Following Yahoo’s $1.1bn acquisition of Tumblr Pandodaily published an article asking why Tumblr and Foursquare, New York’s top consumer web startups, haven’t had the same success as Twitter and Facebook. First the numbers, as measured by 2012 revenues Foursquare and Tumblr are a long way behind:
Pando points out that one would expect Tumblr and Foursquare’s proximity to New York’s strong advertising industry to give them an advantage over their Valley competitors when it comes to building an advertising business, but then comes to the conclusion that the reason they fell behind is more likely to do with access to cash and talent. Valley based companies are more easily able to raise money and have a larger pool of people with scaling experience to recruit from.
That argument makes sense, and I’m sure explains part of the discrepancy in performance, but for me the bigger reason is that the use cases for Twitter and Facebook are important parts of our every day lives whereas Tumblr and Foursquare are more nice-to-haves. Keeping up with news and staying in touch with friends are more important for more people than self expression and checking in/restaurant discovery. More important use cases means more people coming back more often and greater tolerance for ads, and hence much bigger opportunity.
Venturebeat has an article up this morning titled Startups and big corporations embrace the maker movement which reports that the annual Maker Faire has this year introduced a ‘Startup Pavillion’ which it cites as evidence that the maker movement is moving beyond hobbies to being a ‘rich source of economic potential’. Here’s a selection of the 20-odd startups at Maker Faire:
- SeeedStudio, an “open hardware company develops and brings to market innovative and cost-effective prototyping solutions for hobbyists and aspiring inventors.”
- RedBearLab, which makes a wearable BlueTooth 4.0 board you can use to interface with an iPhone or Android device.
- Formlabs, makers of a high-resolution 3D printer aimed at engineers and design professionals.
- Deezmaker, another 3D printer vendor, this one aimed at making an affordable printer called the Bukobot.
- BioLite, a company that aims to reduce third-world pollution with a small wood-fueled stove that converts heat from the fire into usable electricity, improving combustion while allowing users to charge small devices.
- BlinkM, makers of multicolored, programmable LED lights for use in your electronics projects.
- Smitten, a maker of handmade “artisan truffles.”
For the last couple of weeks I’ve been asking myself if we are witnessing the beginning of a major trend here or whether there will only ever be a small number of successful ‘maker-centric’ or innovative hardware companies.
Here are my observations and emerging thoughts:
- the number of startups in this space is definitely increasing – there are a small number that have been around for a few years, like Jawbone, Micro Mobility Scooters, GoPro, and DFJ Esprit portfolio company Graze, and a much larger number that have been founded more recently, including Nest, Sphero, Local Motors, and Pebble.
- A number of factors are combining that enable faster product iteration in hardware
Kickstarter and other crowdfunding platforms are radically improving capital efficiency because customers are now paying for product months in advance and because first demand validation is now virtually free
Arduino and other open source hardware platforms are reducing costs in the same way open source software reduced costs for web companies
Companies are aggregating global audiences and selling direct making new product categories viable which wouldn’t have worked when national distribution limited customers to single countries – companies which build communities around their interest area are particularly powerful in this regard – e.g. DIY Drones
Consumers like buying from companies that embrace the ‘maker’ ethos – i.e. companies that have a human face and a genuine interest in delighting their customers
In contrast to other investment themes that turned out big it is unclear how many opportunities there are in innovative hardware – most of the companies listed above look obvious in hindsight, but it isn’t easy to list large numbers of new opportunities in the way it was for ecommerce or mobile, or to see how these companies will transform the world in the way social media has
It is still unclear how much capital these businesses will require or what the exit market will be like
- 3D printing is reducing the cost of prototyping
- Short run manufacturing is getting cheaper and cheaper due to robot manufacturing and improved supply chain management techniques
- The labour component of manufacturing is falling increasing the feasibility of local manufacturing
Writing and reading back this list it strikes me that whilst it is too early to know how big this wave will be there is more than enough going on to want to start making some investments.
I’ve just read Bill Barnett’s article on Winning as a self-fulfilling prophecy which argues that optimists’ irrational belief in their chances of success makes them to try longer and harder to get there and makes them better motivators and leaders of teams. They are therefore more likely to succeed than people who are more even headed. He cites Steve Jobs as an example:
Steve Jobs was said to have been surrounded by a “reality distortion field,” in that he would believe in possibilities even when others saw them as unthinkable. Of course, once Steve believed, then others would too – making his vision more likely to come true.
As an investor I want to back the entrepreneurs who are most likely to succeed, and as described above that means optimists. On top of that we also like optimists because they take on bigger challenges. So we back optimists. But we want our own decisions to be the best they can be, and that means seeing reality for what it really is.
Reading Bill Barnett’s article it struck me for the first time that one of the most common sources of post investment tension between investors and entrepreneurs is a tension between optimism and realism. When the relationship between investor and entrepreneur is strong that tension is healthy, but when the relationship breaks down it often leads to each side losing faith in the other’s judgement. Investors’ realism can start to look like (and may become) undue pessimism and scepticism, and entrepreneurs’ optimism can start to look like (and may become) naive optimism and an irrational unwillingness to change course.
I write this in the hope that it will help investors to better understand where entrepreneurs are coming from and vice versa, and thereby help to keep relationships trusting and healthy. There is more than a grain of truth in the old joke that the investor-entrepreneur relationship is like a marriage, but harder to get out of, and just like a marriage the relationship will work best when the differences are both understood and valued. Good investors understand that optimism is a very helpful trait and strong entrepreneurs value the check on their optimism that investors can provide.
The FT had an article over the weekend about the job creation in China that has come off the back of Alibaba’s amazing success. According the Chinese Ecommerce Research Centre in the last year alone the Chinese ecommerce industry created more than 12m jobs directly and more than 12m indirectly, and Alibaba controls over half of the market, implying they deserve credit for 7m new jobs last year.
The stats are a little woolly, but even if they are out by a factor of 10 this is a pretty remarkable achievement for a single company in a single year. And they were reported in the FT….
Paul Graham just published an essay which details eighteen reasons startups fail. As he points out, somewhat tongue in cheek, an exhaustive list of reasons why startups fail is actually a prescription for success, and therefore a very big ask. That doesn’t stop him trying though. And who better to have a go?
The whole essay is worth reading, but for those of you that don’t have time I’m going to pull out two of his points.
Firstly, Graham makes the point I have heard him say many times now, that by far the most common reason for startup failure is not making something users want. The eighteen reasons that follow are, in a sense, sub-reasons. Every time I hear this I make a mental note to myself make the question ‘how do you know users want what you are building?’ more prominent in our due diligence process, because at the end of the day if you build something people want then you are generating value and that means your company will most likely be worth something to somebody, even without a business model.
Secondly, I want to pull out a couple of quotes from reason 13. Raising too much money. I’ve said many times now that raising too much money can kill your company just as surely as raising too little money. It’s a counter-intuitive point and Graham explains it well:
The problem is not so much the money itself as what comes with it. As one VC who spoke at Y Combinator said, "Once you take several million dollars of my money, the clock is ticking." If VCs fund you, they’re not going to let you just put the money in the bank and keep operating as two guys living on ramen. They want that money to go to work. At the very least you’ll move into proper office space and hire more people. That will change the atmosphere, and not entirely for the better. Now most of your people will be employees rather than founders. They won’t be as committed; they’ll need to be told what to do; they’ll start to engage in office politics.
Perhaps more dangerously, once you take a lot of money it gets harder to change direction. Suppose your initial plan was to sell something to companies. After taking VC money you hire a sales force to do that. What happens now if you realize you should be making this for consumers instead of businesses? That’s a completely different kind of selling. What happens, in practice, is that you don’t realize that. The more people you have, the more you stay pointed in the same direction.
My general advice for startups is to keep their burn as low as possible until they reach product-market fit at which point they should raise a Series A to accelerate growth. When raising money they should raise enough to get 6-9 months past the next meaningful value milestone. Graham lists value milestones as working prototype, launch, and then significant growth.
Google yesterday announced the launch of paid subscriptions for YouTube channels. So far this is only for a pilot group of around 30 hand-picked channels, but they say they are going to expand to a broader list of qualified partners that will operate on a self-service basis. I take that to mean that getting approval to charge for a YouTube channel will be somewhat like getting approval for an app to appear in the Google Play store – most everything that isn’t offensive will get approved.
If so, this is a big moment in the ongoing shift to over-the-top TV. In the five years or so that Google has been operating its YouTube channel programme which allows content owners to keep 55% of ad revenues from their content the amount of premium content viewed on YouTube has sky-rocketed. YouTube channel network companies that like Machinima, Maker Studios and ChannelFlip that provide distribution and monetisation services to content owners have seen amazing month on month growth in videos viewed and are now enjoy billions of video views per month. Most of these views are from teenagers and young adults who use YouTube as a substitute or even replacement for traditional TV. This growth has come when the only form of monetisation available is an ad share with Google. Now that subscriptions are available expect to see more high quality content come to the platform and as history has shown us over and over high quality content brings viewers.
However, whilst this is an exciting moment for those of us looking forward to ditching our cable and satellite subscriptions I don’t think YouTube channels in their current incarnation will be the end game. Firstly, Google’s 45% take of revenues (they offer the same deal for ads and subscriptions) is too high and in the medium to long term they will face meaningful competition and either lose out or shift to taking a substantially smaller cut. Secondly, as Kevin Kelleher wrote on Pando earlier this week the online TV world is splintering into lots of subscription based walled gardens and the user experience is suffering as a result. At a minimum I expect services to arise which allow users to search and discover across all the services they subscribe to, but I suspect also that ‘pay for what you watch’ revenue models might eventually displace subscriptions. Subscriptions are another form of bundle and with good search and discovery and simple payments I think users will pay more when they are only paying for what they want and not having to pay for things they don’t watch.
When I was growing up I was lauded for being ‘smart’ because I excelled at maths, played a mean game of chess, and partook fully in the political debates that our family used to enjoy over Sunday lunch and at other family occasions. My cognitive intelligence was high. Since then I’ve come to believe that raw cognitive intelligence is great, but pretty useless unless combined with emotional intelligence (EI). Cognitive intelligence and EI contribute equally to a person’s general intelligence and it is only general intelligence that offers an indication of a person’s potential to succeed in life.
Wikipedia has these two definitions of emotional intelligence:
- The ability to perceive emotion, integrate emotion to facilitate thought, understand emotions and to regulate emotions to promote personal growth. – Salovey and Mayer
- Emotional intelligence is concerned with effectively understanding oneself and others, relating well to people, and adapting to and coping with the immediate surroundings to be more successful in dealing with environmental demands.
Emotional intelligence is challenged as a theoretical construct because it is hard to measure, but from a practical perspective it is easy to recognise in people and I think very useful.
I’m writing this today because Bill Gross tweeted an article titled Apply EI to the stages of innovation. This is the first mention of EI I’ve seen for some time. The central point of the article is that people with higher emotional intelligence will generally be better innovators. There are two reasons for this – one they are more self aware and better able to ‘let go’ of problems and get the unconscious mind working on solutions (e.g. by going for a long walk), and two they are more likely to form high EI teams with an atmosphere of trust where people are willing to make themselves vulnerable by coming up with creative ideas.
The area I think about the most that benefits from emotional intelligence is leadership. Looking back to the definitions above it is pretty easy to see how high EI managers will be better at leading and motivating their teams.
There is a good post up today on Segment.io describing how they used Kickstarter as a lean startup tool to validate demand. First the background:
Kickstarter is the perfect way to validate an idea. By definition, a successful Kickstarter campaign has a ton of people who’ve already put their money where their mouth is.
It’s really similar to the popular suggestion of “throwing up a fake landing page” and letting people sign up, or to the strategy of running AdWords before you have a product. Except Kickstarter is even better because you gain a devoted following and the funding you need to pursue your idea all at once
Segment.io’s Kickstarter campaign was for a Python web development course. That’s great, but Kickstarter is especially powerful for hardware startups where production costs are higher and cashflow more of an issue.
But there is more to running a Kickstarter campaign than making a nice video and watching the pledges roll in. You need to hustle:
That’s where my next tip comes in: hustle as much traffic to the site as humanly possible (believe me, you need all the manpower you can find). I hired a virtual assistant from Zirtual named Shea, and she was amazing. She literally doubled my marketing reach!
Together, we worked daily to hit all of the low-hanging marketing opportunities we could find. Here’s an incomplete list of some of the techniques we used:
Day 1 - We lined up tweets from web2py.com and PythonAnywhere.com as well as an email blast from original Real Python course mailing list.
Day 3 - We combed through and responded to Python-related questions on Quora and posts on Reddit.
Day 8–9 - We sent out a guest blog post to lots of different, Python-related blogs.
Day 16 - Our campaign made the front page of Hacker News, driving tons of traffic and resulting in lots of pledges.
Day 24–26 - Pledges remained high after we got another round of tweets from web2py.com, PythonAnywhere.com, Gun.io, PythonforBeginners.com, and another email blast from Real Python. Not to mention the longer-tail traffic from Hacker News hadn’t subsided yet.
Day 27–28 - We did another large push on StackOverflow, Quora and Reddit.
Day 30 - We got a tweet from Heroku, and finally finished our campaign having raised $26,044. It was a good day.
You can see from their graph of pledges per day below shows that they were bringing money in for the whole 30 days of their Kickstarter campaign, implying that promotional activity through the campaign had an impact.
Finally, in a neat twist, when the campaign became over-subscribed they introduced stretch goals to validate demand for new features – saying they would add Flask, video, and Django to the course if they reached $10k, $15k, and $20k in pledges.
Steve Denning, one of my new favourite writers recently wrote on Forbes about Leadership in the three-speed economy. This concept of a a three-speed economy is powerful, although I think ‘three-sector’ would be more accurate. For a while now I’ve been struggling to reconcile vibrant growth in parts of the tech industry with lack-lustre growth at the macro-economic level, and the best explanation I’ve come up with is that some industries are declining whilst others, most notably tech, are growing quickly and that they are balancing each other out. Denning makes a similar, but more sophisticated argument, backed up with an explanation of why we have different sectors of the economy growing at different speeds.
He rightly thinks of financial capitalism as a distinct sector of the economy, giving us three segments overall
- The traditional economy – a real economy with many large firms providing real goods and services, but their hierarchical management and focus on shareholder value are preventing them from responding well to the challenges and opportunities of the 21st century. The traditional economy is much larger than the creative economy but it is in decline and faces a grim future. Good examples of firms are GE, Walmart and HP.
- The creative economy – a real economy that generates real products and services. It’s companies are different to traditional economy companies because they are focused on delighting customers and rapid innovation. Creative economy companies typically enjoy fast growth. Good examples of firms are Apple, Amazon, Whole Foods and Costco.
- Financial capitalism – comprised of firms primarily focused on generating profits from trading financial instruments that are often disconnected from the real economy. These firms have had a significant impact on growth over the last 20 years through the bubbles and crashes they create – e.g. the Long-Term Capital Management crash of 1998, the Dot-Com crash of 2000, and the housing meltdown of 2008.
The creative economy has emerged because the increasing pace of change is rendering 20th century management techniques ineffective. The time taken for information to filter through companies to the centre and then for policies and decisions to filter back out to the rank and file limit the speed at which these firms can respond to new opportunities and customer demands, and creative economy companies employing radically decentralised management techniques to react more quickly are having a field day. Moreover, decentralised management is so different from hierarchical management that few traditional companies are able to switch to the new paradigm. It is simply too hard for managers who are used to having detailed workplans and clear schedules that show when everything is supposed to happen to switch to an environment which values flexibility over knowing what will happen when.
As much as I seek to empower our portfolio companies to do what they think is right and to avoid over-planning I sympathise with these ‘traditional managers’ in the sense that when you switch from operating with a detailed operating plan to operating without one it feels like you are flying blind. When our companies started switching from ‘waterfall’ to ‘agile’ development methodologies we went from having detailed pictures of how products were going to evolve (albeit with delivery risk) to little visibility of what new features would emerge and when. Budgeting became more difficult because we could no longer tie marketing and sales efforts to major release dates, assessing dev teams became more difficult because they were no longer accountable for long term deliverables, and, probably most importantly, reporting within DFJ Esprit and to our LPs became harder because there was less we could say to get people excited about the future.
Much of the comfort with plans was, of course, based on the illusion that they wouldn’t slip, and in even if the plans were good the difficulties listed above are more than offset by the improved productivity and flexibility that comes with agile, but they are real difficulties none-the-less. Creative economy companies have, in effect, adopted agile methodologies across all their business areas and it isn’t surprising that most traditional companies find it impossible to copy them.
One very interesting question which I don’t have an answer to yet is ‘how much planning is optimal in a creative economy company’? Different departments need to be co-ordinated and raising money requires projecting success over a timeline so some planning is still necessary. Just less than before.