and look like you can’t fail — strong intellectual property, great ideas marketing ideas and an amazing team — and the idea is truly “too big to NOT fail.” But if it’s really a good long range vision, then there’s probably a way to engage the ideal corporate buyer to assure you hit your exit. In other words, do your best to go to market, but make sure you know your exit strategy options. To play that game you need protectable intellectual property – because if you don’t get solid revenue production that’s all you have to sell. Even if you can protect your idea, you can still lose out to deeper pockets who can simply litigate you into oblivion if you challenge them in the wrong way. So you might as well court them from beginning. Big ideas are often just plain worthless to entrepreneurs and are easily mimicked or stolen – so if you do not have protectable intellectual property, do not throw your life savings into building something that can be easily duplicated.
A few different scenarios can play out; this anecdote is just one example of failed venture that still created some return.
First there’s the Big Idea
A friend of mine had a Micropayment system. No matter how brilliant his product was, it was a hard sell. Micropayments is one of those things like a fax machine that takes wide adoption before it can be of any value to those unfamiliar with the concept. So it didn’t matter if he had actually solved all the problems to make it work technically; he required some sort of demonstrable mass adoption. The challenge was that to find a market where consumers would desire the service enough for some reason to try it, some sort of driver, or niche.
The next problem was differentiation or at least the consumer perception of differentiation. We had to answer the answer the question: how was this different from just another way to process credit and debit? Could we really establish a brand in parallel to VISA, AMEX, MasterCard, or even PayPal? It’s very difficult to wrap your head around this sort of big picture, and some huge companies have failed, and failed dramatically. To launch he required either a phenomenally huge budget to manufacture some sort of market, or find some way of landing it into the market with many users all at once (like eBay with PayPal). The most obvious example was to try to work with a credit card company on one of their initiatives.
Crossing the Chasm 101 — How to get Adoption
We considered the comparable historical adoption of the fax machine. To create adoption for the fax machine it was sold as an internal communication device for financial institutions. The fax actually created a way for a branch office to show some document to another branch office, or send it back to the corporate office. The cost of ownership was easily offset by the value of being able to share documents in a widely distributed company that already associated a high cost with sharing documents – like an insurance company. And so it was possible to quickly achieve the appropriate economy of scale by having one insurance company buy many fax machines at once for all it’s branch offices. The next insurance company not only followed, it was essentially forced to move to buy fax machines to in order to compete at the newly established standard for efficiency. And like dominoes comparable businesses followed, and eventually fax machines made their way into office supply stores. We wondered if we could find a comparable closed loop model for micropayments – at first we were stumped, especially because micropayment was a consumer play.
Try Something that actually worked!
Then we considered the introduction of Omnipoint, a cell phone company, that later sold to Deutsche Telecom to make up what is now T-mobile. To be able to introduce a cell phone company in the early nineties meant a lot of expensive dealing with other telecommunications companies that owned the transmission towers, or building and buying transmission towers yourself. Telcoms were not all that excited to cooperate with upstarts, so it wasn’t cheap to leverage their infrastructure. The next problem was the expense to acquire customers competing with these same Telecom giants who had the silly-huge ad budgets, but not a lot of sense about spending their money. Omnipoint made a very shrewd decision to aggressively focus on college students. Students were tech savvy enough to want a cell phone. College students aren’t exactly easy to track down by a land-line, so mom and dad would often foot the bill for a mobile phone because they immediately saw the benefit. Omnipoint had found a way to contain costs to have exceptionally low costs for customer acquisition. Omnipoint was able to focus on College Football effectively saturating TV and local media and even creating a strong presence at stadiums. The successfully built a brand and sold it. The rest, as they say, is history.
You can talk to VC’s forever
Oddly the next paradox was that angels and VC’s had the typical response; they either needed a field trial as a proof of concept or they wanted their usual outrageous majority position. So after a few quick (and somewhat ridiculous) meetings we decided to avoid chasing around outside capital. It was either focus on raising capital or revenues.
Just do it!
With limited resources we set up a micropayment card system at a University linking up to the bookstore, cafes and food service. While this was a good idea, it was still difficult to explain the value of micropayment as opposed to credit cards and ATM cards. Essentially, the show-stopper was still branding. Students didn’t know if this was really something they wanted uniquely from services from major banks. Banks offered brands they knew they trusted. The trail was neither successful or a failure; it just didn’t show enough to anyone to invest or keep going.
Know when you’re beat
With much of his savings spent on a failed market launch, my brilliant inventor friend had to ask where was this whole thing headed. He had developed considerable intellectual property, had assembled an exceptional development team and had some very valuable patents. To solve the brand problem, he approached some of the larger brands. The idea was simple: if the product was real, then major financial institutions could be enticed to consider a distribution strategy. Since they already had check cards, cash card and credit cards, it followed that they would want a way to cut transaction cost on smaller payments and could integrated the technology under one of their existing brands – the technical details are not important to the consumer. Further ownership of the IP gave them a position to litigate anybody coming into the space using a comparable approaches; big companies love that stuff. So we embarked on selling consulting services to major banks and having high-level meetings under NDA.
In the end the strategy that worked best for my friend was simple. We turned the startup company into a consulting company. We placed the engineers as consultants and eventually they all got great jobs. The IP was sold to a major bank that also hired my friend the inventor and CEO. If a VC had stepped into the company we could not have done this. The engineers would likely get a cut of the sale, but not necessarily the job. The disposition of companies towards people they get form acquisitions is totally different from those they seek to recruit; it rarely works out for the employee. The asset sale might have yielded more money, but not likely more return to the shareholders on the team since the VC would have taken such a large cut. To date the technology per-se has still not been deployed or adopted, however the founder leveraged everyone’s participation to get some reasonable value and his own money back. He remains a noted expert in the field.
Bottom line is that big problems are hard to solve and creating a startup to solve them is about the most extremely difficult approach. Don’t get the crazy idea that you can just go be David and attack Goliath, get Goliath under NDA and start the conversation early. Don’t be afraid to just get out of your own way and take your exit.
The NY Tech Meetup has become the venue for presenting new start up ideas in NYC. Here is a distillation of a few learning moments at last nights event (August 3, 2010).
