YC Is A Network Effect Business

The best investors often look for network effect businesses - where each incremental addition of a user to the network increases the value of the network for the other users.  These types of business are typically very defensible (hard to break the network) and quite valuable (if in a large market).

In Y-Combinator's case, the "user" in the network is a startup.  YC creates a pretty amazing network effect for the companies who pass through.  This includes:

1. Peer based help.
Many YC founders will ask other batchmates for their advice, feedback, and recent learnings.  When I left Google to start my first company, there was similarly an invaluable network of ex-Google founders to tap into.  This allows you to learn who the helpful investors are, tips on hiring, and about new types of distribution or platforms.  These sorts of peer networks are invaluable and typically quite hard to come by quickly.  YC plugs you directly into this network of peers.

2. Early advice and mentoring.
Beyond peers, YC provides a series of role models and mentors just a few years ahead of the current batch.  YC founders can tap into founders at almost any stage of the startup lifecycle to get advice on what to expect next.  This is where the true network effect of YC kicks in.  By having more startups distributed throughout the lifecycle of a company, YC provides a broad based cross-mentoring network for all its companies.  Each new company helps advise and mentor later companies.

3. Customers & market validation.
One of the most powerful aspects of YC is its built in customer development.  Especially for B2B companies, YC provides an instant initial testing ground and potential user base for the startup's products.  These early customer wins helps with both product testing and iteration, but also provides the startup with fast market validation.  By having a number of early brand name customers (from prior YC batches) using the product, YC B2B companies can both get to revenue faster (helping with fundraising) as well as to some notion of product/market fit (due to fast and broad feedback).

4. Capital.
A number of YC founders have emerged as prominent angels.  They can provide early capital and validation for a startup, allowing it to bootstrap a seed round more effectively.  The first few dollars raised are always the hardest, so early investors are valuable in giving a seed round momentum.

Surprisingly, very few traditional venture firms have an ex-YC founder as a partner.  I would expect this to change and to follow the pattern of Google, where VCs hired a number of ex-Googlers into their firms to access that talented network.

5. Branding.
Each new Continue reading "YC Is A Network Effect Business"

3 Types of Notifications

https://www.flickr.com/photos/postmemes/14876404921/in/photolist-oEzsU2-6ySueJ-6yNpCp-o5SmJA-9aqABV-awo33u-4UHdYz-9AM9vi-yP8Ni-4UHeiF-9QWcmV-9atiAk-9fpeaj-9fyWAN-8iXQ5k-9fvP22-9fyWzJ-a69WFk-68thin-9n4wdv-aVrJBr-7XiLD3-7aXSx1-7xk83j-bVShhj-6s3Lk3-efr8xX-dFCvDi-fLur7b-a5CpcV-dTaciK-gYy1G4-btt8yn-6YwU6j-fieNMs-6TACCc-77WX54-6UCabD-7tKmy9-fqgG5K-b2Kmn6-fGJdaU-74ySFz-6U4jSe-efr9pK-efr8Vn-7zZWk2-efqUmD-efqTvD-6FNCt1/
Photo credit: Post Memes via Flickr

Talking with founders is one of my favorite parts of being an early stage investor. Recently a founder casually mentioned there were three types of push notifications. I pounced on the comment as I had thought the same thing independently and was I excited to hear someone else’s definitions. Turns out we were in completely different places: the founder was thinking about notification technology while I was thinking notification use cases.

The three technical types she outlined were push, local, and in-app. In reviewing the iOS dev docs, one could also frame three as badge, message, and sound. The reality is that on either dominant mobile platform, notifications have a lot of unexplored potential in terms of tech and UX.  And as the sophistication of notifications design grows in support of user engagement (not new user growth as is commonly discussed) the need for specific

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Continue reading "3 Types of Notifications"

3 Types of Notifications

https://www.flickr.com/photos/postmemes/14876404921/in/photolist-oEzsU2-6ySueJ-6yNpCp-o5SmJA-9aqABV-awo33u-4UHdYz-9AM9vi-yP8Ni-4UHeiF-9QWcmV-9atiAk-9fpeaj-9fyWAN-8iXQ5k-9fvP22-9fyWzJ-a69WFk-68thin-9n4wdv-aVrJBr-7XiLD3-7aXSx1-7xk83j-bVShhj-6s3Lk3-efr8xX-dFCvDi-fLur7b-a5CpcV-dTaciK-gYy1G4-btt8yn-6YwU6j-fieNMs-6TACCc-77WX54-6UCabD-7tKmy9-fqgG5K-b2Kmn6-fGJdaU-74ySFz-6U4jSe-efr9pK-efr8Vn-7zZWk2-efqUmD-efqTvD-6FNCt1/

Photo credit: Post Memes via Flickr

Talking with founders is one of my favorite parts of being an early stage investor. Recently a founder casually mentioned there were three types of push notifications. I pounced on the comment as I had thought the same thing independently and was I excited to hear someone else’s definitions. Turns out we were in completely different places: the founder was thinking about notification technology while I was thinking notification use cases.

The three technical types she outlined were push, local, and in-app. In reviewing the iOS dev docs, one could also frame three as badge, message, and sound. The reality is that on either dominant mobile platform, notifications have a lot of unexplored potential in terms of tech and UX.  And as the sophistication of notifications design grows in support of user engagement (not new user growth as is commonly discussed) the need for specific language to analyze the different types of notifications grows since not all of them are made equal!

With that in mind I’m going to enumerate the key notification use cases given their importance to mobile application design, engagement, and growth. Personally, I’ve come to believe there are three common types of use cases for notifications*: (1) user-generated, (2) context generated, and  (3) system generated. Diving into each a bit more:

  1. User-generated notifications: These notifications contain content created by a human using the app to other humans. Generally, these are the most engaging but especially so when the content they contain is private and directed to specific people. Mobile messaging is the highest volume example of this type of notification but other examples include comments / likes / favorites on posted content or @ mentions. My current favorite example of this notification is getting a new photo of my son from my wife.
  2. Context-generated notifications. These notifications are generated by an application based on the permission of its users. This is the fast growing category of notifications because the amount of machine readable data mobile devices create: location, contacts, calendars, and much much more. The norms around context-generated notifications are still be worked out between developers and users. Location-based notifications currently dominate this category but other examples include information about your next meeting (time relevance) or updates about your favorite sports teams (interest relevance). My current favorite example of this notification is when I get notified there is a designer nearby via Highlight (disclosure: I’m an investor there).
  3. System-generated notifications. These notifications are generated by an app based on the needs of the app. This type of notification can usually be called re-engagement at best or spam at worst.  Sometimes these can create value for the end user like letting you know a friend has started
    Continue reading "3 Types of Notifications"

Common vs. Preferred

Yesterday, inspired by a dinner conversation I was having with an old friend, I started musing about the common vs. preferred difference.

He had remarked that, as an employee of a startup, the risk and amount of effort (including opportunity cost) that goes into being part of the success of the business seems to not be commensurate with the incredible amount of rights (voting, information, pro rata, etc) that come along with being an investor. He asked me “why is sweat equity so much less protected than preferred equity, if sweat equity is so much harder, so presumably more valuable?” His instinct was that something about that didn’t seem fair. I had a lot of good reasons for why it’s better for the investor, but didn’t have a good answer for him about why it’s better for the company, or for the employees. So, comme toujours, I took to Twitter for help. Here are some of the thoughts that emerged:

An equity investment is a negotiated contract around future performance. The management pitches that they will do X (based on how they have performed to-date). The preferred ‘bullets’ protect the investor if the management *undershoots* X. If they *outperform*, then common actually equals preferred, because the valuation rises quickly, and the management has optionality in attracting future capital.

— Any human on the planet can sweat. Capital is scarce. This was far more true in the early days of venture capital, when innovative startups were harder to understand, and the capital willing to take a risk on an early entrepreneur was much more scarce. But the convention still holds that smart money is rarer than sweat.

— A return on sweat is harder to value than a return on a dollar. If I, as a founder or an employee, put my time into a startup, I can earn many types of rewards, including friends, a network, a reputation, and learning. If I, as an investor, put my money into a startup, the only accepted return that makes the investment ‘worthwhile’ is more money. So, making $100 after putting $0 in is quite different than making $100 after putting $40 in.

— It’s cyclical. While interest rates are low and institutional investors are pushing capital into funds (and therefore startups), employees and entrepreneurs think this way and push for stronger common stock. But when it’s the opposite, like in the early 2000s they’ll just be glad to have a salary.

If you’re wondering why your investor will get paid in an exit before you do, or why your investor will earn twice their money before the employees earn anything, or why your investor gets to vote on whether Continue reading "Common vs. Preferred"

Learn from Your Analytics Failures

By far, the safest prediction about the business future of predictive analytics is that more thought and effort will go into prediction than analytics. That’s bad news and worse management. Grasping the analytic “hows” and “whys” matters more than the promise of prediction. In the good old days, of course, predictions were called forecasts and stodgy statisticians would torture their time series and/or molest multivariate analyses to get them. Today, brave new data scientists discipline k-means clusters and random graphs to proffer their predictions. Did I mention they have petabytes more data to play with and process? While the computational resources and techniques for prediction may be novel and astonishingly powerful, many of the human problems and organizational pathologies appear depressingly familiar. The prediction imperative frequently narrows focus rather than broadens perception.  “Predicting the future” can—in the spirit of Dan Ariely’s Predictably Irrational—unfortunately bring out the worst cognitive
Continue reading "Learn from Your Analytics Failures"

Learn from Your Analytics Failures

By far, the safest prediction about the business future of predictive analytics is that more thought and effort will go into prediction than analytics. That’s bad news and worse management. Grasping the analytic “hows” and “whys” matters more than the promise of prediction. In the good old days, of course, predictions were called forecasts and stodgy statisticians would torture their time series and/or molest multivariate analyses to get them. Today, brave new data scientists discipline k-means clusters and random graphs to proffer their predictions. Did I mention they have petabytes more data to play with and process? While the computational resources and techniques for prediction may be novel and astonishingly powerful, many of the human problems and organizational pathologies appear depressingly familiar. The prediction imperative frequently narrows focus rather than broadens perception.  “Predicting the future” can—in the spirit of Dan Ariely’s Predictably Irrational—unfortunately bring out the worst cognitive
Continue reading "Learn from Your Analytics Failures"

OpenTable – Opportunity

When I co-founded PrimaTable, a restaurant marketplace startup, I had prior experience within Google’s Adwords and YouTube’s media marketplace. Taking the plunge, I tried to systematically learn about marketplaces from as many public company as possible. Unfortunately, many marketplace companies don’t report on the essential operational metrics (unit economics, CAC, LTV, liquidity, geographic density …) and require crude assumptions to decompose their performance. OpenTable was my closest comparable and reports nearly a complete set of supply side unit economics going back to 2006. Let’s take a look at their business.

History

Founded in 1998, OpenTable is a two-sided local marketplace connecting diners with restaurants. OpenTable started as a restaurant electronic reservation book (ERB). To grow their marketplace, OpenTable focused on single side utility, adding value to restaurants focused on customer service with a CRM and table management system. OpenTable focused on liquidity in a local geography prior to broader expansion. After the aggregation of a comprehensive list of restaurants in a metropolitan area, OpenTable.com provides value to consumers by facilitating the discovery of reservation availability.

Acquired by Priceline in July of 2014 for $2.6B, OpenTable takes reservations currently has over 32K restaurants internationally and has seated over 665 million dinners.

In this post, I’ll dig into OpenTable’s business with a focus on opportunities Priceline can capture. Priceline has stated a focus on three strategic areas (SAs) post-acquisition:

  1. International expansion
  2. Demand generation
  3. Marketplace innovation, especially in mobile

OpenTable’s business model is very similar to Priceline’s, in demand generation, supply aggregation and operational needs. Like hotels and airlines in the travel industry, restaurants have a high fixed cost and low variable cost (35%). To maximize profit, restaurants want to be at 100% occupancy and have significant margin to spend to acquire customers. Unlike Priceline, OpenTable has a much more frequent but lower margin and volume transaction.

Stage

OpenTable has grown to nearly $200M in revenue. The fastest growing portion of their revenue is reservation performance marketing product. SA #2 post-acquisition will be to focus on the marketing products further increasing the growth within performance marketing.

Revenue by Type.

Network effects

The beauty of marketplace businesses is - at liquidity there are strong network effects. Year over year growth in diners has consistently outpaced that of restaurants (outside of the Top Table acquisition in 2010). This is due to the increased value that each incremental user of OpenTable has due to the comprehensive coverage of supply. As OpenTable focuses on SA #3 marketplace innovation, expect revenue growth to begin to outpace even diner growth. OpenTable can offer additional value to both consumers and restaurants by creating a more efficient market.

Year over Year Growth.

Unit Economics

Restaurant Acquisition

Continue reading "OpenTable – Opportunity"

Ryan Martens on Councilperson Macon Cowles’ Ignorance of the Boulder Startup Community

Like many here in Boulder, I felt that Boulder City Councilperson Macon Cowles’ recent remarks about our startup community were both ignorant and offensive. A group of entrepreneurs posted an OpEd this weekend responding to those remarks in the Daily Camera (it’s worth nothing the diversity of those entrepreneurs vs. Councilperson Cowles’ flatly incorrect characterization of Boulder entrepreneurs). Ryan Martens – a long time Boulder entrepreneur and community activist – felt the same way and asked to borrow this spot to post some of his own thoughts on the diversity of the Boulder entrepreneurial ecosystem as well as the many ways that entrepreneurs in Boulder are giving back to our community. His post follows.

I was very discouraged to see councilperson Macon Cowles’ comments from Boulder’s city council meeting the 2nd week of August. “Boulder’s startup economy brought a lot of very highly paid white men to the city, and they were pricing out families and others.”  He then followed up with the statement “I don’t think that’s what people want.”  His over simplified view that Boulder’s entrepreneurial community is the direct source of an affordable housing shortage is grossly incorrect.

Why attack the startup community? It is even more disappointing given the significant impact a collaboration between the City of Boulder and local startups could have in addressing complex social issues that face our whole community.

I’d counter his comment with facts:  The startup community is very present in positive ways in many aspects of Boulder.

During last year’sflood, startups pulled together to fund relief and contributed more than $200,000 and hundreds of volunteer hours during normal work hours.  Most participating startups weren’t even making a profit at the time.

The Entrepreneurs Foundation at the Boulder Community Foundation has contributed more than $2 Million for local non-profits during the past two years through donations of stock options at the time of initial offerings (a circumstance unique to startups).

I want to see our community working and collaborating at a level where we are increasing the economy while addressing issues around environmental sustainability and social equity. It is actually the social mission of my company, (a business I started in Boulder 11 years ago and now employees 250+ in Colorado) – to create Citizen Engineers who use their skills to do just that.  The lack of affordable housing issue has been brewing here just like it has in many strong economic cities in America.  It is complex issue tied to the income gap, a booming economy and smart growth strategies that started in Boulder the 1950’s with the blue line and the greenbelt. (Don’t get me wrong, I am a huge supporter of these land management solutions and benefitted greatly by

Continue reading "Ryan Martens on Councilperson Macon Cowles’ Ignorance of the Boulder Startup Community"

How a 10-year fund life impacts your startup

Venture capital Limited Partner Agreements look very similar. The formula goes something like this: 10 year fund, 4 year investing period, 2% management fee and 20% carried interest. The implications of these terms can help explain why venture capitalists work the way they do, and help founders ask the right questions of their investors.

After the 4-year investing period, the 2% management fee, which otherwise kicks in every year, ratchets down to 2% of the invested capital, meaning that investors tend to fundraise for a subsequent fund before the end of the 4-year period, so they can ensure they can continue deploying capital, paying themselves, and keeping the lights on at their organization. Under these circumstances, a venture investor will pitch their next fund *before* they have fully invested the fund before it, much less realized all of the gains in the first set of investments.

What it means for the investor:
Investors pitch LPs on the ‘markups’ and IRR of the previous fund — has there been follow-on investing, at a higher valuation, from their investment? Any acquisitions, mergers, or public offerings?

What it means for you:
If the fund manager has yet to prove herself, and is still early in building out her portfolio, she has a very strong vested interest in your raising subsequent funding at a higher valuation, ideally soon after her funding comes in.

An investor will deploy all of the principal and reserves in the first four years, which means that the companies which have a long road ahead of them, or which are very experimental, might be better investments at the beginning of a fund, so that they have time to mature.

What it means for the investor:
Consequently, those companies that are somewhat later stage, or are in a period of high valuation but also high revenue / defensibility, might be more appropriate for the end of a fund, where the investor has fewer years to show a return to the LPs.

What it means for you:
If you are doing something very ambitious, highly experimental, or not very viral, you may be better off working with investors who are at the beginning of their fund life, because they are willing to ride for a longer time than investors who are making only a few more new investments before they raise their next fund.

Most investors have an expected return of 3-5x over *at most* 10 years, with a preference towards 7 or even 5 years. This fund structure forces liquidity in a timeframe that is almost always sub optimal for the business.

A business should exit based on one of the following:

- When they have an amazing opportunity to combine Continue reading "How a 10-year fund life impacts your startup"

A Predictive Analytics Primer

No one has the ability to capture and analyze data from the future. However, there is a way to predict the future using data from the past. It’s called predictive analytics, and organizations do it every day. Has your company, for example, developed a customer lifetime value (CLTV) measure? That’s using predictive analytics to determine how much a customer will buy from the company over time. Do you have a “next best offer” or product recommendation capability? That’s an analytical prediction of the product or service that your customer is most likely to buy next. Have you made a forecast of next quarter’s sales? Used digital marketing models to determine what ad to place on what publisher’s site? All of these are forms of predictive analytics. Predictive analytics are gaining in popularity, but what do you—a manager, not an analyst—really need to know in order to interpret results and
Continue reading "A Predictive Analytics Primer"

A Predictive Analytics Primer

No one has the ability to capture and analyze data from the future. However, there is a way to predict the future using data from the past. It’s called predictive analytics, and organizations do it every day. Has your company, for example, developed a customer lifetime value (CLTV) measure? That’s using predictive analytics to determine how much a customer will buy from the company over time. Do you have a “next best offer” or product recommendation capability? That’s an analytical prediction of the product or service that your customer is most likely to buy next. Have you made a forecast of next quarter’s sales? Used digital marketing models to determine what ad to place on what publisher’s site? All of these are forms of predictive analytics. Predictive analytics are gaining in popularity, but what do you—a manager, not an analyst—really need to know in order to interpret results and
Continue reading "A Predictive Analytics Primer"

A Predictive Analytics Primer

No one has the ability to capture and analyze data from the future. However, there is a way to predict the future using data from the past. It’s called predictive analytics, and organizations do it every day. Has your company, for example, developed a customer lifetime value (CLTV) measure? That’s using predictive analytics to determine how much a customer will buy from the company over time. Do you have a “next best offer” or product recommendation capability? That’s an analytical prediction of the product or service that your customer is most likely to buy next. Have you made a forecast of next quarter’s sales? Used digital marketing models to determine what ad to place on what publisher’s site? All of these are forms of predictive analytics. Predictive analytics are gaining in popularity, but what do you—a manager, not an analyst—really need to know in order to interpret results and
Continue reading "A Predictive Analytics Primer"

Oh, The Places You’ll Go!

“You have brains in your head. You have feet in your shoes. You can steer yourself any direction you choose. You’re on your own. And you know what you know. And YOU are the one who’ll decide where to go…”

Dr. Seuss, Oh, The Places You’ll Go!

My son was born a month ago. It has been one of the most amazing experiences, nothing short of miraculous. One night while soothing him back to sleep, I reflected on how different a world he will face when he starts his family. The amount of innovation that has happened over the course of my lifetime is staggering. The cumulative nature of discovery, each invention building upon a growing base of knowledge, dictates that this innovation only continues to accelerate. From our seat in Silicon Valley, acceleration is readily apparent.

In the last 30 years, we’ve seen the mass adoption of personal computers, a global internet, and smartphones. Long the domain of only science fiction, technologies like 3d printing, virtual reality, connected devices, quantified self, consumer robotics, and self-driving cars are on the immediate horizon. A series of simultaneous parallel inventions served to create the modern information technology economy. Exponential growth of compute power (Moore’s law), storage capacity (Kryder’s law), and data transmission (Butters’ and Nielsen’s have driven unfathomable hardware advancement. The lasting effect of these inventions is still playing out.

Previous leaps in efficiency during the Industrial Revolution centered around augmenting physical processes and were limited by fuel and mechanical innovation. More so than anytime before, the technical innovation today serves to enable further innovation (whether explicitly with computer aided design, or implicitly changing how we learn). Information technology augments mental processes and allows the transformation of every facet of our world.

As a huge fan of science fiction I recognize I’m no Hari Seldon. Here are some thoughts about what the next 10 years may bring, looking at startups founded today.

Information Revolution

Information is being digitized, organized and made universally accessible. To quote the film Serenity, “You can’t stop the signal, Mal.” With the rise of connected devices and cheap sensors, data is increasing exponentially. Anything that can, will be quantified. Once quantified, it will be analyzed and understood. Put another way, every physical thing will become smart. Everything will be connected, measured and responsive.

The information revolution that is currently happening in this rapid digitization is what powers much of the modern innovation. As Google Research Director Peter Norvig says, the combination of rapidly increasing data and new methods to process this data means new and better models yielding increased information, relevance and personalization. Already, services are moving from comprehensiveness (10 Continue reading "Oh, The Places You’ll Go!"

Awesome quotes from The Effective Executive

I recently finished reading The Effective Executive by Peter Drucker.  It’s a business classic that’s chock full of exceptional advice and insights.  It was originally published in 1966 and all of the lessons still apply.  Here are my highlights.  Enjoy. 



The Effective Executive (Harperbusiness Essentials) by Peter F. Drucker



"The fewer people, the smaller, the less activity inside, the more nearly perfect is the organization in terms of its only reason for existence: the service to the environment."


"An organization, a social artifact, is very different from a biological organism. Yet it stands under the law that governs the structure and size of animals and plants: The surface goes up with the square of the radius, but the mass grows with the cube. The larger the animal becomes, the more resources have to be devoted to the mass and to the internal tasks, to circulation and information, to the nervous system, and so on."



"The danger is that executives will become contemptuous of information and stimulus that cannot be reduced to computer logic and computer language. Executives may become blind to everything that is perception (i.e., event) rather than fact (i.e., after the event). The tremendous amount of computer information may thus shut out access to reality." 



"Whether this theorem is valid or not, there is little doubt that the more people have to work together, the more time will be spent on “interacting” rather than on work and accomplishment."



"Few executives make personnel decisions of such impact. But all effective executives I have had occasion to observe have learned that they have to give several hours of continuous and uninterrupted thought to decisions on people if they hope to come up with the right answer."



"I have yet to see an executive, regardless of rank or station, who could not consign something like a quarter of the demands on his time to the wastepaper basket without anybody’s noticing their disappearance."



“What do I do that wastes your time without contributing to your effectiveness?” To ask this question, and to ask it without being afraid of the truth, is a mark of the effective executive.”


"The man who focuses on efforts and who stresses his downward authority is a subordinate no matter how exalted his title and rank. But the man who focuses on contribution and who takes responsibility for results, no matter how junior, is in the most literal sense of the phrase, “top management.” He holds himself accountable for the performance of the whole."



“If I had a son or daughter, would I be willing to have him or her work under this Continue reading "Awesome quotes from The Effective Executive"

The Art of Profitability

I've read Adrian Slywotzky's The Art of Profitability three times now, and each time I learn something new. According to its Amazon page, the book "offers 23 business lessons via the tale of a manager's quest to learn the "art of profitability" from David Zhao, a wise master." Each lesson starts with basic principles and uses the Socratic method to build up to a profitable business model. I think current founders, aspiring founders, investors, and employees would find this book valuable and practical. Here are some notes on the profit models that are most relevant to software companies -- although the notes are no substitute for reading the book! The main theme: "The path to profitability lies in understanding your customer."

Assorted Profit Models

Pyramid Profit

Key insight: Different segments of customers want different levels of quality/service and have different abilities to pay. Product lines that Continue reading "The Art of Profitability"

The Art of Profitability

I've read Adrian Slywotzky's The Art of Profitability three times now, and each time I learn something new. According to its Amazon page, the book "offers 23 business lessons via the tale of a manager's quest to learn the "art of profitability" from David Zhao, a wise master." Each lesson starts with basic principles and uses the Socratic method to build up to a profitable business model. I think current founders, aspiring founders, investors, and employees would find this book valuable and practical. Here are some notes on the profit models that are most relevant to software companies -- although the notes are no substitute for reading the book!

The main theme: "The path to profitability lies in understanding your customer."

Assorted Profit Models

Pyramid Profit

Key insight: Different segments of customers want different levels of quality/service and have different abilities to pay. Product lines that map well to different customer segments can capture more profit.

Explanation: A pyramid is a system of three profit tiers:

  • a defensively priced bare-bones product to keep competition out.
  • a standard product for most people.
  • deluxe version to get maximum profit from those with a high willingness to pay.

Many SaaS businesses follow this profit model: there's a free/cheap tier, a medium priced tier that is appropriate to most customers, and an enterprise tier for customers with deep pockets who want the most features and services. Another example of this profit model would be different car models for a single brand (e.g. Nissan Versa vs Altima/Maxima vs GT-R).

Multi-Component Profit

Key insight: Customers can have different price sensitivities for the same item in different contexts. Someone who needs a resume proofread might pay $25, but someone who needs it proofread in the next 24-hours might pay $100.

Explanation: You can often sell the same thing in different contexts and for different prices. For example, you can sell a bar of soap     for $1 at 7-11, a 6-pack $3 at a grocery store, and a 30-pack for $10 at Costco. Similarly, you can rent out a hotel room to individuals, wedding parties, or business conference attendees -- the prices and profitability levels will vary greatly across these use cases, but the room is always the same.

Switchboard Profit

Key insight: In contexts where assembling a package of related goods and services takes a lot of effort, customers will pay a premium for pre-assembled packages.

Explanation: There are situations where a customer prefers to buy a package of several interlocking pieces instead of hunting down each piece separately. The book uses the example of movie studios, which need a director, a script, and a star Continue reading "The Art of Profitability"

NYC: A Natural Home for European Entrepreneurs

Last night I was invited to speak at the inaugural NYC European Tech Meetup.  There are tons of obvious reasons why the NYC and European tech ecosystems should work closely with one another, so a meetup on the topic was long overdue.  Congrats to Alban Denoyel and Anthony Marnell for starting it, and thanks for inviting me to speak, was a lot of fun.  Below are the slides I used – the presentation was meant to be a “State of the Union” of European tech in NYC, a high level overview fit for an inaugural meetup and get the conversation started.

 

Many thanks to David Rogg, our newest associate at FirstMark, for helping me with this.  I’m sure we missed some companies and people – if so, let us know in the comments, and we’ll update the presentation.


Startup Traction Starts With The Right Goal. How To Get It Right.

Without traction -- sustainable customer growth -- your startup will languish or die. As such, traction should always be top of mind.

To focus your traction efforts, you need a traction goal to work towards. Example goals are 1,000 new users, 100 new customers or 10% market share.

The right goal for you depends on your business. It should  be chosen carefully and align with your company's next inflection point. When you reach this goal, what will change significantly? Perhaps you’d be profitable, be able to raise money, or become the market leader.

The importance of choosing the right traction goal cannot be overstated. Are you going for growth, profitability, or something in between? If you need to raise money in 12 months, how much traction do you need to do so? These are the types of questions that help you determine the right traction goal.traction-book

DuckDuckGo Example

DuckDuckGo is the search engine that doesn't track you. We saw more than a billion searches in 2013, six years after I founded the company. At DuckDuckGo, our current traction goal is one percent of the general search market. Achieving that goal is meaningful because at that point we will be an entrenched part of the market and receive everything that comes with that (recognition, better deals, PR, etc.).

This traction goal wouldn’t work well for most other companies because usually one percent of a well-defined market is not that significant or valuable. It works in the search engine space because the market is so big and there are so few companies in it. This speaks to the importance of setting a traction goal that is significant for your company.

Before this traction goal, DuckDuckGo had a traction goal of 100 million searches a month, which took us to break-even. Getting to break-even was the significant company milestone that aligned with this traction goal.

Before that, the traction goal was to get the product and messaging to a point where people were switching to DuckDuckGo as their primary search engine and sticking indefinitely. The company significance there was to achieve true product/market fit.

These are big goals, and that's the point. Our traction goals have each taken about two years to achieve. The timescale is not important, however. The significance to your company is important. If the significance you are trying to achieve is profitability and you think you can get there in six months then that’s great!

Focusing on your Goal

Once you establish a traction goal, you can use it to evaluate what you should be working on. If activities are not related to achieving your traction goal, you should not be doing them. If marketing campaigns won't move

Continue reading "Startup Traction Starts With The Right Goal. How To Get It Right."

SaaS + Marketplace

One of the hardest things about marketplaces is that you typically only get a very small rake.  10% of services is common.  After transaction fees, you may be left with just 7% of gross services.  So, even if you’re doing 100M in gross services, you’re really still doing less than 10M in net revenue.  Some marketplace businesses have started monetizing at least in part through higher-margin software fees. 

There is a new trend emerging which combines two of the most beloved business models in tech.  

SaaS + Marketplace

SaaS (software as a service) models are very well understood and straightforward.  A customer pays a monthly fee to be able to use a hosted software solution.  

Marketplaces are also very common business models.  You simply take a percentage of all the transactions that you facilitate through your platform. 

What happens if you combine these things together? 

The SaaS gets better. 

One of the issues with selling SaaS is that the tools often enable a new use case in the company that the company is not prepared to staff.  Take Optimizely as a hypothetical example.  They provide a great tool for A/B testing, but maybe the internal resources are not in place to actually design a whole bunch of new landing pages.   This creates a hurdle for a company to adopt the software solution that may create longer sales cycles or lower sales conversion. 

Now imagine Optimizely + a Designer Marketplace.  This becomes more of a complete solution and a company can adopt both the software and the designers to start testing pages immediately.   Additionally, it ensures that they will get the full value from the great SaaS tools. This fits with Chris Dixon’s theme of owning the “full stack.”  

Not only that, all of the designers on Optimizely’s platform will be very experienced using Optimizely so they can take full advantage of all the features and functionality.  They will also likely be product evangelists and can help the classic land and expand type SaaS strategy.  Maybe even comp them for upsells of the product within organizations they’re working for. 

Summary: 

  1. Sales cycle decreases 
  2. Sales conversion increases
  3. Value from SaaS increases

The Marketplace gets better. 

The opposite happens sometimes when you start with a marketplace only.  Frequently, the marketplace may be a great source of talent, but then software is needed to manage the process and people. 

Now imagine a designer marketplace without any software solution.  There may be great designers on there, but if you hired them to do A/B testing work, you’d have to figure out an additional software package to use, train them on Continue reading "SaaS + Marketplace"