The 30% Internet Gorilla Tax

I’ve written before about powerful advantages Google, Apple, Amazon, and Facebook have in the software industry.  These four companies control major parts of the ecosystem, take out upstarts when they get too big, corner talent markets in key areas, and enjoy a ~30% “tax” (directly or indirectly) across most other software companies.

I first noted this nearly 5 years ago, but more recently, some of the Internet thought leaders have written about the theme.  For example, Fred Wilson wrote:

Google, Facebook, and to a lesser extent Apple and Amazon will be seen as monopolists by government and individuals in the US (as they have been for years outside the US). Things like the fake news crisis will make clear to everyone how reliant we have become on these tech powerhouses and there will be a backlash. …

And, Sam Altman wrote in the YC Annual Letter:

Companies like Amazon, Facebook, Google, Apple, and Microsoft have powerful advantages that are still not fully understood by most founders and investors. I expect that they will continue to do a lot of things well, have significant data and computation advantages, be able to attract a large percentage of the most talented engineers, and aggressively buy companies that get off to promising starts. This trend is unlikely to reverse without antitrust action, and I suggest people carefully consider its implications for startups. …

(Emphases added)

Now, Snap(chat) has revealed they’ve committed $3b to Google and Amazon over the next five years, or about $600m/year.  When we line that up with revenue estimates ($5.7b over the next three years), we find that the gorillas are getting….. ~30%!

Startups Should Revolve Around Their Founders if They Want to Succeed Big

I read a recent Harvard Business School blog post titled “Startups Can’t Revolve Around Their Founders If They want to Succeed“.  The authors make a general argument that founders are the biggest obstacles to long-term startup growth, citing a new research paper (paywall, sorry) that hypothesizes:

For a given startup, the value of the startup varies inversely with the degree of control retained by founders.

From a statistical analysis of over 6,000 startups, the paper (and article) argue (roughly) that founders with board control, the CEO position, or both, can “harm the firm’s prospects, reducing pre-money valuation by up to 22%.”

Really?

While “founder scale-up” problems are real management issues that can put significant stress and strain on any startup team (I’ve lived it), the argument has a significant flaw:  it’s based on an unweighted startup data set.  If Uber’s value creation (for all stakeholders) is considered equal to Fred’s Wrecking, Storage and App Development, I’m skeptical we can conclude anything really useful.

For example, a full half of the top ten US companies had or have founder leadership to significant significant scale:  Apple, Google, Microsoft, Facebook and Amazon.  These five alone companies represent $1.5 trillion of value — over 8% of the total value of all public US companies!  And all of the top US companies founded within ~30 years are/were founder led.

Furthermore, while I’m quite skeptical of private “unicorn” valuations, all but one at the top of that list have founder CEOs: Uber, Airbnb, Palantir, Snapchat, SpaceX, Pinterest, Dropbox, WeWork, Theranos, Lyft, and Stripe.

So, here’s a completely different hypothesis:

Most startup value creation, by a wide margin, accrues to founder-led companies. (esp. in technology) 

Stated differently: would you rather have a portfolio with 7 out of 10 companies successful, or a portfolio with Facebook?

Deep Learning: A Sport of Kings?

The big news in the machine learning/deep learning world this week is Google’s release of TensorFlow, their deep learning toolkit. This has prompted some to ask: why would they give away “crown jewels” for such a strategic technology? The question is best answered with a machine learning joke (paraphrased): “the winners usually have the most data, not the best algorithms”.

Neural networks have been around for a while, but it’s only been within the past 10 yrs that researchers have figured out how to train networks with many, many layers (the “deep” in “deep learning”). That research has been greatly accelerated by using GPUs as very high-performance, general purpose, vector processors. If a researcher can turn around an algorithm experiment in a day (vs 3 months), a lot more research gets done.

But as the joke suggests, it’s all about that data: you need lots and lots and LOTS of data to train a high-performance deep learning network. And Google has more data than anyone else —so they don’t worry so much about giving away algorithms.

(Also, Google, Baidu, Twitter, Facebook, etc. are investing in GPU compute clusters that can only be described as the new “mainframe supercomputers”. Sure, you can rent GPU instances on Amazon, but there’s nothing like having the latest Nvidia board with lots of RAM and very high-performance interconnect).

What does this all mean for early stage startups? The situation creates several tough hurdles: first, freely available code and technology from Google (and Facebook) enables competitors and devalues whatever the startup might develop. Second, few startups have access to a large enough proprietary data source to compete at scale. And third, GPU compute clusters need real capital.

What’s left for startups? I see at least two interesting patterns:

  • Using deep learning as a key feature to enhance another app.  Use freely available technology to add magic.  Google Photos is a great example of this, and I think every photo and video app will soon be able to recognize stuff, people, people, items, etc. to enhance the functionality.
  • “Man-teaches-machine”.  Start out with a lot of humans doing some task and capture their work to train a network.  Over time, have the network handle the common cases, with the exceptions / ambiguous cases routed to humans for resolution.  Build a large, proprietary training set, enjoy compounded interest, and profit.

The Attention Gatekeepers

I’m seeing interesting cases where Facebook, Google or other gorillas tweak content presentation, and then some other company’s business is directly impacted.  The gorillas have increasing control (and power) over user attention.

For example, Demand Media took a huge hit after Google’s search engine updates lowered rankings for low-quality content.  (DMD is down 80%).

Zynga enjoyed spectacular early success with some of the first social games on Facebook.  But as game updates clogged feeds, Facebook made presentation changes to improve feed quality, and Zynga suffered.  (ZNGA is down 60%).  Facebook continues to tweak how feed content is selected and presented.

More recently, Google added a “Promotions” tab to Gmail, moving most marketing emails out of the main inbox view.  That directly affected Groupon, who’s trying to rely less on the daily coupon.  (GRPN down 20% so far).

And now, Gmail added a prominent “unsubscribe link” to the top of promotional emails, which will impact email marketing performance even more.  (Unsubscribe is one of many “quick action” buttons that Gmail has been rolling out.)

It’s a never-ending battle between those who want user attention, and those who manage it.

Boy, Was I Wrong About Dropbox

A few years ago, I was bearish on Dropbox.  I thought they would be an OS feature in time and that turning down a (rumored) $800m from Apple was a bad move. On Quora, I wrote:

I think “slow fade” is another probable outcome.

I’m reminded of FTP Software, which went like gang-busters selling a TCP/IP stack for Windows. Their revenues fell very quickly after Microsoft started shipping TCP/IP as part of the OS.  (The same thing happened with all of the disk-compression companies).

Wow, was I off base!  I think it’s good to evaluate big entrepreneurial and investment misses and I missed several things (at least).

First, a great product goes a long way.  Dropbox has absolutely nailed the product design and user experience in virtually every aspect.

Second, the service is inherently viral.  I routinely create new Dropbox users by sharing files with them.

Third, they covered every platform equally well.  iCloud works well on OS X, and OneDrive is great on Windows, but Dropbox surfed the whitespace between all of the platforms.  They did an excellent job on everything:  the iPad version isn’t just the iPhone version running 2X and they even support Linux.

I can’t wait to see their IPO.

Email will Be Mostly Mobile

When the Blackberry first came out, it was quickly dubbed the “crackberry” because mobile email access was so addictive.  Now with ubiquitous smart phones, we’re all email addicts to some extent.

So it’s no surprise that now over 40% of email opens are on mobile devices, and mobile is on track overtake the PC this year.  It’s pretty amazing when you consider the smartphone, as we know it, was launched less than 6 years ago.

Mobile and Web are blurring together, slowly ceasing to be distinct “things” (I’ve written before about a mobile strategy for Web sites).  This trend suggests some best practices for emails:

  • Format emails for mobile.  This is basic stuff that a lot of designers seem to mess up.  Make sure emails open and render well on mobile devices.
  • Mobile-optimize email click-through landing pages and flows.  If users are reading emails on mobile devices, they’re also clicking through links on mobile devices.  Check your Web usage stats:  you might find that a significant percentage of your site usage by mobile users is coming from email click through paths.  Nothing kills the user experience like a landing page that hasn’t been mobile formatted.

Gorilla Anti-Trust Posturing

As the big four (Google, Apple, Amazon, and Facebook) continue to wield disproportionate influence over the digital ecosystem, these gorillas are having to worry a lot more about anti-trust issues.  Nobody wants to be broken up like the Bell System.

For example, last month, Liz Gannes wrote about Facebook’s search plans:

…the fact that Facebook has finally made its search intentions known could actually be really good for Google. That’s because regulators — especially those in Europe, who are in the thick of deciding whether to settle with Google over antitrust — now have the prospect of additional search competition to consider.

Also, Google now has Gmail, Maps, and Chrome on the iPhone, where Apple had previously rejected apps that “duplicate the functionality” of built in iOS apps.  But it doesn’t look good (in anti-trust terms) for Apple to reject competitive apps, and Google’s smart to get as many apps as possible to dilute Apple’s platform influence.

I think it’s net-good for consumers, as it increases the chances that more of our devices and systems will interoperate.  But what we really need are some new gorillas.

Why You Can’t Find Any Mobile Developers

In case you haven’t noticed, it’s impossible to find mobile developers. People ask me all the time if I “know anyone”, and I’ve all but given up helping with referrals.

The reason is “self-publishing” is now a reasonable option.  The app store ecosystem has removed most friction from the system, provided a clean and easy business model (70/30 revenue split), and eliminated almost all barriers to entry.  If you have talent, a laptop, and a coffee shop wifi connection, you have a chance at writing the next great app hit.

As a result, many good developers have (or believe they have) a better chance at doing their own thing vs working for someone else for salary or an hourly rate.

Patents and Software Startups

Occasionally, I hear from a software entrepreneur with a “patented” or “patent pending” idea.  Many people view patents in a almost glamorous way:  “Get a patent, and you can control your idea“.  I’ve done a lot of patent work (15 issued, including two of the most cited patents in US history), and it’s never that simple.  Patents are very tricky.

For startups, patents make the most sense in industries with (a) relatively long development times and (b) significant R&D budgets.  The PTO doesn’t move quickly:  for some art units, it can take 2-3 years (or more) to get a patent issued.  That’s fine for a biotech company bringing a new drug to market, but is much too long for a software company launching a product in six months.

Also, patents can be very expensive.  For a $750,000 seed round, it may not make sense to spend ~5% of that (or more) on getting US patents filed.  International?  Budget six figures.

Finally, fundraising entrepreneurs frequently overplay the value of patents, missing the other elements needed to make a successful business and making themselves look naïve.  For example, “provisional patents” don’t exist:  it’s a provisional application that gives an option to file for a utility patent later (and it’s just that, an application).  “Patented” means patent issued and in force, “patent pending” means a patent filed but not issued.

If you don’t have an issued patent, it’s a long and expensive journey:  claims are often rejected entirely or issued very narrowly.  It’s nearly impossible to know what a patent is worth until it issues.

A “Starter” Mobile Strategy

You have to be living under a rock to miss the shift in Web usage from “traditional” devices (desktop and laptop) to mobile devices (phones and tablets).  For example, in India, mobile phones now account for nearly 50% of consumer Internet usage, and mobile usage is growing rapidly world-wide.

As Web site operators watch mobile usage grow, the next thought is usually:  “let’s build a mobile app!”  It’s a good instinct, but I think it’s also a great way to waste a lot of time and money.  Leaping in without any insight on mobile usage is a good way to build the wrong app.  Also, it’s easy to end up with something that only partially replicates Web site functionality, frustrating users and creating two different UIs to maintain in parallel.

For a better strategy, Facebook is a good example to study.  They took way too long to focus on mobile, but their sequencing is a good place to start.  (Note:  this advice is really for existing Web sites).

Following their example, here’s a “starter” mobile plan:

Step #1:  Mobile-enable your Web site.  Remember m.facebook.com?  You can get pretty far these days with just HTML5.  Use your mobile usage data to figure out what areas to prioritize (Google Analytics will break out mobile usage).  Consider both tablet and phone cases:  depending on your application, you may want to deal with them separately.

Step #2:  Develop a native app, with generous use of embedded browser widgets.  Consider which app elements must to be native for the best experience, and do the rest using embedded browser widgets (e.g. WebKit).  Most of your app will actually be HTML5 served from your servers, and you can change content on the fly without having to do an approval cycle with Apple (which can take weeks).

You should be able to leverage the HTML5 work you did in step 1.  Use your existing mobile usage data to prioritize Android vs iPhone and phone vs tablet.

Step #3:  Go 100% native.  (If needed)  At this point, you should have a good sense of the most important use cases, platforms, and form factors.

Edit to taste!