First, Groupon reportedly turns down $6b from Google. I was shocked when I heard that, and then stunned when I saw their financials filed with the SEC. Now, they’re surrounded by competitors, pulling their IPO, and the SEC is questioning the CEO’s leaked all-hands memo for violation of quiet period rules. I wonder if they wonder about the Google offer.
Now, Business Insider is reporting that Dropbox turned down $800m from Apple. I suspect (without data), that Dropbox is much less unprofitable than Groupon, but I’m still shocked. iCloud isn’t perfect, but Dropbox’s long-term risk is that file sharing becomes an OS & app feature.
Don’t get greedy!
Continuing my ad-hoc series on avoiding the entrepreneurial lottery for pure software Internet/mobile projects: another “unfair advantage” is deep domain experience around your product and market.
In this context, this means at least a few years experience in the domain, not “we’ve spent the past 3 months studying this market”. It means you have:
- A clear, “inside baseball” understanding of the markets, customer behaviors, dynamics and existing players
- Personal relationships with key leaders in the market (if you called their cell, would they take your call?)
- An understanding of how the Internet will disrupt the existing market or create the new opportunity
On the last point, there’s a balance: I sometimes find being in a domain too long can make it hard to think disruptively.
Without these advantages, you’re learning on the job, and you’ve got little or no advantage over the half-dozen other Internet competitors that are targeting your product/market. Success is possible, but the odds are more lottery-like.
If you’re one of the five people that read this blog, you know I’ve become negative on many pure-software/Internet/mobile entrepreneurial projects. Low barriers to entry create a competitive, weedy ecosystem that becomes a lottery for many entrepreneurs. (Investors have a slightly different situation: they can pick break-out winners from a field of options, where entrepreneurs have to start from zero).
So, how do entrepreneurs avoid the lottery? There are a number of ways (this is the first in an ad-hoc series of blog posts).
One way is to have a real asset that’s core to the business, but is hard to copy. Amazon’s product reviews are a great example: competing with them means competing with the fact that many buyers go there first to check reviews. Amazon built their own review database, but I think there are many data & content assets that entrepreneurs could buy or license (exclusively) as the basis for a new business.
Sometimes, IP can be the core asset, when there’s real technology with high-quality, issued, in-force patents, and relevant expertise in the team. Given the time it takes to get patents issued, this means the startup is licensing or acquiring patents to get started — pending applications usually aren’t worth that much.
(Note that software/code is rarely a core asset. There are lots of smart developers, and software is usually pretty easy to copy.)
The next lottery-avoidance topic: deep domain expertise (to be continued).
A recent Financial Times article about Facebook’s stunning growth struck a chord with me:
… I am concerned that he [Zuckerberg] sets an example of meteoric success that virtually no one else will ever be able to repeat. But wannabes are trying to copy him, and consequently squandering their careers on false hopes.
For pure-software/Internet/mobile ideas, the low barriers to entry have created a very crowded, “weedy” ecosystem. It’s a great time to be a consumer (e.g. look at the number of mobile apps and free Web sites), but a very tough time for entrepreneurs in these segments. More and more projects look like lottery tickets: long odds, with a slim chance of payoff.
Why do entrepreneurs do it? It’s partially the psychology of poverty, where entrepreneurs hungry for success (financial or otherwise) make irrational decisions. Worse, a startup career commitment, unlike a lottery ticket, has an especially high opportunity cost. The other element is a belief that skill can influence the outcome. This is generally true, but is much less so in these segments: competition is fierce, copying is rampant, and success often comes from quirky combinations of factors that are difficult to plan.
We will have more big Facebook-scale lottery outcomes, and that will spurn more entrepreneurial career bets. But I think the smartest entrepreneurs will avoid the lottery.
I love turntable.fm.
It’s a well-executed simple app offering virtual music “rooms”. You can just listen, or be one of 5 DJs selecting songs for that room. It’s a fun way to share music with friends and co-workers. It’s taking off fast.
I think we’re entering the next chapter for music, following the iTunes era, and it’s all about social. Apple’s Ping service has the right social buzzwords, but isn’t quite right. Turntable.fm is dead on for one aspect of social music, and Facebook has big plans for music.
(And if Facebook is smart, they acquire Turntable.fm now or just copy the feature. Unfortunately, I don’t think Turntable.fm lasts independently & competitive long-term; it’s so obvious that it should be part of Facebook).
It will be interesting to see how Apple reacts. Is the iTunes era ending?
Well, not quite, but it certainly feels that way! When did marketers stop using their own URLs in ads and start using Facebook URLs?
It’s amusing how this seems to have come full circle. Many users started out on AOL, a relatively closed ecosystem. Then, the open Internet came along and AOL’s relevance faded. Now, we’re cycling back from open to Facebook’s partially closed ecosystem. (I do think Facebook will settle into a hybrid of open & closed that AOL never seemed to achieve: they’ll control the ecosystem “backbone”, while providing open APIs for apps.)
Also, we’re starting to see Facebook opportunities analogous to what’s existed for the Internet. For example, we have content management systems (CMS) and other tools to manage Web sites, and we’ll see analogous tools (and associated apps) for Facebook page content. Other things to expect for Facebook:
- Analysis tools for the social graph, analogous to Web site analytics tools
- Tools to manage marketing communications (status updates, new content, direct messaging, etc.), analogous to email marketing / campaign management tools
- Individual user analysis (using social graph data) and profiling, analogous to ad targeting/profiling systems
- Systems to manage communications with individual users, analogous to existing Customer Relationship Management (CRM) tools
In some cases, existing Web tools will evolve to include Facebook-specific functionality. In other cases, the Facebook ecosystem will be different enough that we’ll see new tools emerge (I’m expecting this to happen around the social graph).
Occasionally, I meet an entrepreneur that’s got an interesting idea, but is oriented in the totally wrong direction for the market.
For example, consider ideas around DVDs: they’re still very popular, but their future seems clear. With bandwidth and storage advances, movies will be like music is today: downloaded on demand.
These kinds of ideas aren’t necessarily bad, but they require a shrewd assessment of how big the window of opportunity really is. Trying to build a company is hard enough; doing it while the market is moving in the other direction is virtually impossible.
But at least you should know going in: is your idea oriented in the “right” direction? Do you have enough time?
How can you tell if someone’s never been CEO? They say something like, “I really want to be CEO” I never seem to see former CEOs saying that.
A few days ago, Ben Horowitz wrote one of the best blog posts I’ve ever read, all about CEO psychology:
By far the most difficult skill for me to learn as CEO was the ability to manage my own psychology. … Over the years, I’ve spoken to hundreds of CEOs all with the same experience. Nonetheless, very few people talk about it, and I have never read anything on the topic. It’s like the fight club of management: The first rule of the CEO psychological meltdown is don’t talk about the psychological meltdown.
This blog post is a must-read for all CEOs and boards; it’s very good stuff.
Being CEO was the toughest job I’ve ever had, no question. It was an intense and extreme range of emotions: I never laughed so hard, or cried so hard. I went between periods of pure optimism, to periods of deep anxiety with many, many sleepless nights (in both cases). I formed some new, lifelong friendships, all while feeling I let down all of my friends when things didn’t go as planned. CEOs attract more blame than credit; it is the most demanding job in the world.
I’m glad so Ben wrote this, because the “leader” personality type tends to avoid signs of personal weakness. CEOs talk about “managing to the metrics” or “rallying the troops”, but you never hear “I’m depressed”, “I’m tired”, “I need help”, or “the team is pulling me in three different directions and I can’t choose”.
There’s a reason my friend calls the job “CPO” — Chief Psychological Officer. That “other stuff” is usually the Real Stuff.
A surprising number of entrepreneurs contacting me for investment (or advice) want an NDA before sharing any details. I politely tell them that I don’t do NDAs, and refer them to Brad Feld’s write ups, which explain why most investors take this position.
But I’m finding there’s something deeper going on. Entrepreneurs that insist on non-disclosures from prospective investors usually have the wrong mindset for building a successful software/Internet company.
It’s the difference between playing entrepreneurial offense and defense. The “defense” mindset is focused on secrecy, protecting access to information, and limiting things. The “offense” mindset is focused on speed, execution, and iteration.
There are times when patent filings and NDAs are appropriate, but I’ve seen far more ideas fail from under-sharing and for over-sharing. By the time you launch, everyone can see what you’re doing anyway. If the idea is good, they’ll quickly copy it.
The only defense is a good offense: share widely, get feedback, attract a great team, and go fast.
I know that “how are you acquiring customers?” is now part of a VC joke, but the question is no joke.
Across the companies I work with, there’s a very strong correlation between those that found a new twist on acquiring customers early on, with success in the business. In contrast, those companies that ended up acquiring customers in more traditional ways (e.g. Google AdWords, display ads, etc.) have struggled much more and grown more slowly.
Taking this even further, I think differentiation for many companies resides not with the product idea itself, but with customer acquisition methods. For the Web and mobile, ideas are plentiful, often easily copyable, and increasingly narrow (because it’s gotten so crowded). With the ever-growing app/Web-site/messaging bombardment, it’s impossible to get new user attention.
This viewpoint is heresy for many product-oriented entrepreneurs, but I think it’s more right than wrong. I frequently meet entrepreneurs that have 10 slides on product/service, but only 1 on customer acquisition. That ratio of attention is completely backwards.
And taking this to the extreme, I’ll share advice I recently gave a friend. He’s a very creative product guy, working on a bunch of new product ideas. I suggested he invert things: stop working on products, and start working on customer acquisition opportunities. Then, figure out the apps that will engage those customers.