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Tag: Facebook

The Four Types of M&A

I’m oftentimes asked what determines the prices that companies get bought for: after all, why does one app company get bought for $19 billion and a similar app get bought at a discount to the amount of investor capital that was raised?

While specific transaction values depend a lot on the specific acquirer (i.e. how much cash on hand they have, how big they are, etc.), I’m going to share a framework that has been very helpful to me in thinking about acquisition valuations and how startups can position themselves to get more attractive offers. The key is understanding that, all things being equal, why you’re being acquired determines the buyer’s willingness to pay. These motivations fall on a spectrum dividing acquisitions into four types:

four

  • Talent Acquisitions: These are commonly referred to in the tech press as “acquihires”. In these acquisitions, the buyer has determined that it makes more sense to buy a team than to spend the money, time, and effort needed to recruit a comparable one. In these acquisitions, the size and caliber of the team determine the purchase price.
  • Asset / Capability Acquisitions: In these acquisitions, the buyer is in need of a particular asset or capability of the target: it could be a portfolio of patents, a particular customer relationship, a particular facility, or even a particular product or technology that helps complete the buyer’s product portfolio. In these acquisitions, the uniqueness and potential business value of the assets determine the purchase price.
  • Business Acquisitions: These are acquisitions where the buyer values the target for the success of its business and for the possible synergies that could come about from merging the two. In these acquisitions, the financials of the target (revenues, profitability, growth rate) as well as the benefits that the investment bankers and buyer’s corporate development teams estimate from combining the two businesses (cost savings, ability to easily cross-sell, new business won because of a more complete offering, etc) determine the purchase price.
  • Strategic Gamechangers: These are acquisitions where the buyer believes the target gives them an ability to transform their business and is also a critical threat if acquired by a competitor. These tend to be acquisitions which are priced by the buyer’s full ability to pay as they represent bets on a future.

What’s useful about this framework is that it gives guidance to companies who are contemplating acquisitions as exit opportunities:

  • If your company is being considered for a talent acquisition, then it is your job to convince the acquirer that you have built assets and capabilities above and beyond what your team alone is worth. Emphasize patents, communities, developer ecosystems, corporate relationships, how your product fills a distinct gap in their product portfolio, a sexy domain name, anything that might be valuable beyond just the team that has attracted their interest.
  • If a company is being considered for an asset / capability acquisition, then the key is to emphasize the potential financial trajectory of the business and the synergies that can be realized after a merger. Emphasize how current revenues and contracts will grow and develop, how a combined sales and marketing effort will be more effective than the sum of the parts, and how the current businesses are complementary in a real way that impacts the bottom line, and not just as an interesting “thing” to buy.
  • If a company is being evaluated as a business acquisition, then the key is to emphasize how pivotal a role it can play in defining the future of the acquirer in a way that goes beyond just what the numbers say about the business. This is what drives valuations like GM’s acquisition of Cruise (which was a leader in driverless vehicle technology) for up to $1B, or Facebook’s acquisition of WhatsApp (messenger app with over 600 million users when it was acquired, many in strategic regions for Facebook) for $19B, or Walmart’s acquisition of Jet.com (an innovator in eCommerce that Walmart needs to help in its war for retail marketshare with Amazon.com).

The framework works for two reasons: (1) companies are bought, not sold, and the price is usually determined by the party that is most willing to walk away from a deal (that’s usually the buyer) and (2) it generally reflects how most startups tend to create value over time: they start by hiring a great team, who proceed to build compelling capabilities / assets, which materialize as interesting businesses, which can represent the future direction of an industry.

Hopefully, this framework helps any tech industry onlooker wondering why acquisition valuations end up at a certain level or any startup evaluating how best to court an acquisition offer.

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Why VR Could be as Big as the Smartphone Revolution

Technology in the 1990s and early 2000s marched to the beat of an Intel-and-Microsoft-led drum.

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via IT Portal

Intel would release new chips at a regular cadence: each cheaper, faster, and more energy efficient than the last. This would let Microsoft push out new, more performance-hungry software, which would, in turn, get customers to want Intel’s next, more awesome chip. Couple that virtuous cycle with the fact that millions of households were buying their first PCs and getting onto the Internet for the first time – and great opportunities were created to build businesses and products across software and hardware.

But, over time, that cycle broke down. By the mid-2000s, Intel’s technological progress bumped into the limits of what physics would allow with regards to chip performance and cost. Complacency from its enviable market share coupled with software bloat from its Windows and Office franchises had a similar effect on Microsoft. The result was that the Intel and Microsoft drum stopped beating as they became unable to give the mass market a compelling reason to upgrade to each subsequent generation of devices.

The result was a hollowing out of the hardware and semiconductor industries tied to the PC market that was only masked by the innovation stemming from the rise of the Internet and the dawn of a new technology cycle in the late 2000s in the form of Apple’s iPhone and its Android competitors: the smartphone.

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via Mashable

A new, but eerily familiar cycle began: like clockwork, Qualcomm, Samsung, and Apple (playing the part of Intel) would devise new, more awesome chips which would feed the creation of new performance-hungry software from Google and Apple (playing the part of Microsoft) which led to demand for the next generation of hardware. Just as with the PC cycle, new and lucrative software, hardware, and service businesses flourished.

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But, just as with the PC cycle, the smartphone cycle is starting to show signs of maturity. Apple’s recent slower than expected growth has already been blamed on smartphone market saturation. Users are beginning to see each new generation of smartphone as marginal improvements. There are also eery parallels between the growing complaints over Apple software quality from even Apple fans and the position Microsoft was in near the end of the PC cycle.

While its too early to call the end for Apple and Google, history suggests that we will eventually enter a similar phase with smartphones that the PC industry experienced. This begs the question: what’s next? Many of the traditional answers to this question – connected cars, the “Internet of Things”, Wearables, Digital TVs – have not yet proven themselves to be truly mass market, nor have they shown the virtuous technology upgrade cycle that characterized the PC and smartphone industries.

This brings us to Virtual Reality. With VR, we have a new technology paradigm that can (potentially) appeal to the mass market (new types of games, new ways of doing work, new ways of experiencing the world, etc.). It also has a high bar for hardware performance that will benefit dramatically from advances in technology, not dissimilar from what we saw with the PC and smartphone.

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via Forbes

The ultimate proof will be whether or not a compelling ecosystem of VR software and services emerges to make this technology more of a mainstream “must-have” (something that, admittedly, the high price of the first generation Facebook/Oculus, HTC/Valve, and Microsoft products may hinder).

As a tech enthusiast, its easy to get excited. Not only is VR just frickin’ cool (it is!), its probably the first thing since the smartphone with the mass appeal and virtuous upgrade cycle that can bring about the huge flourishing of products and companies that makes tech so dynamic to be involved with.

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What Happens After the Tech Bubble Pops

In recent years, it’s been the opposite of controversial to say that the tech industry is in a bubble. The terrible recent stock market performance of once high-flying startups across virtually every industry (see table below) and the turmoil in the stock market stemming from low oil prices and concerns about the economies of countries like China and Brazil have raised fears that the bubble is beginning to pop.

Company Ticker Industry Stock Price Change Since IPO (Feb 5)
GoPro NASDAQ:GPRO Consumer Hardware -72%
FitBit NYSE:FIT Wearable -47%
Hortonworks NASDAQ:HDP Big Data -68%
Teladoc NYSE:TDOC Telemedicine -50%
Evolent Health NYSE:EVH Healthcare -46%
Square NYSE:SQ Payment & POS -34%
Box NYSE:BOX Cloud Storage -42%
Etsy NASDAQ:ETSY eCommerce -77%
Lending Club NYSE:LC Lending Platform -72%

While history will judge when this bubble “officially” bursts, the purpose of this post is to try to make some predictions about what will happen during/after this “correction” and pull together some advice for people in / wanting to get into the tech industry. Starting with the immediate consequences, one can reasonably expect that:

  • Exit pipeline will dry up: When startup valuations are higher than what the company could reasonably get in the stock market, management teams (who need to keep their investors and employees happy) become less willing to go public. And, if public markets are less excited about startups, the price acquirers need to pay to convince a management team to sell goes down. The result is fewer exits and less cash back to investors and employees for the exits that do happen.
  • VCs become less willing to invest: VCs invest in startups on the promise that future IPOs and acquisitions will make them even more money. When the exit pipeline dries up, VCs get cold feet because the ability to get a nice exit seems to fade away. The result is that VCs become a lot more price-sensitive when it comes to investing in later stage companies (where the dried up exit pipeline hurts the most).
  • Later stage companies start cutting costs: Companies in an environment where they can’t sell themselves or easily raise money have no choice but to cut costs. Since the vast majority of later-stage startups run at a loss to increase growth, they will find themselves in the uncomfortable position of slowing down hiring and potentially laying employees off, cutting back on perks, and focusing a lot more on getting their financials in order.

The result of all of this will be interesting for folks used to a tech industry (and a Bay Area) flush with cash and boundlessly optimistic:

  1. Job hopping should slow: “Easy money” to help companies figure out what works or to get an “acquihire” as a soft landing will be harder to get in a challenged financing and exit environment. The result is that the rapid job hopping endemic in the tech industry should slow as potential founders find it harder to raise money for their ideas and as it becomes harder for new startups to get the capital they need to pay top dollar.
  2. Strong companies are here to stay: While there is broad agreement that there are too many startups with higher valuations than reasonable, what’s also become clear is there are a number of mature tech companies that are doing exceptionally well (i.e. Facebook, Amazon, Netflix, and Google) and a number of “hotshots” which have demonstrated enough growth and strong enough unit economics and market position to survive a challenged environment (i.e. Uber, Airbnb). This will let them continue to hire and invest in ways that weaker peers will be unable to match.
  3. Tech “luxury money” will slow but not disappear: Anyone who lives in the Bay Area has a story of the ridiculousness of “tech money” (sky-high rents, gourmet toast, “its like Uber but for X”, etc). This has been fueled by cash from the startup world as well as free flowing VC money subsidizing many of these new services . However, in a world where companies need to cut costs, where exits are harder to come by, and where VCs are less willing to subsidize random on-demand services, a lot of this will diminish. That some of these services are fundamentally better than what came before (i.e. Uber) and that stronger companies will continue to pay top dollar for top talent will prevent all of this from collapsing (and lets not forget San Francisco’s irrational housing supply policies). As a result, people expecting a reversal of gentrification and the excesses of tech wealth will likely be disappointed, but its reasonable to expect a dramatic rationalization of the price and quantity of many “luxuries” that Bay Area inhabitants have become accustomed to soon.

So, what to do if you’re in / trying to get in to / wanting to invest in the tech industry?

  • Understand the business before you get in: Its a shame that market sentiment drives fundraising and exits, because good financial performance is generally a pretty good indicator of the long-term prospects of a business. In an environment where its harder to exit and raise cash, its absolutely critical to make sure there is a solid business footing so the company can keep going or raise money / exit on good terms.
  • Be concerned about companies which have a lot of startup exposure: Even if a company has solid financial performance, if much of that comes from selling to startups (especially services around accounting, recruiting, or sales), then they’re dependent on VCs opening up their own wallets to make money.
  • Have a much higher bar for large, later-stage companies: The companies that will feel the most “pain” the earliest will be those with with high valuations and high costs. Raising money at unicorn valuations can make a sexy press release but it doesn’t amount to anything if you can’t exit or raise money at an even higher valuation.
  • Rationalize exposure to “luxury”: Don’t expect that “Uber but for X” service that you love to stick around (at least not at current prices)…
  • Early stage companies can still be attractive: Companies that are several years from an exit & raising large amounts of cash will be insulated in the near-term from the pain in the later stage, especially if they are committed to staying frugal and building a disruptive business. Since they are already relatively low in valuation and since investors know they are discounting off a valuation in the future (potentially after any current market softness), the downward pressures on valuation are potentially lighter as well.
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The Facebook Hamster Wheel

With a $1 billion price tag for Instagram, a $1.1 billion valuation for Tumblr, and a rumored $3 billion bid for Snapchat, many observers are probably scratching their heads, wondering: why are companies like Facebook and Yahoo willing to shell out this kind of cash for barely-in-revenue-if-at-all consumer startups?

hamster-wheelWhile I can’t pretend that all these valuations are “rational” in a traditional sense, I can say that it becomes more understandable if you think about Facebook’s business model. Plain and simple, Facebook’s business model revolves around taking the total amount of time users spend on Facebook and making money against it, whether its through ads or charging a “tax” on virtual goods (think Farmville items) or gifts bought on the platform.

As a result, for Facebook to grow its core business, it really has two options:

  1. Increase the total amount of time users are spending on Facebook
  2. Increase how effectively you are monetizing existing time spent on Facebook

The challenge with #2 is that there really is an upper limit to how much money you can make on a minute of user eyeball-time before you start annoying the user base (either because there are too many ads or because the ads get kind of creepy). So, what most internet media companies strive for is #1 – increase the total amount of time users spend on their websites/apps.

The challenge with #1, though, is that every additional user-minute a company gets is an incremental minute of some other activity that the user needs to give up. And, since we all only have 24 hours a day (and need to sleep), that’s a limited number of minutes to go around, especially for a company like Facebook, where its users are already pretty addicted.

This means that Facebook (and other digital media companies like Yahoo and Twitter) is in a horrifying never-ending race not only to get more precious user-minutes but just to hold on to what they already have. Any time a shiny new startup takes off which seems to suck up user-time — especially if its amongst teens/adolescents who, because they don’t have tons of friends on Facebook already, don’t have any strong reason to be on Facebook — Facebook needs to find a way to grab that time back just to stay even. It’s a hamster wheel that Facebook can never get off of short of changing its underlying business model.

It’s this attention economy that drives digital media companies to pay up for startups like Instagram or Tumblr or Snapchat — they’re new threats to Facebook’s growth and business model, as well as new opportunities to get new user-minutes. That’s why these companies are so prized – for digital media companies in the attention economy, it’s the user-minutes, stupid.

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No Digital Skyscrapers

A colleague of mine shared an interesting article by Sarah Lacy from tech site Pando Daily about the power of technology building the next set of “digital skyscrapers” – Lacy’s term for enduring, 100-year brands in/made possible by technology. On the one hand, I wholeheartedly agree with one of the big takeaways Lacy wants the reader to walk away with: that more entrepreneurs need to strive to make a big impact on the world and not settle for quick-and-easy payouts. That is, after all, why venture capitalists exist: to fund transformative ideas.

But, the premise of the article that I fundamentally disagreed with – and in fact, the very reason I’m interested in technology is that the ability to make transformative ideas means that I don’t think its possible to make “100-year digital skyscrapers”.

In fact, I genuinely hope its not possible. Frankly, if I felt it were, I wouldn’t be in technology, and certainly not in venture capital. To me, technology is exciting and disruptive because you can’t create long-standing skyscrapers. Sure, IBM and Intel have been around a while — but what they as companies do, what their brands mean, and their relative positions in the industry have radically changed. I just don’t believe the products we will care about or the companies we think are shaping the future ten years from now will be the same as the ones we are talking about today, nor were they the ones we talked about ten years ago, and they won’t be the same as the ones we talk about twenty years from now. I’ve done the 10 year comparison before to illustrate the rapid pace of Moore’s Law, but just to be illustrative again: remember, 10 years ago:

  • the iPhone (and Android) did not exist
  • Facebook did not exist (Zuckerberg had just started at Harvard)
  • Amazon had yet to make a single cent of profit
  • Intel thought Itanium was its future (something its basically given up on now)
  • Yahoo had just launched a dialup internet service (seriously)
  • The Human Genome Project had yet to be completed
  • Illumina (posterchild for next-generation DNA sequencing today) had just launched its first system product

And, you know what, I bet 10 years from now, I’ll be able to make a similar list. Technology is a brutal industry and it succeeds by continuously making itself obsolete. It’s why its exciting, and it’s why I don’t think and, in fact, I hope that no long-lasting digital skyscrapers emerge.

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Google Reader Blues

grlogoIf it hasn’t been clear from posts on this blog or from my huge shared posts activity feed, I am a huge fan of Google Reader. My reliance/use of the RSS reader tool from Google is second only to my use of Gmail. Its my main primary source of information and analysis on the world and, because a group of my close friends are actively sharing and commenting on the service, it is my most important social network.

Yes, that’s right. I’d give up Facebook and Twitter before I’d give up Google Reader.

I’ve always been disappointed by Google’s lack of attention to the product, so you would think that after announcing that they would find a way to better integrate the product with Google+ that I would be jumping for joy.

However, I am not. And, I am not the only one. E. D. Kain from Forbes says it best when he writes:

[A]fter reading Sarah Perez and Austin Frakt and after thinking about just how much I use Google Reader every day, I’m beginning to revise my initial forecast. Stay calm is quickly shifting toward full-bore Panic Mode.

(bolding and underlining from me)

Now, for the record, I can definitely see the value of integrating Google+ with Google Reader well. I think the key to doing that is finding a way to replace the not-really-used-at-all Sparks feature (which seems to have been replaced by a saved searches feature) in Google+ with Google Reader to make it easier to share high quality blog posts/content. So why am I so anxious? Well, looking at the existing products, there are two big things:

  • Google+ is not designed to share posts/content – its designed to share snippets. Yes, there are quite a few folks (i.e. Steve Yegge who made the now-famous-accidentally-public rant about Google’s approach to platforms vs Amazon/Facebook/Apple’s on products) who make very long posts on Google+ using it almost as a mini-blog platform. And, yes, one can share videos and photos on the site. However, what the platform has not proven to be able to share (and is, fundamentally, one of the best uses/features for Google Reader) is a rich site with embedded video, photos, rich text, and links. This blog post that you’re reading for instance? I can’t share this on Google+. All I can share is a text excerpt and an image – that reduces the utility of the service as a reading/sharing/posting platform.
  • Google Reader is not just “another circle” for Google+, it’s a different type of online social behavior. I gave Google props earlier this year for thinking through online social behavior when building their Circles and Hangouts features, but it slipped my mind then that my use of Google Reader was yet another way to do online social interaction that Google+ did not capture. What do I mean by that? Well, when you put friends in a circle, it means you have grouped that set of friends into one category and think of them as similar enough to want to receive their updates/shared items together and to send them updates/shared items, together. Now, this feels more natural to me than the original Facebook concept (where every friend is equal) and Twitter concept (where the idea is to just broadcast everything to everybody), but it misses one dynamic: followers may have different levels of interest in different types of sharing. When I share an article on Google Reader, I want to do it publicly (hence the public share page), but only to people who are interested in what I am reading/thinking. If I wanted to share it with all of my friends, I would’ve long ago integrated Google Reader shares into Facebook and Twitter. On the flip side, whether or not I feel socially close to the people I follow on Google Reader is irrelevant: I follow them on Google Reader because I’m interested in their shares/comments. With Google+, this sort of “public, but only for folks who are interested” sharing and reading mode is not present at all – and it strikes me as worrisome because the idea behind the Google Reader change is to replace its social dynamics with Google+

Now, of course, Google could address these concerns by implementing additional features – and if that were the case, that would be great. But, putting my realist hat on and looking at the tone of the Google Reader blog post and the way that Google+ has been developed, I am skeptical. Or, to sum it up, in the words of Austin Frakt at the Incidental Economist (again bolding/underlining is by me)

I will be entering next week with some trepidation. I’m a big fan of Google and its products, in general. (Love the Droid. Love the Gmail. Etc.) However, today, I’ve never been more frightened of the company. I sure hope they don’t blow this one!

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Singapore to Combat Dengue with Social Media

(Cross posted to Bench Press)

Singapore is a fascinating country – despite the lack of what most in the West would recognize as democratic freedom, it consistently ranks well in terms of lack of corruption and high and growing standard of living for its people.

It is also one of the boldest when it comes to instituting policies and reforms: they were the first to implement a congestion tax to help manage traffic. Unlike most countries, Singapore is open to competition and investment from foreigners in strategic areas like telecommunications, power generation, and financial services. Singapore has also been extremely active in attempting to build up its capabilities as a center for life sciences excellence.

So it shouldn’t surprise me that they are among the first countries to actively utilize social media applications like Facebook and Twitter to help deal with a public health risk like Dengue Fever (from The Jakarta Globe):

The city-state’s National Environment Agency (NEA) plans to roll out … providing information on the latest dengue clusters or areas that have been earmarked as high-risk – on these new media platforms within the next three months … Through Facebook and Twitter, the public will also be able to post feedback or provide tip-offs. For example, if Singaporeans notice an increase in the number of mosquitoes in your neighbourhood or find potential breeding sites, they can alert NEA officers by posting on the agency’s Facebook page or tweeting the NEA account. “We need to put more information out in the public space, so more people can be informed and take action,” said Derek Ho, director of the environmental health department at NEA. “Leveraging on new media channels such as Facebook and Twitter is a good way to do that.”

A refreshing understanding of the uses of social media by a government agency – more interesting than that, though, is the work Singapore’s NEA is doing to build image recognition capabilities into smartphone apps like the NEA’s iPhone app to help field workers (and potentially the public) track and identify mosquitos and mosquito larvae!

The NEA is also in the process of developing a mosquito-recognition program that can identify the species of mosquito from a photograph of its pupae or larvae. With such software, and with the help of a mini microscope that attaches to the camera on a personal digital assistant or cellphone, NEA officers will be able to take photographs of larvae or pupae found in mosquito-breeding sites and instantly find out if they belong to the Aedes species, which spreads dengue … When it is ready, the agency hopes to be able to integrate it with the NEA iPhone application, so that the public or grassroots members conducting checks around the neighbourhood can use the technology as well.
Early identification will allow the NEA to act more swiftly to curb the spread of dengue in potential high-risk zones.

Very cool demonstration of the power of smartphones and of a government that is motivated to try out new technologies to tackle serious problems.

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The Goal is Not Profitability

I’ve blogged before about how the economics of the venture industry affect how venture capitalists evaluate potential investments, the main conclusion of which is that VCs are really only interested in companies that could potentially IPO or sell for at least several hundred million dollars.

One variation on that line of logic which I think startups/entrepreneurs oftentimes fail to grasp is that profitability is not the number one goal.

Now, don’t get me wrong. The reason for any business to exist is to ultimately make profit. And, all things being equal, investors certainly prefer more profitable companies to less/unprofitable ones. But, the truth of the matter is that things are rarely all equal and, at the end of the day, your venture capital investors aren’t necessarily looking for profit, they are looking for a large outcome.

businessgrowthBefore I get accused of being supportive of bubble companies (I’m not), let me explain what this seemingly crazy concept means in practice. First of all, short-term profitability can conflict with rapid growth. This will sound counter-intuitive, but its the very premise for venture capital investment. Think about it: Facebook could’ve tried much harder to make a profit in its early years by cutting salaries and not investing in R&D, but that would’ve killed Facebook’s ability to grow quickly. Instead, they raised venture capital and ignored short-term profitability to build out the product and aggressively market. This might seem simplistic, but I oftentimes receive pitches/plans from entrepreneurs who boast that they can achieve profitability quickly or that they don’t need to raise another round of investment because they will be making a profit soon, never giving any thought to what might happen with their growth rate if they ignored profitability for another quarter or year.

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Secondly, the promise of growth and future profitability can drive large outcomes. Pandora, Groupon, Enphase, Tesla, A123, and Solazyme are among some of the hottest venture-backed IPOs in recent memory and do you know what they all also happen to share? They are very unprofitable and, to the best of my knowledge, have not yet had a single profitable year. However, the investment community has strong faith in the ability of these businesses to continue to grow rapidly and, eventually, deliver profitability. Whether or not that faith is well-placed is another question (and I have my doubts on some of the companies on that list), but as these examples illustrate, you don’t necessarily need to be profitable to be able to get a large venture-sized outcome.

Of course, it’d be a mistake to take this logic and assume that you never need to achieve or think about profitability. After all, a company that is bleeding cash unnecessarily is not a good company by any definition, regardless of whether or not the person evaluating it is in venture capital. Furthermore, while the public market may forgive Pandora and Groupon’s money-losing, there’s also no guarantee that they will be so forgiving of another company’s or even of Pandora/Groupons a few months from now.

But what I am saying is that entrepreneurs need to be more thoughtful when approaching a venture investor with a plan to achieve profitability/stop raising money more quickly, because the goal of that investor is not necessarily short-term profits.

(Image credit) (Image credit)

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Japan

I was originally going to post as if the world were “business as usual”, but it seemed too flippant and disrespectful to do so given what’s happened in Japan over the past week.

This particular crisis hits very close to home not only because my employer has a significant presence in Japan, but because of all the people I had the opportunity to meet on my last trip there.

https://i0.wp.com/images.businessweek.com/mz/11/13/600/1113_mz_11openingremarks1.jpg?resize=550%2C275

Thankfully, nobody that I am acquainted with in Japan has been seriously injured and, while the nuclear situation is still troubling, that realization has given me enough calm to try to look at what happened through a more dispassionate lens.

A few thoughts/takeaways:

  • It is amazing to me that the situation did not play out significantly worse. That the number of lives lost was not greater in the immediate aftermath and that Katrina-like mob chaos did not emerge is a testament to Japanese engineering and the training of Japanese transit workers, health officials, police, etc. If this doesn’t convince you of the value of investing in disaster preparation/training/prevention, I don’t know what will.
  • As smart and resourceful as we humans are, we are still “small fry” relative to massive geological phenomenon. We are reminded of this all the time (especially during hurricane season), but seeing one of the most populous, wealthy, and technologically advanced countries be knocked off its feet in the matter of hours is a striking reminder.
  • Make sure your backup/redundant systems are truly independent and de-coupled. One of the causes of the current nuclear crisis was the incorrect assumption that diesel generation could be a fairly independent redundant system versus relying on the main power grid to power the coolant system. While in most circumstances, diesel generators are a good backup to the electric grid, the mistake was not recognizing that a massive geological event could knock out both the electric grid and create a big enough tsunami to take out the diesel generators. Its important for all of us to think through what risks can actually be heavily correlated when we plan risk mitigation.
  • The internet and new social media technologies are revolutionary. Although phone lines were quickly overwhelmed following the initial earthquake, networks such as Twitter, Facebook, and email kept going. Facebook actually became my primary means of reaching out to people I knew there. I can definitely see this as a major turning point for the promise of new technologies for communication.
  • The public needs greater scientific literacy. I am no nuclear expert, but the great amount of confusion I hear/read about from both average American and Japanese people about what is going on and I think its sad suggests we still have a ways to go in scientific literacy.

I just want to end this post with two thoughts. The first is that despite the tragedy, I hope countries and companies out there will study what happened in Japan and plan appropriately. The second is a sincere hope that the authorities and the IAEA find a way to restore some semblance of normalcy to the nuclear situation as soon as possible.

(Image credit)

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The Social Network

imageOn my flight back from Tokyo, I finally watched The Social Network, Hollywood’s depiction of the founding of Facebook.

While at least one of my good friends is going to be appalled by my opinion here, I actually liked the movie. Does it paint an unrealistically evil/status-obsessed/backstabbing-prone portrayal of Harvard students and hence is kind of an insult to me? Yes. Was it a truthful account that can be used as a historical document one day? Probably not. Was it a action thriller which kept me at the edge of my seat? No. Do I enjoy the weird undertone that implies successful entrepreneurs are all geeks, antisocial, socially awkward, vengeful, jealous, addicted to drugs, paranoid, or some combination of the above? No.

So why did I enjoy it? Two reasons.

The first is purely nostalgia. It takes me back to my Freshman year, when the site had just started. I attended the Bill Gates presentation that was referenced there. I had friends in Kirkland house (where Zuckerberg built FaceMash and Facebook). I’ve looked over the Harvard student code of conduct that the Winklevoss twins tried to use with the Harvard President (who’s office I’ve walked by). Heck, after college, two of my friends went to work for Peter Thiel, the venture capitalist who put money into Facebook in the movie. So the story, in its own weird way, is an odd re-telling of a world I inhabited – and so I can’t help but be drawn to it if only for that.

The second reason is that the portrayal of Zuckerberg just felt very natural. I don’t mean that I felt it was accurate – but Jesse Eisenberg delivered a performance of Zuckerberg which seemed human and believable. Eisenberg’s Zuckerberg was arrogant, vulnerable, brilliant, hard-working, misunderstood, misled, and eager – all at once – and that’s something which is hard to write and hard to portray. I personally could’ve done without the excessive stereotyping of geeks and Harvard, but if I view this as a purely fictional piece about the flawed people who put together something bigger than themselves, I think I can call myself a fan.

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Community

As someone who tried to build a fashion social network and is now an investor who sees his fair share of social networking startup ideas, I can attest to the difficulties in building a genuine community.

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So, when people question why Friendfeed users like myself are so dedicated to the site and why we don’t switch over to the new Facebook Groups feature (which has integrated many of Friendfeed’s features), I find myself scratching my forehead as to why so many web experts seem to miss out on the obvious.

The point so many web sites seem to misunderstand is that community is not a feature. If I got paid everytime someone said “we’ve added a ‘Post to Facebook’/‘bulletin board’/‘chat’/[insert other cliché “community” feature] feature” as evidence that they had a strong community, I would be a very wealthy man. To be fair, not having certain social features makes it harder to have a community, but having those features doesn’t necessarily mean you will have a community. You don’t add community to a website the way you might add Google Analytics or a new banner ad.

Community is something which has to be built and nurtured. At its core, its about users experiencing a genuine connection with other people and wanting to engage more: both on and off the site.

Similarly, community is not just having a lot number of users. Sure, Twitter/Facebook/LinkedIn have a ton of users. But, that alone doesn’t make them a community. Walmart has a lot of employees too – I doubt an outsider would consider that a tight-knit community.

What matters is not so much the number of users, but the number and quality of connections that they make. That’s one reason I actually consider the core group of Twitter users that I engage with a closer community than my LinkedIn or Facebook circle  (which is composed mostly of people that I actually know and have interacted with “in the real world”!) – I “talk with” (or Tweet) that group on Twitter more than I engage with people on Facebook, get a lot more value out of those internet relationships (I learn about interesting things, keep up with the daily actions of people I know, and get comments on things I share/say) than I do through those other sites. It doesn’t mean I don’t find LinkedIn or Facebook valuable (I do, for other reasons), but its that community which keeps me coming back and more engaged with Twitter, and Friendfeed for that matter, than with LinkedIn or Facebook.

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So, back to the original question – why do I stick with Friendfeed?

  • Bookmarklet: The FriendFeed bookmarklet is extremely powerful: its not only my primary means of sharing things on Twitter, it also lets me pull in additional content beyond Twitter’s 140 character limit. This convenience and pattern of use is difficult to break.
  • Feature set: There are practically zero features on Friendfeed which haven’t been replicated by someone else (esp. Facebook). However, I have yet to see the killer social feature which has convinced me to replace Friendfeed with something else – simply put, its good enough for what I need and, until it stops being good enough or I find something else far better, I’ll be sticking around.
  • Quality of Community: The people I engage with (and people-watch) on Friendfeed and the sorts of conversations that are had are deeper and more satisfying than almost any online forum I’ve been on (with the noteworthy exception of the group of friends I interact with on Google Reader). That exclusivity and depth of engagement is something I have yet to see Facebook or any other social media site replicate and, until they do and until the community that I like engaging with on Friendfeed chooses to move elsewhere, I don’t plan on stopping.

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fbPhone

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This past weekend, a TechCrunch article caught the tech blogosophere off guard with an interesting claim:

Facebook is building a mobile phone, says a source who has knowledge of the project. Or rather, they’re building the software for the phone and working with a third party to actually build the hardware. Which is exactly what Apple and everyone else does, too.

The question is, does a Facebook phone platform (or, fbPhone to borrow the i/g prefix style corresponding to Apple and Google) make sense for Facebook to pursue?

On the one hand, Facebook is rapidly becoming an “operating system” of sorts for the web. According to Facebook’s statistics page, Facebook has over 550K active applications developed on it and over 1 million additional third party websites which have integrated in some fashion with this monumental platform. But, beyond sheer numbers, Facebook’s platform passes what I consider to be the true “is it a real platform” test that Windows, Linux, and Mac OS have passed: it has the ability to sustain a large $100M+ software company like Zynga (which has been estimated to generate over $800 million in annual revenues), capable of now spending enormous amounts on R&D and sales & marketing (and even of experimenting with its own rival gaming platform). This is something which, to my knowledge, the iPhone and Android ecosystems have yet to achieve.

Given its status as an “operating system” for web developers, there is certainly some value Facebook could gain from expanding into the mobile operating system sphere. It would make the Facebook experience more sticky for users who, once they step away from their computers, can only interact with the most basic Facebook features (pictures, notifications, news feeds) by making it easier for developers to truly view Facebook (mobile and desktop) as one application platform.

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On a strategic level, Facebook probably also sees potential dangers from Google and Apple’s control of the underlying smartphone software platforms. This control could transform Apple’s very shoddily constructed music “social networking service” Ping and Google’s thus-far unsuccessful attempts, as per its usual business strategy, to weaken Facebook’s dominant position in the social web into a serious threat to Facebook’s long-term position.

So, there are obvious benefits to Facebook in pursuing the platform route. However, I think there is an even more obvious downside: its HARD to build a mobile phone operating system. The TechCrunch article points out that Facebook has hired a number of the top mobile/tablet OS developers in the industry – while this means that its not impossible for Facebook to build a phone platform, its a long shot from building a full-fledged operating system. Assuming Facebook wants to build a phone, its unlikely to take the Apple route and build one monolithic phone. Like Google, Facebook’s business model is built around more user engagement, so a Facebook phone strategy would more likely be centered around getting as many users and phones possible to plug into Facebook.

The path towards such a phone platform (rather than single phone) requires many complicated relationships with carriers, with middleware providers, with hardware manufacturers, and with regulatory bodies (who are not too keen on Facebook’s privacy policies right now), not to mention deep expertise around hardware/software integration. Compare the dates for when Google and its wide swath of partners first announced the Open Handset Alliance (November 2007) to when the first Android phone was available (October 2008). A full year of committed development from industry giants HTC (hardware), Qualcomm (silicon), T-Mobile (carrier), and Google – and that’s assuming the alliance got started on the day that the project was announced and that partners like Verizon/Motorola/Samsung/ARM/etc did absolutely nothing.

From my perspective, Facebook has three much more likely (albeit still difficult) paths forward given the benefits I mentioned above for having its own mobile phone platform:

  • Build another “Open Handset Alliance” with the ecosystem: This is the only route that I see for Facebook to take if it wants its own, strong foothold in the mobile platform space. The challenge here is that the industry is not only tired of new platforms, but is also not likely to want to cede as much control to Facebook as they did to Google and Apple (and potentially Microsoft when it rolls out its Windows Phone 7 OS). This makes the path forward for Facebook complicated at best and, even when successful, requires it to compete against very well-established operating systems from Google & its partners and Apple.
  • Pull a HTC/Motorola and build a layer on top of or modify an open OS like Android or MeeGo: This, to me, makes the most sense. It eliminates the need for Facebook to invest heavily in hardware/network/silicon capabilities for deep phone platform development, and it also allows Facebook to leverage the application and ecosystem support that Android and MeeGo command (provided they don’t make too many modifications). Instead, Facebook can focus on building the tools and features that are most relevant to its own business goals. The downside to this, though, is that Facebook loses a fair amount of control over the final user experience and still has to play nice with the phone manufacturers, but these are things it would have to do no matter what strategy it picked
  • Just build a more complex mobile app which can support Facebook apps: This is the path of least resistance but leaves Facebook at the greatest mercy of Apple and Google, as well as forces Facebook to keep up with phone proliferation (iPhone 3G vs iPhone 3GS vs iPhone 4 vs DROID vs DROID 2 vs DROID X vs…)

Bottom-line: I don’t know if Facebook is even thinking about a bold mobile platform strategy, but if it is, I doubt it comes in the form of a full-fledged fbPhone. To me, it makes a lot more sense to stay the course and build more a sophisticated app in the short-term and, if needed, figure out ways to integrate rich user interface/development tool layers on an open operating system like Android or MeeGo.

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Science of Social Networks

Another month has gone by which means another paper to cover!

image This month, instead of covering my usual stomping grounds of biology or chemistry, I decided to look into something a little bit more related to my work in venture capital: social networks!

The power behind the social network concept goes beyond just the number of users. Facebook’s 500 million users is pretty damn compelling, but what brings it home is that by focusing on relationships between people rather than the people themselves, social networks turn into a very interesting channel for information consumption and influence.

This month’s paper (from Damon Centola at MIT Sloan) covered influence – specifically, how different social network structures (or “topologies” if you want to be snooty and academic about it) might have different influences on the people in the networks. More specifically, it asked the question of what social network would you expect to be better able to influence behavior: one which is more “viral”, in the sense that connections aren’t clustered (i.e., I’m as likely to be friends with my friend’s friends as people my friends don’t know), or one which is more “clustered” (i.e., my friends are likely to be friends with one another).

It’s an interesting question, and I found this paper notable for two reasons. First, its the most rigorous social networking experiment I’ve ever seen. Granted, this isn’t saying very much. Most social network/graph studies are observational, but I was impressed by the methodology and the attempt to strip out as much bias and extraneous factors as possible:

  • The behavior being tested was whether or not they would sign up and re-visit a particular health forum. This forum had to be valuable enough to get people to use it (and actually contribute to it), but also unknown and inaccessible to the rest of the world (as to avoid additional social cues from the user’s “real world” social network).
  • The author (and I do mean one single author: pretty rare these days for a Science paper as far as I know) created different social graphs which were superficially identical (same number of users, same number of contacts per user) but had the different network structures he wanted to test(one structure had subgroups of tightly inter-connected users, the other structure had random connections scattered across the network). The figure below shows one example of the network structures: the black lines show connections between people. On the left-hand-side is the highly clustered social graph – the individual users are only connected to people “next to them”. The right-hand-side is the more “viral” social graph, where users can be connected to any user across the social network.
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  • The users made profiles (with user name, avatar, and stated health interests), but to preserve anonymity (and limit the impact of a person’s “real world” social network on a user), the user names were blinded and users were not allowed to directly communicate (except in an anonymized fashion through the health forum) or add/remove contacts
  • However, whenever a user’s contacts participated in the health forum, the user would be notified.

The result was a somewhat bizarre and artificial “network” – but its certainly a very creative (and probably as good as it can get) means of turning social networking studies into a rigorous study with real controlled experiments.

Second, the conclusion is interesting and has many implications for people who want to use social networks to influence people. Virality may be a remarkably fast way to get people to hear about something, but the paper concludes that virality does not necessarily translate into people acting. The author conducted 6 different trials with slightly different network topologies (number of users ranged from 98 to 144, number of contacts per user ranged from 6 to 8). The results are in the graph below which shows the fraction of the users who joined the forum over time. As you can see, the clustered networks (solid circles) had much higher and faster adoption than the “viral” networks (open triangles):

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Why would this be? The author’s standing theory is that while “viral” networks might be faster at disseminating information (e.g., a funny video), clustered networks work better at driving behavior because you get more reinforcement from your friends. In a clustered network, if you have one friend join the forum, chances are the two of you will have a mutual friend who will also join. At a very basic level, this means you get the same cue to join the forum from two of your friends. In a un-clustered network, however, if you have one friend join the forum, the two of you are less likely to have a mutual friend, and so you are less likely to receive that second cue.

Does this matter? According to the study, someone who had two contacts join the forum was ~75% more likely to join than someone who only had one contact join. And, someone who had four contacts join was ~150% more likely to join than someone who only had one contact. While this effect rapidly diminshes with more contacts (having five or six contacts join made relatively little difference compared with four), its a powerful illustration of quality vs. speed in a social network – something which is also borne out by the fact that while only 15% of people who only had one contact join returned to the forum, 35-45% of users who had multiple contacts join did.

This was definitely a very impressive and well-designed study. While it would be fair to attack the study for its artificiality, I don’t really think there’s any other way to systematically strip out the  biases that are intrinsic to most observational (not a controlled experiment) studies of social networks.

Where I do think this was lacking (and maybe the researcher has already teed this up) is the black-and-white nature of the study. What I mean by this is while I find the argument that network clustering helps drive greater behavior plausible, I think there needs to be a more rigorous/mathematical conception – how “clustered” does a network need to be? If a network is overly clustered, then it loses the virality which helps to spread ideas more quickly and widely – is there an optimal balance somewhere in the middle? Also, the paper only dug, on a very superficial level, into how network size and the number of contacts per user might impact this. I think further experimental and mathematical modeling/computational studies would be nice to really flesh this out.

Paper: Centola, Damon. “The Spread of Behavior in an Online Social Network Experiment.” Science 329 (Sep 2010) – doi:10.1126/science.1185231

(Image credit – social network diagram) (Figures 1 and 2 from paper)

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How big does it take?

Everybody knows Twitter and Facebook are big deals. Like Google before them, they have themselves inspired a new wave of startups aiming to be the next big thing.

But how big do you need to get to truly be a home run? This is something I think very few people have a good grasp of (and one reason so many people think social networks are the “easy way” to money). Granted, if you have the right business model, you might not need to hit quite the same heights as a Twitter or a Facebook, but even the right business model doesn’t change the fact that you’ve got to be big to have the type of influence and IPO/M&A potential that the true giants have.

So how big? We’re talking at least three million users (FourSquare) if you’ve got a PR engine and potentially ultra-disruptive model but more likely you need more than fifty million users! (Thanks to this infographic I pulled from GigaOm which itself came from digital agency Jess3)

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Platform perils

image One of the most impressive developments in the web and the mobile phone space has been the emergence of new platforms for software developers to target. The developer’s repertoire is no longer just Windows, Mac OS, and Linux, but Android, iPhone OS, Windows Phone 7, Facebook, Twitter, and many more.

While these new platforms are big opportunities for developers, I always find it quite amusing to see the reaction of developers as they see the platform owners aggressively expand beyond their original domains, for example:

imageI’m always shocked at how up-in-arms developers can get about these moves. Why? Because this is nothing new in the software industry. Remember when Microsoft bundled Internet Explorer with their operating system and killed off Netscape? Or when Apple bundled iTunes into Mac OS and killed third-party MP3 player developers? Or IBM, widely considered a pioneer in open source, who bundles a full and very closed software stack with its UNIX servers and mainframes?

So, how does any developer succeed (seeing how most developers don’t control the platforms they develop for)? They key is to understand the economics from the platform owner’s vantage point:

  • Platform value and proliferation – When all is said and done, the business of the platform owner is to sell and proliferate its platform. So, foremost in the owner’s mind in rolling out a new feature which was once left to third party developers is whether or not that feature adds significant value to the platform. For Twitter, implementing a list feature (where formerly it was managed with custom apps like Tweetdeck) made a lot of sense as it not only helped users with organizing their Twitter usage but also helped to increase the social value of the service by helping users find other users to follow. Likewise, to me, the big surprise was not that Twitter acquired Ate Bits, but that it took them this long to buy/release official Twitter clients for iPhone, Android, and Blackberry.
  • New monetization – The full value of a platform extends far beyond the price tag on the platform and the applications being sold. It also includes advertising, virtual goods sales, content, and online transactions which take place. Is it any wonder, then, that Apple has expanded into mobile advertising with its iAd platform or content with its iTunes store? As before, the big surprise to me is that it took them this long to roll out iAd.
  • Impact of integration – There are many features where integration into the platform drives significant additional value. Whereas a cute game or widget doesn’t benefit much from being integrated into an operating system/web service, there is significant additional value to an operating system like Windows or Mac OS or Android to have an internet browser integrated, and there is a great deal of value in tying features related to security or virtual currency into a web platform like Facebook.
  • Impact on developer community – Despite what developers may believe, platform owners do care a great deal about the effect of their actions on their developer community. It doesn’t benefit a platform to have the owner unnecessarily alienate their developer base or to make the developer’s lives significantly harder. After all, a rich developer community makes platforms significantly more valuable – even giants like Microsoft, Apple, and Google can’t possibly create all the games, music, videos, and features which users may want, nor can they necessarily create better apps/content than specialized third party developers. This means that, by default, platform vendors are generally loath to aggressively push their own applications –- and it in fact requires a significant value-creator from one or more of the reasons above  to get an intelligent platform owner to “step on the toes” of their developer community.

Put them together, and you drive a number of conclusions about where platform owners will make aggressive inroads into the domains of their developers:

  • The “cost of admission” – If there is a feature or application which is used by enough users that it needs to be integrated/bundled in order to get users “up and running” quickly, you can be pretty sure that the platform owner will build, acquire, or partner with a vendor of applications there. Examples: web browsers and multimedia players in operating systems, social features in social networks, mobile phone apps to access a popular web application/social network, common device drivers in operating systems
  • “Platform in a platform” – In war, the side which maintains control of the most important roads and resources will win. Similarly, in business, not only does disproportionate profit tends to flow to the businesses which control the key “gateways” to developers and the change of funds, control of those gateways also enables the business to better shape the consumer’s experience. In the past, this has primarily resulted in platform owners seeking greater control over the development of applications, but Apple has proven that advertising, transaction fees on application sales, and digital content delivery are also key gateways to have influence over. Examples: virtual goods/currency on social network, advertising, development tools, digital content, application store, runtime layers
  • image “Plumbing” – To a platform owner, the platform’s inner workings are sacred. After all, a platform’s performance and ability to work with content/applications is heavily tied to its “plumbing”. In the same way that you aren’t likely to trust a random stranger to do open heart surgery on you, platform owners are unlikely to trust third party hacks/modifications on their platform’s inner workings and are unhappy when third party developers clog their “pipes” with too many requests/garbage. It should be no surprise that platform owners often restrict access to and limit/prevent modifications to a platform’s inner workings. Similarly, because of the value of integrating enhancements to lower level processes into the platform itself, it is also likely that platform owners will make their own modifications when needed and heavily restrict access (if its granted at all) to those lower level processes. Examples: APIs which tap into hardware-level capabilities on operating systems, quantity limits on social network/web service API usage, device driver creation in operating systems

So, what to do if you’re a developer who doesn’t own your own platform? The following is a quick (and by no means comprehensive) list

  1. Develop a plan for dealing with a platform owner’s ire: If you go into a business venture expecting everything everything your way, you are likely delusional. This is especially true if you’ve hit a modicum of success as there is nothing which paints a bullseye on your back better than success. The recent Zynga/Facebook spat (although its recently reached a semi-amiable detente) is an example of this. Better to assume, at a relatively early point, that you will sooner or later earn the platform owner’s wrath and come up with ways to prevent/deal with it than to be caught with your pants down when it happens.
  2. Build the best app: There’s almost never a situation where building the best product isn’t a good strategy, but in this case its a very good one. Building the best product gives you a reputation among users who may put pressure on the platform owner in your favor. It also gives you a shield, especially if your app goes above and beyond “the cost of admission”, by making it harder for a platform owner to take market share from you (i.e. the strength of Oracle’s products have allowed it to maintain its lead position in databases despite attempts from IBM and Microsoft). It also gives you more options as it gives the platform owner a reason to acquire/partner with you rather than with a competitor.
  3. Make your app flexible: Flexibility creates more options for a developer. It allows the developer to potentially work with additional platforms, thus creating a larger user base and an “exit strategy” if one platform becomes too hostile. It also allows a developer to more rapidly release new features or cope with platform changes. In the case where a platform owner is also considering acquisitions/partnerships as a route, the more flexible developer has a strong leg up in that he/she can more quickly integrate with the platform, as well as provide a more competitive opponent to take on.
  4. image Ally yourself with other developers: I pointed out earlier that the reason a platform owner exists is to sell and improve the value of the platform. Because of this and because the value of a platform is dependent on having a vibrant developer community, platform developers are loath to make aggressive moves which may alienate that community. To that end, aligning oneself with other developers can help amplify one developer’s protest when a platform owner makes an aggressive move encroaching on your turf.
  5. Create stickiness: There are many ways for developer “Davids” to tilt the battlefield in their favor against platform owner “Goliaths”. Building in social functionality (i.e. social games) so as to force users to give up connections with their friends if they switch to another vendor is becoming increasingly common as a tactic to develop stickiness. Linking your applications to other commonly used applications or services is another way (i.e. pulling in data from Google and Twitter). It may be an uphill battle, but its not a hopeless one.

It was great that there was a time when one could be a success just by building cute Twitter mobile applications that don’t do anything more than access Twitter’s basic API, but such a strategy was never going to be sustainable.  And the same thing is (or will be) true for a lot of the other new platforms.

(Image credit – Apps) (Image credit – Fish) (Image credit – Pipes) (Image credit – Fish)

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Private concerns

imageOne reason I love science fiction is that it challenges our morals and beliefs in a way that other art forms rarely do. It asks us difficult questions, like, what if we had the ability to visit other planets and encounter different cultures? What if we could genetically “design” our children? What if we could go back in time and change history?

Unsettling questions aren’t they? But, why are they unsettling? My personal belief is that they are unsettling because our intuitions, our values, our beliefs, our laws, and our institutions were not designed to handle those questions. If you assume that Western culture is heavily derived from Ancient Greek and Roman humanism, is it any wonder that society has trouble understanding what to do with our nuclear arsenals or with humankind’s new ability to genetically alter the people and animals around us? After all, the foundations of today’s laws and values predated when people could even conceive that humans would ever have to think about such things.

So, when people ask me what I think about all the press that privacy concerns about Google or privacy concerns about Facebook or any of the other myriad social networks have garnered, I view it as manifestation of the fact that we now have technology which makes it super-easy to share information about ourselves and our location but we have yet to develop the intuititions, values, and laws/institutions to handle it.

Lets use myself as an example: I personally find auto-GPS-tagging my Tweets to be oversharing. However, I frequently Tweet the location I’m at and even the friends I’m with. Is this odd combination of preferences an example of irrationality? Probably (I was never the brightest kid). But I’d argue its more about my lack of intuition on the technology and the lack of clear cultural norms/values.

image And I’m not the only one who is beginning to come to terms with the un-intuitiveness of our digital lives. My good friend, and prominent blogger, Serena Wu recently went through a social network consolidation/privacy overhaul as a result of understanding just what it was she was sharing and how it could be used. All across the internet, I believe users are beginning to understand the consequences to privacy of their social network and search engine behavior.

Now, the easy reflex thing to do would be to simply cut off such privacy issues and cut out these social networks like one would a tumor. But, I think that would be a dramatic over-reaction akin to how the Luddites reacted to factory automation. It ignores the potential value of the technology: in the case of sharing information on social networks, this can come in the form of helping people advertise themselves to employers, assisting friends with keeping in contact with one another, and/or even delivering more valuable services over the internet. Now, that shouldn’t be construed as a blanket defense of everything Facebook or Twitter or Google does, but an understanding that there is a tradeoff to be made between privacy and service value is necessary to help the services, their users, society, and the government realize the appropriate changes in intuition, values, and rules to properly cope.

I’m not smart enough to predict what that tradeoff will look like or how our intuitions and values may change in the future, but I do think we can count on a few things happening:

  • Privacy will remain a big issue. Facebook and Twitter’s early years were marked by a very laissez-faire approach by both the users and the services on privacy. I believe that such an approach is unlikely to persist given the potential dangers and users’ growing appreciation for them. There is no doubt in my mind that, whether it be through laws, user demand, advocacy groups, or some combination of the above, data privacy and security will be a “must-have” feature of great significance for future web services built around sharing/accessing information.
  • Privacy policies and settings will become more standardized. I believe that the industry, in an attempt to become more transparent to their users and to avoid some of the un-intuitiveness that I described above, will build simpler and more standardized privacy controls. This isn’t to say that there won’t be room for extra innovation around privacy settings, but I think a “lexicon” of terms and settings will emerge which most services will have to support to gain user trust.
  • Data access APIs will become more restricted and/or use better authentication. The proliferation of web APIs has created a huge boom in new web services and mashups. However, many of these APIs use antiquated methods of authentication which don’t necessarily protect privacy. Consequently, I believe that the APIs that many new web services have grown to use will face new pressures to authenticate properly and frequently as to avoid data privacy compromise.

In the meantime, the few tips I listed below will probably be relevant to users regardless of how our rules, values, and intuitions change:

  • Understand the privacy policy of the services you use.
  • Figure out what you are willing to share and with whom as well as what you are not willing to share. Only use services which allow you to set access restrictions to those limits.
  • Check with your web service regularly on what information is being stored and what information is being accessed by a third party. (i.e., the Google Dashboard or Twitter’s Connections)
  • Advocate for better forms of authentication and privacy controls

No matter what happens in the web service privacy area, we are definitely in for an interesting ride!

(Image credit – ethics) (Image credit – Big Facebook Brother)

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Keep your enemies closer

One of the most interesting things about technology strategy is that the lines of competition between different businesses is always blurry. Don’t believe me? Ask yourself this, would anyone 10 years ago have predicted that:

I’m betting not too many people saw these coming. Well, a short while ago, the New York Times Tech Blog decided to chart some of this out, highlighting how the boundaries between some of the big tech giants out there (Google, Microsoft, Apple, and Yahoo) are blurring:

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Its an oversimplification of the complexity and the economics of each of these business moves, but its still a very useful depiction of how tech companies wage war: they keep their enemies so close that they eventually imitate their business models.

(Chart credit)

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Why smartphones are a big deal (Part 2)

[This is a continuation of my post on Why Smartphones are a Big Deal (Part 1)]

Last time, I laid out four reasons why smartphones are a lot more than just phones for rich snobs:

  1. It’s the software, stupid
  2. Look ma, no <insert other device here>
  3. Putting the carriers in their place
  4. Contextuality

My last post focused on #1 and #2, mainly that (#1) software opens up a whole new world of money and possibility for smartphones that “regular” phones can’t replicate and (#2) that the combination of smartphones being able to do the things that many other devices can and phones being something that you carry around with you all day spells bad news for GPS makers, MP3 player companies, digital camera companies, and a lot of other device categories.

This time, I’ll focus on #3 and #4.

III. Putting the carriers in their place

Throughout most of the history of the phone industry, the carriers were the dominant power. Sure, enormous phone companies like Nokia, Samsung, and Motorola had some clout, but at the end of the day, especially in the US, everybody felt the crushing influence of the major wireless carriers.

In the US, the carriers regulated access to phones with subsidies. They controlled which functions were allowed. They controlled how many texts and phone calls you were able to make. When they did let you access the internet, they exerted strong influence on which websites you had access to and which ringtones/wallpapers/music you could download. In short, they managed the business to minimize costs and risks, and they did it because their government-granted monopolies (over the right to use wireless spectrum) and already-built networks made it impossible  for a new guy to enter the market.

imageBut this sorry state of affairs has already started to change with the advent of the smartphone. RIM’s Blackberry had started to affect the balance of power, but Apple’s iPhone really shook things up – precisely because users started demanding more than just a wireless service plan – they wanted a particular operating system with a particular internet experience and a particular set of applications – and, oh, it’s on AT&T? That’s not important, tell me more about the Apple part of it!

What’s more, the iPhone’s commercial success accelerated the change in consumer appetites. Smartphone users were now picking a wireless service provider not because of coverage or the cost of service or the special carrier-branded applications  – that was all now secondary to the availability of the phone they wanted and what sort of applications and internet experience they could get over that phone. And much to the carriers’ dismay, the wireless carrier was becoming less like the gatekeeper who got to charge crazy prices because he/she controlled the keys to the walled garden and more like the dumb pipe that people connected to the web on their iPhone with.

Now, it would be an exaggeration to say that the carriers will necessarily turn into the “dumb pipes” that today’s internet service providers are (remember when everyone in the US used AOL?) as these large carriers are still largely immune to competitors. But, there are signs that the carriers are adapting to their new role. The once ultra-closed Verizon now allows Palm WebOS and Google Android devices to roam free on its network as a consequence of AT&T and T-Mobile offering devices from Apple and Google’s partners, respectively, and has even agreed to allow VOIP applications like Skype access to its network, something which jeopardizes their former core voice revenue stream.

As for the carriers, as they begin to see their influence slip over basic phone experience considerations, they will likely shift their focus to finding ways to better monetize all the traffic that is pouring through their networks. Whether this means finding a way to get a cut of the ad/virtual good/eCommerce revenue that’s flowing through or shifting how they charge for network access away from unlimited/“all you can eat” plans is unclear, but it will be interesting to see how this ecosystem evolves.

IV. Contextuality

There is no better price than the amazingly low price of free. And, in my humble opinion, it is that amazingly low price of free which has enabled web services to have such a high rate of adoption. Ask yourself, would services like Facebook and Google have grown nearly as fast without being free to use?

How does one provide compelling value to users for free? Before the age of the internet, the answer to that age-old question was simple: you either got a nice government subsidy, or you just didn’t. Thankfully, the advent of the internet allowed for an entirely new business model: providing services for free and still making a decent profit by using ads. While over-hyping of this business model led to the dot com crash in 2001 as countless websites found it pretty difficult to monetize their sites purely with ads, services like Google survived because they found that they could actually increase the value of the advertising on their pages not only because they had a ton of traffic, but because they could use the content on the page to find ads which visitors had a significantly higher probability of caring about.

imageThe idea that context could be used to increase ad conversion rates (the percent of people who see an ad and actually end up buying) has spawned a whole new world of web startups and technologies which aim to find new ways to mine context to provide better ad targeting. Facebook is one such example of the use of social context (who your friends are, what your interests are, what your friends’ interests are) to serve more targeted ads.

So, where do smartphones fit in? There are two ways in which smartphones completely change the context-to-advertising dynamic:

  • Location-based services: Your phone is a device which not only has a processor which can run software, but is also likely to have GPS built-in, and is something which you carry on your person at all hours of the day. What this means is that the phone not only know what apps/websites you’re using, it also knows where you are and if you’re on a vehicle (based on how fast you are moving) when you’re using them. If that doesn’t let a merchant figure out a way to send you a very relevant ad, I don’t know what will. The Yowza iPhone application is an example of how this might shape out in the future, where you can search for mobile coupons for local stores all on your phone.
  • image Augmented reality: In the same way that the GPS lets mobile applications do location-based services, the camera, compass, and GPS in a mobile phone lets mobile applications do something called augmented reality. The concept behind augmented reality (AR) is that, in the real world, you and I are only limited by what our five senses can perceive. If I see an ad for a book, I can only perceive what is on the advertisement. I don’t necessarily know much about how much it costs on Amazon.com or what my friends on Facebook have said about it. Of course, with a mobile phone, I could look up those things on the internet, but AR takes this a step further. Instead of merely looking something up on the internet, AR will actually overlay content and information on top of what you are seeing on your phone screen. One example of this is the ShopSavvy application for Android which allows you to scan product barcodes to find product review information and even information on pricing from online and other local stores! Google has taken this a step further with Google Goggles which can recognize pictures of landmarks, books, and even bottles of wine! For an advertiser or a store, the ability to embed additional content through AR technology is the ultimate in providing context but only to those people who want it. Forget finding the right balance between putting too much or too little information on an ad, use AR so that only the people who are interested will get the extra information.

The result of all four of these factors? If you assume that a phone is only a calling device, you’re flat out wrong. And if you think a phone is just another device for accessing the internet and playing goofy little games, you’re also wrong. The smartphone will, in this blogger’s humble opinion, dramatically change the technology landscape, and the smart money is on the companies and startups and venture capitalists who recognize that and act on it.

(Image credit) (Image credit) (Image credit)

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If you have any love for Northern California

You will become a member of this Facebook petition to “Establish ‘Hella-‘ as the SI Prefix for 10^27“.

Why?

  1. “Hella” is something that is quintessential Northern California (or as we call it, Norcal), and how could you not love a place which brings you Silicon Valley and San Francisco?
  2. How awesome would it be to someday say that you have a “one hella-byte hard drive” or to say that the universe is “two hella-light years”?
  3. I want to someday make a search engine just simply called “Hella” — sure its not quite the 10^100 that a “googol” is, but that’s because my search engine only gets you 27% (on a logarithmic scale) of the way there

As a consultant, I’d normally turn these brilliant thoughts into a slide, but you’ll just have to trust that this is awesome

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Pride and Prejudice in the 21st Century

I’ve posted before on some hilarious Facebook parodies, like what if the Earth had a Facebook account?, or Hamlet as told through Facebook.

Today, I stumbled on yet another to add to the collection: what if Pride and Prejudice were told through Facebook, brought to you by much-ado.net (cut to focus on the few events I can remember from the story)?


Charles Bingley is buying a house!

Mrs. Bennet became a fan of Charles Bingley.

Charles Bingley is now friends with Mr. Bennet and Sir William Lucas.

11 of your friends are attending Assembly at Meryton.

Fitzwilliam Darcy is dreading this evening.

Charles Bingley and Jane Bennet are now friends.

Elizabeth Bennet is not handsome enough to tempt a certain gentleman. Ha!

Elizabeth Bennet promises never to dance with Mr. Darcy.

Fitzwilliam Darcy became a fan of Fine Eyes.

Caroline Bingley tagged Jane Bennet in her note Visit us at Netherfield.

Elizabeth Bennet is improving her mind by extensive reading.

Charles Bingley created an event: Ball at Netherfield.

Caroline Bingley has suggestions for Mr. Darcy’s domestic felicity.

Elizabeth Bennet and Caroline Bingley are attending the event Take a Turn about the Room.

Fitzwilliam Darcy feels the danger of paying Elizabeth too much attention.

Fitzwilliam Darcy is not pleased to see Wickham in town.

Elizabeth Bennet and George Wickham are now friends.

George Wickham told Elizabeth Bennet about Mr. Darcy’s evil deeds. 😉

15 of your friends are attending Ball at Netherfield.

Fitzwilliam Darcy is dancing with Elizabeth Bennet.

Elizabeth Bennet is trying to make out Mr. Darcy’s character and does not get on at all.

Caroline Bingley tagged Jane Bennet in her note We’re Leaving.

Elizabeth Bennet and Colonel Fitzwilliam are now friends.

Fitzwilliam Darcy is not afraid of Elizabeth Bennet. Well, maybe a little.

Charlotte Collins thinks she knows why Mr. Darcy visits so often.

Elizabeth Bennet is furious at Mr. Darcy for separating Bingley and her sister.

Fitzwilliam Darcy is proposing to Elizabeth Bennet. It is not going well. :-/

Lydia Bennet and Kitty Bennet joined the group 1,000,000 Strong Against the Officers Leaving Meryton!

Elizabeth Bennet and Georgiana Darcy are now friends.

Lydia Bennet and George Wickham are in a relationship.

Jane Bennet tagged Elizabeth Bennet in her note Bad News About Lydia.

Fitzwilliam Darcy is determined to find Wickham.

Mrs. Bennet left the group Widows of Men Killed in Duels.

Edward Gardiner tagged Mr. Bennet in his note They’re not Married, but They Will Be.

Mrs. Gardiner tagged Elizabeth Bennet in her note Yes, Mr. Darcy Arranged Everything (and I think he likes you).

Charles Bingley is back in Hertfordshire with Darcy.

Jane Bennet and Charles Bingley are now engaged.

Elizabeth Bennet has been insulted in every possible method.

Elizabeth Bennet and Fitzwilliam Darcy are now engaged.

Elizabeth Bennet and Fitzwilliam Darcy are now married.

Jane Bennet and Charles Bingley are now married.

Mrs. Bennet KNEW that single men with good fortunes would want wives.

For the whole thing, in all of its literary grandeur, check out much-ado.net’s genius!

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