This morning I read a good post from YC Alumn Vibhu Norby who describes the dangers of a big product launch. He had everything set up for success – 25k people signed up to be notified about the launch, forthcoming Techcrunch and AllThingsD articles, a great social media plan, etc etc but his initial bang was quieter than anticipated, they didn’t get top of the app store charts and then new user sign ups trended down over the next few days not up. The lesson that Vibhu took away is that it’s best not to have a launch at all. At Origami, his new startup, they simply put the service live and are focused on making their small number of users happy, and letting the user base grow by word of mouth.
Big launches are fantastic if they go well, and if you are hell bent on taking the quickest path to wealth and fame then the lure of the big launch will probably be irresistable, but most big launches fail, and that failure comes with a cost. Big launches come with high expectations and disappointment is hard to recover from – employee morale will suffer, investors may lose faith, you may pick up a hard to shake bad reputation with the press, and possibly worst of all, you may lose confidence yourself.
Why do most big launches fail? Because very few companies are clever enough, or lucky enough, to have a good product market fit on launch day. For most it takes a period of iteration as customers use the product before they find the sweet spot.
You could say that choosing to have a big launch for a startup is adopting a strategy of ‘be lucky’, and as we know, luck isn’t a strategy.
Next a caveat. If you are operating in a known market then the dynamics are different. In this case you have a much better chance of good product market fit out of the gate and a big launch might make sense. The new Samsung S4 is a good example here. Also, companies operating in very crowded markets may not be able to think of another way to rise above the noise (although that raises the question of whether they should find another market….).
Wrapping up – the ‘big launch’ vs ‘build slowly from a passionate user base’ is one of many areas where startups can choose between being aggressive about getting as big as they can as quickly as they can or focusing on sustainability first and fast growth second. I’m all for shooting for the stars, but for me the second path is the better one. It locks down value more quickly and relies less on luck. It’s absolutely right to keep open the option of being lucky, and if a lucky break comes to double down, and double down hard, but going to early and relying on being lucky just isnt sensible.
Clayton Christensen has similar advice when he talks about going for profitability first, and scale second, whilst the likes of Steve Blank and Eric Ries have a similar message when they say that finding product market fit is a startup’s first job. These are wise words from wise men, but it can be hard to know exactly when product market fit has been reached (how sure should you be?) and profitability turns out to quite complex too, as many startups reach the point when their inheret profitability is apparent before their management accounts are showing month on month profits. For me the time to invest hard to scale fast is when scaling doesn’t require any great leaps of faith, i.e. demand and marketing channels are proven at a small scale and there are no obvious barriers to growth.
The power of behavioural economics is that identifies irrational cognitive processes to produce counter-intuitive insights which help us to better predict human behaviour. Consider the chart embedded above which shows the pain intensity over time experienced by experimental subjects. Patients in the B category clearly experienced more pain, but the surprising, counter-intuitive, result is that Patients in the A category remembered themselves as having had a worse experience.
In this case it is human memory which performs irrationally. Rather than accurately remembering and each element of an experience we are driven by what behavioural economists call the Peak-End rule which says that our memories are unduly influenced by the best and worst elements of an experience and by its final moments. In the ‘pain experiment’ which was conducted by Daniel Kahneman patients in Category A finished with much greater pain than those in category B and it is this worse ‘end moment’ which explains why they recall the pain as being worse than patients in category B (more details of the experiment here).
When I read about theories like this I like to test them on my own memories, and when I think back over the best and worst experiences of my life it is the peaks and troughs that I remember. For example – when I think about the best gigs that I’ve been to, I come up with a list where the best moments were AMAZING, not where the end to end experience was great. I can also see the importance of final moments, bands for example, routinely save their best tracks for the encore.
Turning to consumer internet, the peak-end rule tells us that to get consumers to have a great memory of an app it should deliver a real wow and maximise the peak, and that the impression in the moment when the consumer leaves the service is also important. Think about the Twitter ‘Fail whale’ and the amount of goodwill they got by having a bit humour having just delivered a service outage.
Interestingly, the amount of time spent using a service doesn’t impact how we recall it which implies that after a point engagement metrics are a poor guide to customer satisfaction (although they may be important for revenue). Google intuitively grasped this point in their early days when their goal was to get you off of Google and onto the page you wanted as quickly as possible.
You may have seen the recent brouhaha in the financial press about a 2010 research paper by Carmen M. Reinhart and Kenneth Rogoff of Harvard which found a correlation between high levels of government debt and low or negative economic growth. This paper was important because it underpinned the austerity policies adopted by many governments around the world since the financial crash – not least here in the UK. The brouhaha has come about because economists from the University of Massachusetts have repeated their analysis using the same data but different weightings and found that the median growth at highly indebted economies was much higher.
In the meantime other studies of different data have apparently found similar results to the original 2010 paper from Reinhart and Rogoff.
This is a big deal because whether to pursue austerity policies is perhaps the most important decision facing most developed economy politicians right now.
The problem is that there isn’t much data to go on and the data quality itself is questionable. There haven’t been many periods in history when governments were as indebted as they are now, and it is impossible to know if economics have changed to a sufficient extent that historical data isn’t relevant. If we understood economics well enough to have a causal theory linking debt and growth then minimal data proving that theory would be helpful, but in the absence of that causal theory we are simply looking at correlations of limited data sets. In this situation people with convictions based on their political persuasion use data to press their case rather than to determine the right answer. A very dangerous game.
This problem also exists in business where most of our ‘understanding’ is based on observed correlations with little understanding of causal relationships. With the best intentions in the world this can lead to slavish following of trends to the detriment of business performance. The problem is, if anything, more pernicious in business because the advice of most business gurus includes is backed up by some level of causal logic as well as observed correlations with success. The 1970-2000 mantra that a simple focus on shareholder value was the best way for companies to generate success is a good example. It started with an observation that there was a correlation – successful companies like Coca Cola were shareholder value focused – and then added the causal theory to back it up (in simplified form a company’s shareholders want value, which can only come from generating good cash and profits, which are the essence of a sustainable business), but the correlation has recently fallen apart and the causal link between a focus shareholder value and long term success is now hotly disputed. The problem arose because the causal theory was based on an erroneous assumption that shareholders would distinguish between short term profit creation that destroyed long term value and truly building for the long term.
So what to do?
I think there is huge value in drawing insight from the limited data available but it’s critical to sense check the conclusions that others come to before following their advice. The most important sense check is whether it feels right – intuitively it makes sense to me that indebted countries will grow more slowly because they are having to use more of their resources to repay debt and hence have less to promote growth. In a business context this intuition often has its roots in the vision and values of a company. Advice that is inconsistent with that world view won’t feel right.
The next sense check is the credibility of the theorist – most importantly, are they impartial, looking at the data and searching for conclusions, or did they start with the conclusion and then go looking for data to back it up.
Thirdly – do research. If an idea is important then it is worth investing time to form a considered view.
Finally – stay open minded and be prepared to try things and change. Don’t make the oh-so-common mistake of ignoring everything that doesn’t fit with existing beliefs (behavioural psychologists call this the ‘confirmation bias’) and be prepared to disucss half formed opinions and lightly held convictions. In a fast moving world with little data it’s the only way to progress.
These ideas apply to many decisions that startups have to take on an ongoing basis – should I have a freemium business model? should I sell director or via channel? should I pursue growth over profitability? etc. etc. etc.
I love it when I come across data like this. The chart shows how far people will drive to get to a business in a bunch of different places in the US. It’s no great shock to find that in major cities people are less willing to travel – they have more options close by – but I bet there aren’t many mobile ad campaigns that factor this insight into account. The data, collated by navigation services company Telenav and reported on Venturebeat, also found that people will drive further to visit restaurants and malls than sandwich and coffee shops.
The really fun thing about data like this is that you can extrapolate to form a bunch of other hypotheses. For example, I would guess that the closer you get to the centre of a city the shorter the distances that people will travel, and that in general distance travelled will correlate with time and money spent.
I guess I enjoy this sort of analysis because it informs my view of how the world works which helps with my personal life, but is a real help with investing where I need to form views about what products will work in what markets on the back of very little data.
Jeff Bezos’ latest letter to the Amazon shareholders is a timely reminder that keeping customers happy is the best way to build a sustainable business. He opens the letter by contrasting the approaches of focusing on competitors and focusing on customers:
As regular readers of this letter will know, our energy at Amazon comes from the desire to impress customers rather than the zeal to best competitors. We don’t take a view on which of these approaches is more likely to maximize business success. There are pros and cons to both and many examples of highly successful competitor-focused companies. We do work to pay attention to competitors and be inspired by them, but it is a fact that the customer-centric way is at this point a defining element of our culture.
One advantage – perhaps a somewhat subtle one – of a customer-driven focus is that it aids a certain type of proactivity. When we’re at our best, we don’t wait for external pressures. We are internally driven to improve our services, adding benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to. These investments are motivated by customer focus rather than by reaction to competition. We think this approach earns more trust with customers and drives rapid improvements in customer experience – importantly – even in those areas where we are already the leader.
It is tempting for companies to focus on staying ahead of their competitors, especially as they grow larger, but that way you can only ever be just a little better than they are. That opens you up to being leapfrogged be competitors that suddenly launch a great new idea or simply decide to increase their investment, and can open up entire industries to disruption from new players who have spotted new trends in customer demand, or radically new ways to satisfy existing demand.
Companies that continually seek innovations that will delight their customers are less exposed because so long at they are doing a good job there will be less white space between what they are delivering and what their customers want. These companies will have longer lives because they leave less opportunity for their competitors to exploit.
Bezos finishes his letter with a comment on the tension between constantly delighting the company and building shareholder value:
Our heavy investments in Prime, AWS, Kindle, digital media, and customer experience in general strike some as too generous, shareholder indifferent, or even at odds with being a for-profit company. “Amazon, as far as I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers,” writes one outside observer. But I don’t think so. To me, trying to dole out improvements in a just-in-time fashion would be too clever by half. It would be risky in a world as fast-moving as the one we all live in. More fundamentally, I think long-term thinking squares the circle. Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.
As I write this, our recent stock performance has been positive, but we constantly remind ourselves of an important point – as I frequently quote famed investor Benjamin Graham in our employee all-hands meetings – “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” We don’t celebrate a 10% increase in the stock price like we celebrate excellent customer experience. We aren’t 10% smarter when that happens and conversely aren’t 10% dumber when the stock goes the other way. We want to be weighed, and we’re always working to build a heavier company.
I like that analogy a lot. It’s best for companies to focus on becoming heavy and not get distracted by the voting machine. Use it to your advantage when you can, certainly, but don’t confuse votes with value.
The chatter around Bitcoin reached frenzy levels last week as the Bitcoin:US$ exchange rate shot up and then crashed by over 50%. The chart above shows just how much volatility there was.
As many people have observed, one of the functions of a currency is to store value, and with this level of volatility Bitcoin is doing a very poor job of that. I can’t see many people choosing to own Bitcoins if the value of them might halve over a couple of days. Fiat (i.e. state sponsored) currencies experience volatility on the foreign exchange markets, of course, but not at this level, and they have the additional advantage that changing FX rates take a little while to filter through to changing prices in retail which means real world value changes more slowly. Because Bitcoins (generally) have to be changed to fiat money before they can be spent the pain is felt immediately.
My view is that if Bitcoin is to grow much from where it is today something needs to change about Bitcoin to bring more stability to the price. Put differently – the current volatility is an existential threat.
What is also becoming increasingly clear to me is that there is demand for a virtual currency, and that if Bitcoin fails we will most likely see something else rise in its place. This quote from Robert MacMillan, a former economist with the U.S. Federal Trade Commission and Stanford economist,currently Head of Portfolio Management and Director of Quantitative Research at HNC Advisors AG explains why (hat tip to Techncrunch):
The value of having an easy-to-store, hard-to-steal, and hard-to-counterfeit medium of exchange is substantial.
I would add one additional value which MacMillan doesn’t list, and that is ‘not state controlled’. I think we have seen enough examples of government mistakes undermining currencies to think it is a reasonable bet that a virtual currency controlled by a transparent set of rules and protocols that aren’t open to manipulation can have a place in the world, assuming the rules and protocols are such that it doesn’t suffer from the volatility and other problems Bitcoin is experiencing.
Finally – much of the talk about Bitcoin is of an apocalyptic nature. Most opinions are polarised, either thinking Bitcoin will fail or will amount to an amazing revolution. Whether it be Bitcoin or another virtual currency it seems to me that there is space for it to co-exist with existing currencies. If it only takes a very small percentage of the market there will be space for substantial disruption. As an example, there are a large number of startups at the moment pursuing the consumer forex market. If Bitcoin was just used for a small percentage of those transactions – e.g. salary remittance for migrant workers – then substantial value would be created. There are many small examples like this which would be good Bitcoin use cases and if they all came to pass Bitcoin would still only represent a small fraction of currency flows.
This TEDx video from Daniel Amen gives a great explanation of how to take care of your brain. He has taken over 63,000 brain scans over the last 20 years and has found that the brain scans of people with bad habits are all gnarly and horrible. A gnarly scans mean a physically unhealthy brain which means thinking, judgement, personality, interaction with others and ability to innovate will all suffer. The picture above shows a healthy brain on the left and an unhealthy brain on the right.
Daniel says it is ‘very clear to him’ that people with healthy brains are happier, healthier, wealthier, and wiser, whereas people with unhealthy brains are sadder, sicker, poorer, not as smart and less flexible.
Mostly people think of this as ageing, but what Daniel shows is that the way we treat our brains also has a massive effect. Moreover, people who improve their habits can improve the physical health of their brains even at relatively advanced ages. He shows scans from one man whose brain got significantly healthier over ten years from the age of 53 after he began taking care of it.
So what do you need to do to take care of your brain – nothing too surprising really, except maybe meditate!
- Sleep a min of 7 hours a night (less than 7 hours blood flow to the brain reduces)
- Avoid drinking (even two glasses of red wine a day aren’t good….)
- Don’t smoke
- Avoid obesity (body weight correlates negatively with brain weight)
- Form new social connections
- Learn new stuff
- Be grateful
- Eat well
I think the best way to think about the brain is that it is like a muscle. They teach this to my kids at school saying that like a muscle the more you use it the stronger it gets. Saying the same thing, the work of Kurzweil and many others has shown for a long time that using your brain in a positive way (intellectual challenge, social interaction, ball sports) slows the rate of decline in elderly people. But exercise is only one half of taking care of a muscle – you also need to rest it and feed it right.
As you can see the latest data out from CBInsights shows a modest increase in investment activity in the US from Q4 to Q1 and no change in the split between Seed, Series A and so on. There isn’t much seasonality in this data, so I think it is more meaningful to look at the quarter to quarter trend than the difference to the same quarter one year ago.
I guess the most remarkable thing about this is that all the talk about a coming Series A crunch hasn’t impacted seed funding. I can think of two explanations for that. Firstly investors are always slow to respond to new data. When they hear things that cause them to re-think their strategy they typically do that rethink over a period of weeks whilst they complete on the deals they have in process. Most angels wouldn’t feel right turning to an entrepreneur and saying “I know I said I would invest in your company but following everything I’ve read I’m now too worried about the Series A crunch”. They would rather honour their commitment. Secondly, investors might be hearing the talk of a Series A crunch but not really believing it yet. In this scenario they will wait until there is blood on the streets before they stop investing.
The other thing that is going on, of course, is that the cost of innovation is continuing to decline meaning that more value can be created with less capital and that all else being equal I would expect seed deals as a percentage of the total to be increasing.
Putting it all together I would expect that over the coming quarters the impact of the Series A crunch, both in expectation and reality, will outweigh the secular trend towards more seed deals and the share of seed deals will drop.
The picture from the other side of the market, LPs investing into VC funds, is also fairly static. I haven’t seen hard numbers recently, but anecdotally top tier funds are continuing to close funds successfully, some of them at an increased size, whilst second tier funds and new funds continue to find it difficult. I don’t expect this to change much until returns start to improve or unless we have a significant upswing in the economy.
This post has been about the US rather than Europe, but I think the trends are the same here, except maybe that seed investment is growing in the UK on the back of the EIS and SEIS tax incentive schemes.