Software as a Service and cloud computing has been transformational for the software industry. But compared to what is coming next, you ain’t seen nothing yet. First, to appreciate where we are heading a quick review of where we’ve been is in order. Back in the olden days of business software a software company sold you an application which you installed on your servers and desktops which made business processes more efficient, facilitated workflow, and sped up information retrieval. As you used it this software accumulated data such as your customer records, financial results and manufacturing statistics. If you wanted to deeply analyze this data for trends and insights you bought Business Intelligence or Analytics packages from a different set of software vendors so you could slice and dice your data, generate reports for executives, and hopefully decipher interesting trends about your business that you would then go act on. In the early 2000s Software-as-a Service companies emerged and enabled you to “rent” business applications, rather than buy them, as your employees accessed them through the Internet and their web browsers. This came with many advantages in total cost of ownership and manageability, but fundamentally most of the first SaaS applications were about workflow and data storage/retrieval just like their on-premise software forefathers. In the last few years we’ve had a “Big Data” explosion and a host of new open source technologies like Hadoop, MapReduce, and Cassandra packaged by a set of new companies that help businesses manage and manipulate their ever expanding mountains of data. Also emerging is a new generation of cloud based analytics companies that make it easy to slice, dice, and visualize big data sets.
So what’s the point of this history lesson? The point is that, for the most part, all of these business applications and more recent Big Data tools have left the burden of capturing real business insight, making decisions, and taking action on the business customers themselves. In essence, if you wanted real business value you had to create that value yourself by getting your employees to use the applications (which often means manual data input), have analysts mine and interpret the data, and ask managers and executives to make decisions based on what they see in the reports and charts. For example, if your company used Sales Force Automation, whether it be Siebel on premise or Salesforce.com in the cloud, your sales reps had to diligently input data about their sales calls and management had to be smart about logging in to read the reports, suggest actions for each account and discern broader trends across the data. A new breed of software company is emerging, however, that combines data science expertise with deep understanding of business problems. I call them Data Driven Solutions. These solutions use algorithmic data mining, not only on your own data but often on external third party data sets accessible by cloud ecosystems and APIs. Data Driven Solutions make predictions about business functions, prescribe what to do next, and in many cases take action autonomously. Trained analysts are not required to query databases but rather business users get answers directly from the software. These answers typically feed seamlessly into the flow of business activity, often invisibly. While this distinction may seem subtle, I believe it is fundamental and disruptive, and represents the future of software. This is in no way the end of the SaaS, but in fact where SaaS is going next and presents massive opportunity to new SaaS innovators and a potential threat to incumbents who do not adapt.
Think Moneyball, for everything. Billy Beane of the Oakland A’s defied the conventional wisdom of traditional baseball talent scouts by recruiting players other teams underappreciated but whom he believed represented great return on investment. He did this not by relying on his own brilliant sense of which players to recruit but by letting a math whiz run regression analysis on player statistics to figure out which lesser heralded stats were most predictive of winning baseball games. The math predicted results and told him which players to acquire, predictions which Beane followed to his team’s competitive advantage. Opportunities to apply this approach in business are practically everywhere. 6Sense* is a new SaaS company that analyzes B2B website traffic and third party data to predict which prospects are most likely to buy from you, what they will buy, when they will buy, and how much they will buy. Like Beane, they don’t rely on rules of thumb in scoring prospects, such as whether the prospect downloaded a white paper, viewed lots of product detail webpages, or has “Procurement” in their job title. 6Sense has found that these heuristics yield only about 50% accurate forecasts which is not enough to compel a sales person to trust the results. Instead, 6Sense uses a variety of machine learning statistical models to uncover the unexpected correlations which drive predictive accuracy up to 85-90% accuracy which definitely gets a sale rep’s attention. Instead of being a chore to use like Sales Force Automation, 6Sense tells sales reps how to close more deals and earn more commissions. Infer, Lattice, and C9 are also innovating in the area of predictive CRM solutions. Use your domain expertise to figure out what problems to solve for your customers, but let the data lead to new and unexpected insights.
Build in Data Learning Loops Google enjoys a very powerful form of Network Effect. The more searches they run and resultant clicks they see the better they understand the intent of what a searcher wanted to find. This makes their search algorithms better which earns them more user searches, which keeps the search quality/volume flywheel spinning. This notion of a “learning loop” can be applied to many business settings as long as you find a way to “close the loop” and see how your prediction or answer actually fared. For example, AppNexus* is an AdTech company that operates an exchange where publishers and ad networks on one side are matched by algorithms with advertisers and agencies on the other side to put the right ad in front of the right audience at the right time. Learning loops are built in to the bidding and optimization algorithms which get the chance to learn from their results more than a billion times per day. Data Learning Loops are powerful sources of competitive advantage akin to natural monopolies for those who achieve greatest scale.
Don’t Just Describe–Predict and Prescribe Some may ask whether Data Driven Solutions are just a new name for Business Intelligence. I don’t think so. Analytics packages mostly describe what is happening by sorting and filtering your data to show sums and averages and trend lines in tabular or graphical format. Data Driven Solutions go much further by using the data to make predictions and even prescribe or execute actions. A good example is the retail industry and Point of Sale results. POS data is the basket by basket, sku by sku, store by store sales results that are collected across hundreds of thousands of retail outlets daily. Nielsen has been compiling this data for decades and batch processes data sets for retailers and their vendors to study on a monthly basis. How those vendors and retailers derive value from the data is up to them. Retail Solutions* is a data driven solutions company which also gets POS data from retailers and shares it with vendors, but on a near real-time or daily basis. More important than freshness of the data, however, is that Retail Solutions offers predictions and prescribes actions as solutions to business problems. RSI doesn’t just create reports, they predict when you will be out of stock on a given SKU and sends mobile alerts to shop clerks, distributors and store managers to make sure the shelves stay full. This is one of over ten predictive and prescriptive applications they provide in order to maximize return on investment for their customers. Pretty charts are not enough.
Data is not the point, Focus on Solutions Lots of companies market themselves as “Big Data” companies, but unless you are selling to IT Departments whose problems actually include managing lots of data, most business customers don’t really care about data. They care about solving business problems. Athenahealth* helps doctors get paid faster. Turns out cashflow is really important to doctors and as a result Athena has grown very quickly and is now one of the largest SaaS companies. Doctors don’t care how Athena actually does what they do, which happens to involve statistical analysis of massive amounts of insurance claims data and heavy use of learning loops. The team at Athena deeply understands healthcare and doctors and so astutely markets themselves as a complete solution to real problems, and resist pounding their chest about how smart they are at Big Data. In fact, the word “data” does not appear even once on their homepage. Smart move.
Horizontal Strategy: Solve New Problems in New Ways Providing applications for horizontal business functions like sales, finance, or human resources that function similarly across many industries represents very large opportunities because the market sizes are huge. As a result there are powerful SaaS incumbents, such as Salesforce.com, Netsuite, and Workday, in each of these functional domains. As you would expect, these players are starting to add data driven application intelligence to their offerings. Fortunately for startups the challenges businesses face are constantly changing thus creating opportunities to be the first to solve new problems with a new approach. In the realm of marketing, for example, “Content Marketing” is the hottest new trend and is the digital marketing approach seeing the greatest increase in budget allocation. Yet marketers are highly confused as to what content to produce, how to produce it, where and how to distribute it, and especially how to measure ROI. Captora is a young startup that has jumped on this new problem with data and domain expertise and is seeing rapid growth and using their head start to establish a beachhead before direct competition comes at them. Knowing the experience of the team they won’t be resting on the side of the road but rather racing ahead to broaden their solution in synch with new challenges facing modern marketers.
Vertical Strategy: Feed the Starving Providing deep solutions in specific industry verticals like healthcare, entertainment or education can be a huge opportunity. This is especially true in industries where data has largely been non-existent or hard to access as has been the case in the three industries I just mentioned. If a Data Driven Solution can access, interpret, or create new data and use it to solve a big problem the market reaction can be like a starving person being offering a hot meal. Castlight Health*, for example, solves the problem that in healthcare it is generally impossible to know what a given service (an office visit or a test for example) will cost until after you’ve consumed the service and you receive your bill 30 days later. It turns out that the variance in pricing for even a commodity service like an MRI test can be 5 to 10x in a given 5 mile radius. If one could know the price difference ahead of time they can consume intelligently–as we do in most other shopping situations. Large employers, who tend to be self-insured, really like the idea of helping their employees spend less on healthcare as those savings drop straight to the bottom line, and as a result some of the largest employers in America have adopted Castlights’ solution. Customers like CVS Caremark, Microsoft, and Wal-Mart don’t really care about the big data blahdy blah that Castlight uses to come up with their solution, they just know they are starving for ways to lower their employee health care costs and Castlight has an effective solution.
Vertical Strategy While some industries are just getting their first taste of Big Data, others have been sophisticated handlers and miners of Big Data for a long time, such as the investment industry, airlines, and eCommerce. In those fields a small incremental advantage afforded by a data driven vertical solution can be extremely valuable. DataMinr* is a company that transforms the full Twitter stream of public tweets using sophisticated math to discern important news events amid all the noisy babble as quickly as possible ahead of the media. Investment hedge funds will pay handsomely for incremental advantage and getting a jump on news that might move the market or a particular stock is something they are eager to buy even amidst all their number crunching sophistication and home grown solutions. On April 23, 2013 when the stock market “Flash Crash” occurred based on a rumor that the Whitehouse was under attack, Dataminr’s algorithms figured out the attack was a hoax a full two minutes before other new outlets and their clients were able to act on the news ahead of the market’s rapid recovery from the severe dip the rumor had caused. It turns out that news agencies like CNN, which typically rely on human reporters and shoe leather to beak news, have also turned to Dataminr as a solution to their problem. Dataminr thus serves both a very sophisticated big data segment, investment funds, and an industry at the opposite end of the data automation curve, the news industry, with a solution that simply could not have existed until very recently.
Consumer solutions can be driven by data too Using Uber is a magical experience. Push a button on your phone and a car appears within an instant to take you where you want to go—no hailing, no reservations, no need to reach into your pocket for payment, and remarkably little waiting for your ride to arrive. If Uber simply sent messages to available drivers about customers needing rides the system might still be good but customers would have longer wait times, which wouldn’t be as magical. Instead, Uber uses statistical analysis on data coming from their drivers and riders to predict where demand will be highest and recommends that drivers congregate there to be ready for ride requests. Nowhere in their marketing does Uber talk about data or “quantifying” your ride patterns—consumers don’t need to know how the magic happens as long as their ride shows up quickly. Similarly, Better Finance* makes secured loans to consumers with low or no credit so they can buy smartphones and other high-value items. Better Finance can do this at rates far less than payday lenders because of their data driven underwriting and feedback loops coming from high loan volumes and thus their underwriting algorithms constantly improve—to the benefit of Better Finance and their customers. Opportunities to create consumer solutions enabled by big data are everywhere…just don’t mention the word data.
Traditional SaaS and on-premise software will be around for a long time in the future and these vendors will add more and more data intelligence to their offerings. They will be joined however, and possibly threatened by, a new generation of nimble and innovative next generation SaaS companies that will combine data and domain expertise to add massive business value to their customers.
I look forward to meeting and helping as many of those companies as possible.
*Venrock is an investor in these companies.
You sit down at your laptop one day and go to your favorite video streaming website. But instead of getting clips of hilarious cats, you get a message telling you that you have exceeded your streaming allowance for the month, unless you would you like to purchase some extra streaming credits.
This is a scenario that we were promised would never arise by the opponents of net neutrality, and yet it’s one of the first things that happened when the US legislature failed to protect the concept. Immediately, a legal wrangle opened between Netflix and Comcast. The Internet service provider attempted to negotiate rates with the movie streaming service due to the high volume of traffic it was being asked to handle.
Within a free market, Comcast’s position makes sense. There is a demand, they are the supplier, and they should be able to price their service accordingly. And Netflix can’t play the victim in this scenario; they are on the brink of becoming one of the largest media companies in the world, so surely they should contribute to the infrastructure that supports their business model. Right? Netflix decided to give into this notion, as they struck a deal in February that put an end to throttling of traffic generated by their site.
The argument of ISPs (and the companies behind them that provide infrastructure) is that they need to invest in order to provide the best possible service to their customers, and that certain websites make this more difficult. Therefore, in a free market, they should be able to charge those larger sites, or manage traffic accordingly.
But the Internet is more than Netflix, Facebook, Google and Amazon. The open web has operated on a free and equal access ever since Tim Berners-Lee developed HTML. It has fostered the open atmosphere that allowed bloggers and startups to thrive. The internet is a place where a good idea done well can take on the giants of any field. The end of net neutrality is not Goliath beating David; it is a sign outside saying “No Davids”.
An image created by Reddit user Quink displays in stark detail how the Internet might look for users in the future. It may seem far-fetched but it is actually based on common advertisements for cable packages. This is a model that already exists and there is no reason that it cannot be applied to Internet services.
Consider how this new Internet looks for you, if you run a business website or tech startup. Where do you fit in? Do users get free access to the service you provide? Or do they have to pay extra just for a pageload? What about personal sites and non-profits? Where there is competition, what happens when one company pays ISPs for preferential treatment?
The unknown elements of a post-neutral web are scary. Nobody can really predict how it will look. All we know for sure is that the level playing field of the early Internet will be gone, and this is as much a concern economically as it is politically. Business thrives on fair competition and a closed Internet is inherently unfair.
It’s not too late though. Just recently, the European Union have enshrined net neutrality into law. Lawmakers in the US may yet see the advantages of an open web and struggle to protect it. Not only does net neutrality strengthen constitutional ideals such as freedom of speech and freedom of assembly, but it’s good for business and essential for innovation. Let’s hope that our government make the right decision, and protect the free and open internet that we have come to cherish.
In this economy, the cost of cable television is more of a pain than a benefit. With the introduction of lower cost alternatives such as Netflix and Hulu, more and more people are deciding to cut the cord. However, there is one problem, one obstacle — where will sports fans go? As it stands, the only way to “legally” watch real-time sporting news and events is to sign up for a cable TV service. This is because the 1992 Cable Act requires that consumers sign up for regular cable service before they can enjoy the benefit of having premium channels like HBO or ESPN. However, consumers who want cable (and aren’t that interested in sports) are being forced to pay tax on ESPN — and they aren’t happy about it.
Sports lovers want ESPN, others don’t, but everyone’s paying for it. As it stands, cable viewers are up in arms about having to pay a tax on the channel whether they want it or not. In fact, Bloomberg Businessweek stated the ESPN charges cable operators $4.69 per month, although I’ve seen much higher rates from other publications) for it. That charge trickles down to the viewer. The bad news is that this price is predicted to grow as ESPN announced its plan to broadcast Monday Night Football for the next eight years. As of now, it seems that the ESPN problem just won’t go away.
So you want to be a cord-cutter, but you love your sports. This is a dilemma that many sports fans have. Not to mention the problem of having to pay for basic cable just to get ESPN. So what could solve this revolving issue? A subscription only option perhaps? If cable TV doesn’t impress you, but you want to watch your Monday or Thursday night NFL games whenever they’re on, this may serve to be the best way forward. This option would provide an outlet that allows you to just watch (and pay for) what you really want — ESPN. The upside to this solution is that only fans who want the subscription will pay, and people who aren’t that interested in sports will no longer have to. Although ESPN has no interest in doing this for the time being, many cable providers are pondering it over. When asked about this very prospect in an interview in Bloomberg, Suddenlink Communication’s CEO, Jerald L. Kent, said the following:
“If I could offer high-cost channels like ESPN as stand-alone channels, à la carte, I’d do it.”
Another option that could work to keep you off of the tube and into your smartbox is a Go option.
The good news is that subscribers can still enjoy the flexibility of ESPNGo. As of now, ESPNGo can only be viewed if a person has subscribed to basic cable, but a standalone option could change that. ESPN-only subscribers could log into their cable account on the ESPNGo app and enjoy any game, any time, any where.
For one, people who don’t want it, will no longer have to pay for it. So, ideally a subscription-only option will save cable subscribers at least $5 a month. On top of that, those who only want ESPN won’t be forced to pay for channels they don’t want, which could range from $40 to $100 a month! A downside to this option is that some cable companies enjoy the inflated rates of bundling channels because after all, that’s how they keep the revenue flowing. The other downside is that they could potentially charge consumers more per month to “unbundle” as they try to deter viewers from cord-cutting.
All in all, a standalone ESPN option is a feasible solution to everyone involved. Cable companies can retain sports fan, who account for a significant percentage of their earned revenue, and sports-fans can take their games on the go. Will cable companies catch on? We can only wait and see. I for one would be willing to pay a large portion of my current cable bill to have a sports only subscription.
Will the recorded music industry ever grow again? Since 1999, the industry has been in rapid decline as CDs became unbundled into downloaded singles. The digital download market never came close to the size of the physical music market. Now we are in the midst of another format transition, this time from downloaded singles to streaming. The question many people ask, like the thoughtful Marc Geiger, is how big will the streaming market be? I think the answer lies not in consumers’ appetite for streaming songs but in the price services charge consumers for streaming.
At the 1999 peak of the recorded music market about $40 billion of recorded music was sold. How much did the average consumer spend per year on recorded music? Hundreds of dollars? Nope. According to IFPI at the time, across the total 18-and-over population (both across many countries or individually within one), the average amount spent came to $28 per consumer. But that includes people who did not buy any music that year. If we look at just the consumers who bought music, they spent $64 on average that year. And that was at a time when one had to buy a bundle of 12 songs in the form of a CD in order to get access to just one or two. What has happened since?
Once the bundle broke, the average spending per consumer decreased. This is predictable, since bundles artificially raise the amount of total dollars a consumer spends. The chart below shows the average spending per capita in various countries according to IFPI (note UK Pounds):
Another study by NPD Group in 2011 found similar spending, about $55 per music buyer per year on all forms of recorded music (they note that this spending is slightly higher among P2P music service users.)
But the one retailer on the planet who would really know what consumer are willing to spend on recorded digital music today is Apple. They are the largest music retailer in the world. Their data is very consistent, about $12 per iTunes account per quarter is spent on music, or about $48 per year. Note that this figure declines year by year as iTunes users are confronted with many more choices on which to spend their disposable income like apps and videos. Also note that total disposable spending, on average, is decreasing per account as iTunes gets bigger and bigger. As a service becomes truly mass market, it reaches fewer and fewer consumers willing to spend as much as previous consumers.
So, the data tells us that consumers are willing to spend somewhere around $45 – $65 per year on music and that the larger a service gets, the lower in that range the number becomes. And these numbers have remained consistent regardless of music format, from CD to download.
Curiously, the on-demand subscription music services like Spotify, Deezer, Rdio and Beats Music are all priced the same at more than twice consumer spending on music. They largely land at $120 per year (although Beats has a family member option for AT&T users at $15 per month.) This is because the three major record labels, as part of their music licenses, have mandated a minimum price these services must charge. While it may seem strange that suppliers can dictate to retailers the price they must charge end users for their service, this is common practice in digital music. The services are not able to charge a price they believe will result in maximum adoption by consumers. The data shows that $120 per year is far beyond what the overwhelming majority of consumers will pay for music and instead shows that a price closer to $48 per year is likely much closer to a sweet spot to attract a large number of subscribers.
For this reason, I believe the market size for these services is limited to a subset of music buyers, which in turn is a subset of the population. This means that there will be fewer subscribers to these services than there are purchasers of digital downloads unless one of two things happen:
(a) consumers decide to spend more than two times their historical spend on recorded music or
(b) major record labels allow the price of subscription music services to fall to $3 – $4 per month
I think the former is highly unlikely given the overwhelming number of choices competing for consumers’ disposable income combined with the amount of free music available from YouTube, VEVO, Pandora and many others. The data shows consumer spending per category decreases in the face of many disparate entertainment choices. The latter is the big question. My experience with the major labels when I was CEO of eMusic was that they largely did not believe that music was an elastic good. They were unwilling to lower unit economics, especially for hit music, to see if more people would buy. Our experience at eMusic taught us that music *is* in fact elastic and that lower prices lead to increased sales. If the major labels want to see the recorded music business grow again, I believe the price of music must fall.
The other weekend while enjoying some rare snow this season, in Utah, I had the chance to listen to Bob Wheaton the President of Deer Valley Resort Company give a talk about his management techniques. Bob started his career at Deer Valley as a ski instructor in 1981 and worked his way up through a variety of positions. He came across as a humble, straight shooting leader, and many of the techniques he mentioned were what you would expect from a modern business leader. He makes sure to hit the slopes daily to ask customers and employees how things are going. He has weekly stand-up meetings with his senior executive direct reports to synch up on operational issues. He sends regular broadcasts to all of Deer Valley Resort Co.’s roughly 2,800 employees and he routinely holds open office hours. One tool, however, struck me as relatively unique and powerful even though it is quite simple. It is a weekly meeting Bob calls the Managers Meeting.
This meeting is for all of his direct reports’ direct reports, about 60 managers in all. Interestingly, Bob’s own direct reports are not there, so the middle managers are free from having their own bosses in the room. This serves to remove inhibitions about upsetting or upstaging your supervisor. The minutes of these meetings, however, are carefully transcribed and distributed to ALL company employees so the senior leaders are not in the dark or suspicious about what occurred in the meeting. The meeting is also large enough that it would be inappropriate and self-destructive to air personal grievances about one’s boss. It does, however, give middle managers a chance to be heard by the President in their own voice on a routine basis, and hear directly from the top rather than always through the filter of their supervisor. The fact that the meeting is held weekly means that issues get dealt with promptly and the frequency keeps Bob in touch with operational details he otherwise might not be exposed to. The weekly cadence means they get past the high level and into tangible and actionable topics. It struck me as an elegantly balanced yin-yang leadership method that is both effective and efficient, and would probably work in many other industries. I can say that the level of professionalism and smiling attitude of the Dear Valley team feels palpably different than most other resorts, and I suspect Bob’s leadership, and this particular tool, play a big part in that.
As the viewer trend data make clear, legacy TV is undergoing a dramatic transformation, led by the many alternative ways of watching video. Cable subs are in decline, network TV viewership has tanked, and now even cable TV viewership is eroding. We frequently discuss the new streaming providers (YouTube, Netflix, Amazon, Hulu) and the on-demand show/movie retailers (iTunes, Amazon, Vudu), but a new model is emerging and worth discussing — the over-the-top (OTT) TV network. Our recently-exited investment in Crunchyroll provides a prime example.
Crunchyroll is the largest provider of Japanese anime online. They license scores of hit and long tail anime shows from Japanese media companies for streaming throughout the world ex-Japan. They offer a free ad-supported viewing option and attract millions of unique monthly viewers. They also offer a paid commercial-free offering at seven dollars per month which makes available a deeper selection of shows. They are available on the web for PC streaming, and have an app available on every mobile and connected TV platform available (iOS, Android, Roku, AppleTV, PS3, Xbox, etc.).
Crunchyroll has amassed hundreds of thousands of paying subscribers and is profitable with net margins many internet and legacy media companies would envy.
While they don’t benefit from the incredibly rich we-will-pay-you-a-fee-even-if-no-one-watches-your-network affiliate fee model of legacy cable TV, they enjoy a more accountable dual advertising/consumer subscription model. While most of us would consider this content niche, their total active actual viewers are considerably larger than most cable networks on your cable grid. Perhaps most impressively, like most technology companies, they are highly efficient, employing fewer than fifty employees.
This model benefits from many of the advantages of the web. An embedding/link-sharing culture helps Crunchy, as everything viewable can be shared and discussed throughout the web. The product is highly mobile and feeds our preference for snackable media consumption on phones and tablets. Non-subscribers get easy access and a thorough chance to experience the content without paying. And the team is staffed by fantastic technologists who rapidly adopt and optimize the service for every new platform that emerges. The team has already started expanding their successful model to new content verticals.
Their success, I think, points the way for niche programmers to deliver great video services directly accountable to their viewers and advertisers alike, and not polluted by the MVPD indirect affiliate fee model nor the antiquated Nielsen people viewer/sweeps model.
For these reasons, Peter Chernin’s The Chernin Group is the new owner of this impressive company and team. I look forward to watching the continued success of Kun, Brandon, James, Brady and the whole team. Without much fanfare, they have pioneered a way forward for much of the video programming world. We are honored to have been investors since 2007 and to have watched you succeed.
I was fortunate enough to be asked to deliver the keynote address at this year’s Sustainable Scholarship Conference, put on by ITHAKA. Here, I attempt to review how the internet has disrupted bundled industries and consider the question of whether it will unbundle higher education too.
ITHAKA is a not-for-profit that helps the academic community use digital technologies to preserve the scholarly record and to advance research and teaching in sustainable ways. They run the popular JSTOR service, a growing digital library of more than 2,000 academic journals, nearly 20,000 books, and two million primary source objects provided to colleges, universities and scholarly communities. I serve as a trustee of ITHAKA.
My slides from the presentation are here:
Thank you to Kevin Guthrie, ITHAKA’s CEO, for the invitation to speak and for the overly-generous introduction!
Software as a Service (SaaS) is having its moment. Customers, entrepreneurs, and capital markets are all enamored with the SaaS model– with good reason. For customers, software as a service can yield dramatic reductions in total cost of ownership, quicker time to value, and pricing models which let you pay for only what you need and as you go versus all up-front. For entrepreneurs, the recurring nature of subscription pricing gives more forward revenue and cash flow visibility, enables new customer acquisition models (such as Freemium), and the single code base for all customers is significantly easier to support than custom installs on-premise or supporting multiple generations of packaged software releases (and the Operating Systems they run on.) Investors love the predictable revenue, high margins and high growth rates. This love affair with the SaaS model is likely to continue for a very long time. The vast majority of business software is still custom and/or on-premise license based, so there is more than a decade of disruption and growth ahead.
When we dive one fathom deeper into the SaaS model, however, we quickly discover that there is not one single model but at least three very distinct Go-To-Market archetypes. At one end of the spectrum are the high-volume, low priced offerings such as Dropbox, Evernote, and Cloudflare that often deploy Freemium models, providing value to millions of individual users at no charge and converting some small percentage of them to premium paid accounts. Workgroup collaboration and social/viral features are often built in to these products to help turbo-charge organic growth and online acquisition characterized by self-service signup and setup. There are many entrepreneurs and investors who believe the whole point of SaaS is to get away from expensive direct selling in favor of these “self-service” models. As an example, I was recently asked by an entrepreneur if I was in the “pro-sales or anti-sales camp.” I am pretty sure they were referring to the need for salespeople, not sales themselves. For the record, I like sales very much.
At the opposite end of the spectrum are sophisticated enterprise offerings such as Workday, Veeva and Castlight Health that are used by large enterprises and can justify pricing of millions of dollar per year. There solutions are usually sold by experienced field sales teams, skilled in solution selling and navigating long and complex sales cycles. These products are feature rich in terms of end-user capabilities but also in terms of security, administration and ability to integrate with legacy systems.
In the middle are solutions that usually charge tens of thousands of dollars to low hundreds of thousands per year and are sold largely over the phone by an inside sales team and can be reasonably configurable. Customers may be medium sized companies or departments or business units of larger companies. Examples of this model are Salesforce, Netsuite, Hubspot, and Smartling.
So which of these three models are best? Is there one “just right” answer as there was for Goldilocks? Or do we take the Three Bears perspective that as long as you line up the size of the chair, temperature of the porridge and firmness of the bed with the needs of your target market, all three models can be equally successful. Clearly the latter, as one can point to several highly successful billion dollar market cap SaaS providers deploying each of the three models. The key is to line up product/market fit, sales and support, and price in a consistent and appropriate fashion.
It should be noted that it is possible to expand across models over time, such as Salesforce.com who both sells over the phone to mid-market customers and also deploys a field sales teams to sell bigger deals to large enterprises. Another example is Box.com which can be used by individuals, small teams, and large enterprises with pricing, feature sets and support options appropriate to each tier.
But what happens when the product, Go-To-Market strategy, and price are misaligned? Here are the most common mistakes we tend to see:
Market too small or product too narrow for Freemium: Free is a very compelling price, especially when trying to entice consumers to try something new, and this model can certainly lead to lots of users relatively quickly. However, employing this model in too small a market or with a product that lacks broad appeal faces the problem of there not being enough “top of funnel” free users from which some single digit percentage (typically) will convert to paying users to grow a sustainable business. In B2B markets free can be a red herring as there ought to be enough ROI (return on investment) enjoyed by customers using your product, such that they will happily pay at least some minimal monthly payment. Those business customers that don’t see such value likely won’t remain engaged over the long term as free users anyway. Switching to a paid-only offering, perhaps with a brief free trial period or money back guarantee, can be an accelerant to SaaS companies if they make the change early enough to avoid the messiness of taking away a free service from your early adopters. Some interesting case studies of SaaS offerings that saw their businesses grow rapidly when they dropped Freemium can be found here and here. Even large SaaS companies in big horizontal markets such as DocuSign and 37Signals have greatly downplayed their free versions over time, in some cases removing them from the pricing pages of their websites, though customers can still find these free options offered if you search a little.
Underpowered and underpriced for large enterprise: We sometimes see impressive Fortune 500 logos on a customer list only to discover that the price points and deployments are quite modest. These customers were acquired via heroic in-person selling efforts by the Founders and below market price points for non-strategic use cases. The hope is usually that this will catalyze “land and expand” proliferation, but unfortunately oftentimes the product is not sophisticated enough to deploy enterprise-wide or the sales team is incapable of selling at a price point that can ultimately sustain field sales efforts or a product roadmap necessary to serve large enterprise accounts. While these “lighthouse” accounts are meant to serve as references upon which future inside sales efforts can draw credibility, the fundamental problem space can sometimes be too complex for effective phone sales to customers of any size. Aria Systems is a SaaS subscription billing provider that serves large enterprises and has found that to truly handle the needs of core business units within Fortune 500 customers requires a field sales team, sophisticated product feature sets, high touch support, and price points that can sustain such service levels. Aria has left the opposite end of the market, serving small developers with an inexpensive and simple online billing service, to competitors that are better tuned to the broad low-end of the market and cannot compete with Aria for the narrower high-end of the market.
Overbuilding for long tail markets: The opposite mistake from that just mentioned is trying to serve long tail markets with a product too complex and expensive for widespread appeal, leaving oneself vulnerable to much simpler, cheaper, easier to use products. This is particularly true when marketing to developers where “cheap and cheerful” is more than adequate for most applications. Stripe and Twilio have done a nice job of providing appropriately simple developer-centric solutions at the low ends of their respective markets, payments and voice/messaging services, stealing this opportunity from incumbent providers who were too expensive, too complicated, and too hard to do business with.
Too many flavors all at once: While true that established vendors like Cornerstore OnDemand and Concur can serve the spectrum from small business up to global enterprise, generally young startups lack the resources to serve multiple audiences at once. Those that allow themselves to be pulled thin in multiple directions find they serve no segment particularly well and have cost structures that are unsustainable. Better to nail one of the three basic models and let the market pull you emphatically up or down market as a means of successful expansion. When are you ready to broaden?
My advice is to wait until you are sure that you are sufficiently up the Sales Learning Curve, that you are sure you can recoup your paid sales and marketing expenses in an appropriately short timeframe (usually a year or less) given your particular customer churn rate, margin profile and price points. Once you are happy with your Customer Acquisition Costs (CAC) Payback period, you can respond to market signals pulling you up or down market. Likewise, I recommend making sure that your product is optimized for easy onboarding and support of the mid-market before adding sophisticated enterprise features to go upmarket or your development team may be overwhelmed and your user experience compromised. In general there seem to be more examples of moving up market than down market. It is fundamentally easier to add features and sales people to serve more sophisticated needs up market than to make a product simpler and master indirect channels to go down market. When cooking porridge you can add salt, sugar and spice, but is much harder to take them away.
It’s a great time to build, buy or invest in Software-as-a-Service. Recognizing that there are multiple, distinct Go-To-Market models, each equally valid in the right circumstances, enables a clear-eyed and internally consistent strategy that avoids the mistakes describe above and captures the high level benefits of SaaS.
One of the most valuable characteristics of venture investing is that sectors go in and out of favor. Certain sectors, no matter the investment climate, have perennial long-term value. At least, that is my view. And I hold that view strongly about the AdTech sector.
More than 60% of the enterprise value created by internet companies comes from companies whose business model is primarily the selling of ads. Since the internet is both a communications medium and a transactions platform, I believe it will always create massive value through advertising. The internet, unlike most traditional media, is inherently a performance-oriented medium and it delivers on the promise to make advertising and marketing more accountable and more efficient. Underlying the delivery of better ad performance, in a world filled with big, quantifiable data, is an ever-increasing slate of sophisticated technology operating on massive datasets in real time. If you advertise on the internet, and eventually, every brand and service in the world will, you need exposure to these technologies or you will underperform your competitors. The AdTech sector, fundamentally, is the delivery of these advanced advertising technologies to all advertisers.
In my previous posts on the evolution of online advertising, I painted a picture, like so many observers of the space, of a world where all impressions are traded on exchanges. That inevitable transition is happening at light speed now. More than 17% of display impressions on the web are traded on exchanges and the forecasts are bullish on this trend. In that world, online advertising looks much more like trading stocks than the buying of ads over lunch meetings. In 2008, we believed that significant value would be built in this exchange layer. It was this thesis that supported our Series B investment in AppNexus. That company continues its incredible run and is one of the largest global ad exchanges in the universe. We believe AppNexus will remain one of the most important companies on the internet.
While a huge amount of buying has moved to the exchanges, the level of sophistication of many advertisers taking advantage of these RTB platforms is still rudimentary. It turns out, just like outperforming the stock market year in and year out, it’s hard to do it well. The amount of data available to buyers is enormous. The number of parameters available in tuning and targeting your audience is almost limitless. And, most importantly, there are always better data scientists down the road doing a better job than you can at building proprietary targeting models. For all of these reasons, in our opinion, the second-most valuable layer in AdTech is the data-driven ad network layer. (Not to be confused with the inventory driven ad networks.) Data-driven ad networks employ either large proprietary data sets or proprietary targeting models on top of very large data sets. The sophistication of the data scientists within these companies delivers a sustainable performance advantage over their less well-equipped peers. Two examples of these companies in our portfolio are Dstillery (formerly Media6Degrees) and Bizo. Both Rocket Fuel and Criteo are two additional companies in the space. Rocket Fuel’s recent IPO fetched it a market cap of more than $1.7B and Criteo is now over $2B. Many are asking themselves, “Why?”
[As an aside, Zach Coelius, the CEO of Triggit, points out that these companies should no longer be called ad networks because they no longer amass large amounts of inventory. They are instead more accurately "algorithmic media buying" companies or "data-driven targeting" companies...not really sure, but they aren't traditional ad networks.]
The reason these companies are so valuable is that buyers on the exchanges are dominated by performance-oriented marketers today. Their dollars seek the best performance. The data-driven ad network layer is increasingly a case of the haves and have-nots. The better you perform relative to your peers, the more ad dollars you receive. These four companies significantly out-perform their peers, and their incredible revenue growth (and enviable media margins) indicate this.
The reason these companies have bright long-term futures is that this layer is increasingly necessary, hard to replicate, and experiences tremendous network effects. In the early days of AdTech, some believed the traditional media buyers would be able to build their own technology stacks and deliver better performance and value than independent companies in the market. This has not turned out to be true. The best performance can be found elsewhere, largely within technology companies, and so that is where the dollars are flowing. This presents enormous long-term challenges for the incumbent media buyers and will continue to pressure them to flow more and more of their client’s dollars to the better performing AdTech companies.
I believe this layer will eventually see tens of billions of dollars of media buying flowing through it. Of course, the exchange layer benefits from all of this too. For these reasons, there will be additional public AdTech companies which will fetch multi-billion dollar valuations coming to market. AdTech is back. Except it never left.
According to its site, Instagram is a “fast, beautiful and fun way to share your life with friends and family.” And that’s great! But Instagram just announced that they will be introducing ads into the user’s experience, is the best model Instagram could use to generate revenue?
Placing ads around content is a tried and true way to generate revenue while offering a free service. Google does it, Facebook does it, mobile apps do it, and even little blogs with a unique viewership of 20 people try to do it. So, why shouldn’t Instagram do it, too?
Instagram can attract plenty of brands to spend advertising dollars. There’s little doubt about that. But, if they take that route, they will run the risk of subjecting their users to potentially unwanted ads for the sake of revenues.
With that said the medium of expression that Instagram provides lends itself well for brands to increase awareness and engagement. Let’s take a look at H&M, they have over 1M followers, however a large number of those followers also follow hundreds of other accounts. Therefore, there is a fair chance that a brand’s followers may miss a fair portion of their posts.
Employing a Twitter like suggested follower or suggested list ad unit would allow brands a mechanism to pay to acquire potential customers. They could also take a page from Facebook’s playbook and allow brands to pay for “suggested” posts, where a brand could pay to insert a photo into your feed. The latter strategy could be seen as much more disruptive to the user’s experience. To prepare their users for such ad units, Instagram could begin to insert photos that your friends like into your feed to make the “suggested” post feature seem less intrusive.
It’s an easy route to go, as long as Instagram is generating the traffic to make it worth their while. That’s not the problem, since they have well over 150 million users.
The problem is that ads could potentially degrade the experience of Instagram users. Keep in mind that these visitors are used to an ad-free Instagram experience. Now consider that Instagram provides users with the opportunity to display works of art to a global audience. Ads could also distract users from the aesthetic experience they crave seek from Instagram.
There are other ways to generate revenue online, even while offering a free service. eBay comes to mind here. eBay is free to shop, but requires payment from sellers. Like the advertising model, a commerce model could potentially degrade the Instagram user experience, if a user’s feed begins to be flooded with photos of folks just looking to sell a myriad of items.
This model does require a bit more creativity to make it work. Luckily for Instagram, they have an advantage. Real sellers are already using Instagram to showcase their work! Up and coming fashion designers are using Instagram to reveal their work to the world.
Want to see for yourself? Check out these fashion fellows worth following:
In order to generate revenue, Instagram would need to find the right balance between commerce and the artistry and communication that is the heart of their site. Giving users who wish to sell items an option to add a “Purchase” button right next to the “Comment” button seems like a natural move.
Instagram has already announced that ads are coming. It sounds like Instagram will roll this out slowly and will give users the options to block ads that they do not wish to see. It’s possible, but I’m not convinced a soft approach would generate enough revenue to protect the user’s experience.
So, maybe it’s time to take a step back. Bridging art and commerce is a business tradition even older than hosting ads. It’s a way for people to appreciate beautiful things, whether they can own it or not.
It’s also a way for those who can afford those beautiful things to keep the Instagram experience ad-free for the rest of us. With a little innovation, Instagram could embrace the commerce while keeping the artistry intact. All it takes is a little creativity and that’s what art and business have most in common.
I’m looking forward to see the monetization progression of Instagram, it has great potential to be a real revenue driver for Facebook. What are your thoughts?
I’m excited to announce Venrock’s investment in Burner! Marissa Campise and I will be working closely with Greg Cohn and the Burner team along with David Frankel at Founder Collective.
There are 300M mobile phones in the US and a couple hundred million dwindling more landlines. Roughly 34% of Americans have done away with landlines and only have a mobile number. Mobile is now the single number for your identity.
Burner is a privacy and identity layer for your mobile device and provides consumers with disposable numbers. It’s super easier to use—you download the app and you can instantly get a new number on the fly, which can be used for texting or calling, until you want to burn or destroy the number and put it out of circulation. This idea of different electronic signatures is not new. We’ve been doing this with email. But we currently have no way to do this with phone numbers because the carriers control that. Burner puts control into the hands of consumers.
Where it’s really exciting, is thinking about this as a mobile identity and communications platform. We are hopeful that in the same way that hotmail and yahoo mail pulled the internet identity layer away from ISPs and let consumers make their own email addresses, Burner will be able to separate the last piece of the telcom stack from the carriers. By enabling true number portability and moving the voice and SMS stacks out of the carriers hands, it completes the transition of them into a dumb pipe, gives consumers more flexibility and is supportive of a longer term trend of separating identity from a single mobile number.
So if you haven’t already downloaded the app, go ahead and do so and let me know what you think! For the official announcement from the company head here.
People are bound to be skeptical when you put the word
“hype” at the front of your name. However, the reason you should care about the
Hyperloop is Elon Musk’s track record of making impossible things happen. Keep
in mind that this guy has been in business since he developed the video game
Blastar, at age 12. He turned email into a financial instrument, with PayPal;
his SpaceX built the only commercial rockets that could deliver a payload to
the International Space Station; and with Tesla Motors, Musk has even managed
to make an electric car that is miles from dorky.
4 Things You Need To Know About the Hyperloop
So, yeah. Musk is serious. Here is a very brief breakdown of his Hyperloop and why the world needs one.
Life in Tube Land
Musk explained that there are limits to this new form of transportation, “It makes sense for things like L.A. to San Francisco, New York to D.C., New York to Boston and that sort of thing. Over 1,000 miles, the tube cost starts to become prohibitive, and you don’t want tubes every which way. You don’t want to live in Tube Land.”
One of the most obvious benefit of the Hyperloop is that it vastly expands recruiting territories. Companies would have a greater pool of candidates to choose from, as employees could commute hundreds of miles away from the office. On deeper reflection, what it really means is a merging of America’s biggest metropolitan regions.
It can become a new economic engine by creating a practical way for talent to reach vision, for investors to discover inventors and for families to heal the distances between them. As the development of commercial airlines unleashed the economic boom of the 1950s, the economic possibilities of this technology could be truly staggering.
Is the Hyperloop a Sure Thing?
Let’s be clear, though. The Hyperloop is purely hypothetical at this point, and Musk readily declared that he won’t be available to work out the details. It would cost more than $6 billion under the best of circumstances, although I do think Jonah Peretti’s idea of an LA to Vegas route funded by the casinos is a great one. The first working model is at least seven years away and in that time, there will be plenty of hurdles to clear even if California approves it – and that’s a long shot. On the other hand, it is not nearly as long as a rocket flight to geostationary orbit, so I wouldn’t bet against him on this one.
Stock shorting is popular among public investors, however, it is not applicable in all types of company stocks. Only individuals dealing with public company stock can short shares. Private company stock cannot be shortened regardless of the number of willing stock buyers. To perfectly understand why it can’t be done, it’s vital to first comprehensively define what shorting entails
What shorting entails
To effectively generate money from shorting, you have to be good in market speculating and analysis. As an investor, you have to concentrate on the particular stocks you think are currently overpriced and will possibly depreciate later. Selling such stocks in the current market and buying them later at a lower price earns you some significant profit especially if the price margin is quite large.
You definitely need to have stock to sell it. Unfortunately, you may not have the particular ‘overpriced’ stocks. The best way to acquire the stocks is to borrow them from a share holder. You can do this by directly contacting the holder or using your broker. Some brokers usually ‘borrow’ stocks from unknowing holders and lend them to investors for shorting. Such stocks always have to be returned immediately after the shorting before the holders realize they are missing.
As an investor, you will short by selling the ‘overpriced’ stocks and waiting for the price to subsequently depreciate. When the value significantly reduces, you should buy the same number of stocks and return them to the lender. You will therefore end up pocketing the profits that the stocks have acquired. Although this is a relatively attractive business endeavor, it is considerably risky since company stock may appreciate instead of depreciating. Let’s now take a look at a numeric example.
Let’s say I own 10 shares of company ABC at $10 per share. You believe the stock price of ABC is overvalued and is going to crash sometime soon. You then come to me, and ask to borrow my ten shares of ABC and sell them at the current market price for $10. I agree to lend you my shares as long as you pay me back ten shares of ABC at some point in the future. You take the ten borrowed shares, sell them for $100 and pocket the money (10 shares x $10 per share = $100).
The following week, the price of ABC stock falls to $5 per share. You call your broker and tell him to buy 10 shares of ABC stock, at the new price of $5 per share. You pay him the $50 (10 shares x $5 per share = $50). You then return the shares of ABC that you borrowed from me.
In summary, you borrowed my shares of ABC, sold them for $100. When ABC fell to $5 per share, you repurchased those ten shares for $50 and gave them back to me. This resulted in a $50 profit for you (minus of course any trading fees).
What would have happened if you were wrong and the stock price had increased? You would have had to buy back the shares at the new, higher price, and absorb the loss. Unlike regular investing where your losses are limited to the amount of capital you invest (e.g., if you invest $100, you cannot lose more than the $100), shorting stock has no limit to the amount you might ultimately lose. In the unlikely event the stock had shot up to $500, you would have had to purchase ten shares at $500 a share for $5,000. Taking into account the $100 you received from selling the shares earlier, you would have lost $4,900 on a $100 investment.
Public vs Private Company Shorting
Public company shorting is possible primarily because stocks can be freely sold. They can be easily sold to willing buyers and re-acquired through willing sellers. However, the transfer of private company stock, is limited due to the current restrictions on private company stock and thus cannot be freely bought or sold.
Consumers have been minimizing time and cost by shopping online for awhile now. Amazon and others have been offering an online shopping option for years. However, more people are looking into ordering perishable items such as groceries or flowers and they’re requesting same-day delivery. In this post I will explore four services that I’ve tried: Google Express Checkout, Amazon prime, Instacart and Fresh Direct to see how each works and what their pros and cons are for consumers looking to shop through them.
Amazon prime customers are able to enjoy live streaming video and streaming movies from Amazon prime’s website. Amazon prime customers are also able to enjoy other discounts on the site including discounted express delivery costs. Recently, Amazon Prime began offering discounts on same-day delivery much to their customers’ satisfaction. The good thing about Amazon, is that it doesn’t just offer same-day delivery on perishable items, it also offer same-day delivery on any item that has the prime logo near it. Most of these items are shipped and sold from Amazon and not third-party companies, although there are a few exceptions. People can enjoy same-day delivery on items such as furniture, food and gifts for as little as $3.99. Amazon same-day delivery is called Local Express Delivery.
Fresh Direct is a well-known online grocer that delivers everything from eggs to toilet paper directly to your home or place of business. At the moment, they primarily deliver to NYC and parts of Connecticut and Pennsylvania. Since they have a 100% satisfaction guarantee, customers feel safe purchasing products from the site even if they can’t view them in the store before hand. A lot of their popularity comes from the fact that their prices are similar to those that you would find in a grocery store and sometimes less. Items are all shipped in a refrigerated truck seven days a week between the hours of 6:30 AM and 11 PM, making it very convenient for those who need their groceries anytime of the day. The great thing about fresh direct is that they also have an app that allows consumers to shop directly from their iPhone, iPad or android powered device. This was a go-to service for me when I lived in NYC.
Instacart is well known across areas of San Francisco, Palo alto and other surrounding neighborhoods. Unfortunately they don’t deliver outside of California just yet. Instacart allows consumers to purchase items from stores such as Safeway, Costco, Whole Foods and Trader Joe’s from the convenience of their home computer, tablet or smart phone. They carry over 30,000 grocery items from the stores and they’re all available for same-day delivery within as little as one hour. The way it works is that the consumer purchases items from their online catalog, the order gets routed to a personal shopper for collection and then it’s delivered directly from the grocery store to your home. Depending on where your home or office is located, these items could be to you in as little as 60 minutes. The prices for their deliveries vary, but most customers choose to have their groceries delivered in under two hours (the majority of these orders there around $35) making the the delivery just around $3.99. They deliver on holidays and weekends in their normal delivery hours are between 10 AM and 9 PM seven days a week.
Instacart has been my favorite service in SF.
Google Shopping Express, not to be confused with Google Express a.k.a. Google Wallet, is a delivery service that allows consumers to purchase from big retailers such as Walgreens, Office Depot, Staples and Target for quick same-day delivery. At the moment, Google Shopping Express only delivers in the San Francisco Bay area, but they are looking to expand into other cities and states. The Google model is identical to Instacart’s, however the big downside her are the delivery times. While Instacart has one hour delivery windows, Google uses 3 hour delivery windows which is pretty burdensome for those of us who can’t block off 3 hours of our day to stay in one location. I am sure Google will improve on their delivery items since the service is not yet publicly launched.
There a plethora of other services that can also provide a similar service – TaskRabbit, Exec, etc. I love products and services that make me more efficient.
What are everyone else’s thoughts?
There is a new type of connected technology that’s making eyebrows raise all around the world – self driving cars. Ok ok, so everyone is actually talking about Google Glass, but I have a greater fascination with the way in which the self-driving car can change the lives of all of us.
Some consumers and companies are worried about the programming going rouge and causing the passengers to be in danger, and others wonder if this will be a solution to the global warming crisis that seems to be worsening each year . Below are some reasons of why I think this innovation will help in more ways than one.
Minimizing loss of life. Everyday dozens of drivers are killed in automobile accidents. Driverless cars are able to detect potential hazards and work as the eyes and ears for the driver. According to Google, their driverless cars will reduce traffic accidents by 90 percent. In addition to saving lives, these driverless cars will also cut the annual cost of traffic accidents, which is currently over $450 billion per year.
Saves money on commuting. Not only do driverless cars know the most efficient routes to get to your destination, but they’re also estimated to use less gas. Google claims that using driverless cars can save over $101 billion dollars in fuel costs. The majority of this $101 billion is spent on wasted gas from taking incorrect or less-efficient routes, which will equate to savings in your pocket and savings for the ozone.
Auto Industry Disruption Businesses are already lining up and investing in buying fleets of these driverless cars. Businesses such as Zipcar could see a fundamental change in the structure of their fleets once these driverless cars hit the road as livery/taxi services and are produced in mass numbers. The reason investors are scrambling to invest in driverless car services is because of the profit margin and the best part about it is that they won’t have to hire in a staff to drive. The car will do all the work itself so there’s no need to pay those high health insurance payments or employee salaries.
All in all, I think Google has got something something special here (and we thought Google glasses were cool). Are you ready to ghost ride the whip? When driverless cars hit the mainstream, will you buy one?
I’m going to Venturescape, the NVCA Annual Meeting May 14 and 15 in San Francisco and you should too. I haven’t been to one in many years, but this year is different.
The NVCA is the National Venture Capital Association. It’s much more than just a trade organization, and this year’s annual meeting demonstrates that.
My friend Jason Mendelson from Foundry Group is on the NVCA Board of Directors and he is running Venturescape. That being said, if the meeting was going to suck I wouldn’t go. But it looks quite good.
I’m excited about the agenda, as this is the best lineup I’ve seen at one of these events. Included in the mix are:
There is also the world’s largest VC Office Hours. And for the first time, “fun” is part of the meeting in the form of NVCA Live! — a great concert featuring Pat Monahan from Train and Legitimate Front, a band in which I’m staring as the drummer and main groove man.
If you are a VC, I hope to see you there. If you are an entrepreneur, ask your VC funders for tickets to NVCA Live!, as that is open to everyone, although tickets are only purchasable by NVCA members.
If you are coming, especially to NVCA Live!, let me know. See you there.
Having worked in the FinTech space many years ago, invested in the space for over a decade, and met with hundreds of talented teams in this area, I have observed the following ten traits among the most successful companies:
Rule #1: Unlock Economic Value Most traditional financial service firms have invested heavily in branch networks that create expensive cost structures which result in higher prices to customers. Mass-marketing channels and poor customer segmentation also result in higher costs and marketing expenses which translate to higher prices. Online-only financial services can unlock significant economic value and pass this along to consumers. Lending Club offers borrowers better rates and more credit than they can get from traditional banks, while offering lenders better rates of return than they can get from savings accounts or CDs. SoFi is disrupting the world of student loans with better rates to student borrowers and superior returns to alumni lenders relative to comparable fixed income investment opportunities.
Rule #2: Champion the Consumer Consumers are disenchanted and distrustful of existing financial institutions. Let’s take this historic opportunity to champion their interests and build brands deserving of their love. The team at Simple has envisioned a new online banking experience that puts the consumer first via transparency, simplicity and accessibility. Its blog reads like a manifesto for consumer-friendly financial service delivery. LearnVest is another company on a consumer-first mission to “empower people everywhere to take control of their money.” Its low-cost pricing model is clear and free of conflicts of interest that are rampant in the financial sector. There is plenty of margin to be made in championing the consumer. The speed at which consumer sentiment spreads online these days creates an opportunity to become the Zappos or Virgin Airlines of financial services in relatively short order.
Rule #3: Serve The Underserved In my last post explaining why the FinTech revolution is only just getting started, I described how the global credit crunch left whole segments of consumers and small businesses abandoned. Some segments at the bottom of the economic ladder have never really been served by traditional FIs in the first place. Greendot was one of the pioneers of the reloadable prepaid cards bringing the convenience of card-based paying online and offline to those who lacked access to credit cards or even bank accounts. Boom Financial is providing mobile to mobile international money transfer at unprecedented low rates and ultra-convenience from the US to poorly served markets across Latin America and the Caribbean, and eventually globally. No need for a bank account, a computer, or even a trip downtown to dodgy money transfer agent locations.
Rule #4: Remember the “Service” in Financial Service Just because you are building an online financial service does not mean that your service is only delivered by computer servers. When dealing with money matters many people want to speak to a live person from time to time or at least have this as an option just in case. Personal Capital delivers a high tech and high touch wealth management service via powerful financial aggregation and self-service analysis tools, but also provides live financial advisors for clients who want help in constructing and maintaining a diversified and balanced portfolio. These advisors are reachable via phone, email, or Facetime video chat. As a rule of thumb every FinTech company should provide a toll-free phone number no more than one click from your homepage.
Rule #5: Put a Face on It Chuck Schwab, Ken Fisher, John Bogle, Ric Edelman. These stock market titans may have very different investment styles but they knew that consumers want to see the person to whom they are entrusting their money and as a result they each plastered their face and viewpoints all over their marketing materials, websites, and prolific publications. If your startup wants consumers to entrust you with their nest eggs, you ought to be willing to show your face too. This means full bios of the management team, with pictures, and clear location for your company as well as numerous ways to be contacted. It’s also a good idea to make sure that your management team have detailed LinkedIn profiles and that a Google search for any of them will yield results that would comfort a consumer.
Rule #6: Be a Financial Institution, not a vendor The real money in FinTech isn’t in generating leads for FIs or displaying ads for them. That can be a nice business, but the real margin is in making loans, investing assets, insuring assets, or settling transactions. In just a few years Wonga has a become a massive online lender in the UK by instantly underwriting and dynamically pricing short term loans. Financial Engines and a new crop of online investment advisors make and manage investment recommendations for their clients. You do not need to become a chartered bank or an investment custodian as there are plenty of partners that can provide this behind the scenes, but if you can brave the regulatory complexity and develop the technology and skills to underwrite and/or advise exceptionally well, the opportunities are huge.
Rule #7: Use Technology Creatively The incumbents have scale, brand history, brick and mortar presence, and armies of lawyers and lobbyists. If FinTech startups are going to disrupt the incumbents, you will need to work magic with your technology. How clever of Square to use the humble but ubiquitous audio port on smart phones to transmit data from their swipe dongle and for using GPS and the camera/photo album to make everyone feel like a familiar local when using Square Wallet. MetroMile is a FinTech revolutionary disrupting the auto insurance market by offering pay per mile insurance so that low mileage drivers do not overpay and subsidize high mileage drives who tend to have more claims. They do this via a GPS enabled device that plugs into your car’s OBD-II diagnostic port and transmits data via cellular data networks in real-time. Start-ups playing in the Bitcoin ecosystem such as Coinbase and BitPay are certainly at the vanguard of creative use of technology and are tapping in to the mistrust of central banks and fiat currencies felt by a growing number citizens around the world who trust open technologies more than they do governments and banks.
Rule #8: Create Big Data Learning Loops Of all the technologies that will disrupt financial services, Big Data is likely the most powerful. There has never been more data available about consumers and their money, and incumbent algorithms like Fair Isaac’s FICO scores leave most of these gold nuggets lying on the ground. Today’s technology entrepreneurs like those at Billfloat, ZestCash, and Billguard are bringing Google-like data processing technologies and online financial and social data to underwrite, advise and transact in a much smarter way. Once these companies reach enough scale such that their algorithms can learn and improve based on the results of their own past decisions, a very powerful network effect kicks in that makes them tough to catch by copycats who lack the scale and history.
Rule #9: Beware the Tactical vs. Strategic Conundrum One challenge when it comes to financial services is that the truly strategic and important financial decisions that will impact a person’s financial life in the long run, such as savings rate, investment diversification and asset allocation, tend to be activities that are infrequent or easily ignored. Activities that are frequent and cannot be ignored, like paying the bills or filing tax returns, tend to be less strategic and have inherently less margin in them for FinTech providers. Real thought needs to go into how you can provide strategic, life changing services wrapped in an experience that enables you to stay top of mind with consumers so that you are the chosen one when such decisions get made. Likewise, if you provide a low margin but high frequency services like payments you must find a way to retain customers for long enough to pay multiples of your customer acquisition cost.
Rule #10: Make it Beautiful, Take it To Go A medical Explanation of Benefit is possibly the only statement uglier and more obtuse than a typical financial statement. Incumbent FI websites are not much better and over the past ten years many large FIs have heavily prioritized expansion of their branch networks over innovating and improving their online presence. As a FinTech startups you have the golden opportunity to redefine design and user experience around money matters and daresay make it fun for consumers to interact with their finances. Mint really set the standard when it comes to user experience and beautiful design, while PageOnce pioneered mobile financial account aggregation and bill payment. To deliver a world class consumer finance experience online today one needs to offer a product that looks, feels, and functions world class across web, mobile and tablet.
There has never been a better time to be a FinTech revolutionary, and hopefully these rules for revolutionaries provide some actionable insights for those seeking to make money in the money business.
The Occupy Wall Street protestors are gone (for now), but the real revolution against banking is still taking place at breathtaking speed, thanks to a new breed of technology entrepreneurs. The financial services industry, long protected by complex regulations, high barriers to entry and economies of scale, is ripe for disruption. Here’s my take on the macro environment, how consumer attitudes are changing and why technology and available talent make now the best time to challenge the status quo.
Global credit markets clamped shut in late 2008 and froze entire sectors of consumer credit. Mortgages became less available, millions of credit cards were revoked, lines of credit dried up, and banks essentially abandoned the small business and student loan markets. This left tens of millions of households in the position of “underbanked” (have jobs and bank accounts, but little to no credit) and the “unbanked” (no traditional banking relationship at all.) This credit crunch fueled demand for startups like Wonga, Billfloat, and OnDeck Capital to establish themselves and grow rapidly, and the reloadable prepaid card market pioneered by GreenDot and NetSpend soared. While credit has eased for certain segments in certain markets, there are still big opportunities to fill credit voids, especially at the lower end of the market.
The last few years have seen significant changes in banking, payment, tax, investment and financial disclosure regulations. While complex legislation such as the Dodd–Frank Wall Street Reform and Consumer Protection Act is hardly intended to unleash entrepreneurial innovation, and virtually no single person can comprehend it in entirety, it does contain hundreds of provisions that restrict incumbent business practices, and typically when there is change and complexity there are new opportunities for those that can move quickest and are least encumbered by legacy. Other regulations such as the Check 21 Act which paved the way for paperless remote deposit of checks, and the JOBS Act crowd funding provision are examples of technologically and entrepreneurially progressive laws that create opportunities for entrepreneurs and tech companies. Inspired by the success of pioneers such as microfinance site Kiva and crowd funding sites like KickStarter and indiegogo, I expect that once the JOBS Act is fully enacted and allows for equity investments by unaccredited investors we will see a surge of specialized crowd funding sites with great positive impact on deserving individuals and new ventures.
Within a few weeks of Occupy Wall Street in Sept 2011, protests had spread to over 600 U.S. communities (Occupy Maui anyone?), hundreds of international cities (did I see you at Occupy Ulaanbaatar Mongolia?), and every continent except Antarctica. Regardless of what you think of such protests, it is safe to say that as a whole we are more skeptical and distrustful of financial institutions than virtually any other industry. Clay Shirky’s term “confuseopoly”, in which incumbent institutions overload consumers with information and (sometimes intentional) complexity in order to make it hard for them to truly understand costs and make informed decisions, is unfortunately a very apt term for the traditional financial services industry. There is thus a crying need for new service providers who truly champion consumers’ best interests and create brands based on transparency, fairness, and doing right by their customers. Going one step further, peer-to-peer models and online lending circles enable the traditional practice of individuals helping one another without a traditional bank in the middle, but with a technology enabled matchmaker in the middle. Perhaps the ultimate example of bypassing the mistrusted incumbents is the recent acceleration in the use of Bitcoin, a digital currency not controlled by any nation or central bank but by servers and open source cryptograpy.
As a Product Manager for Quicken back in 1995 I remember sweating through focus groups with consumers shaking with fear at the notion of online banking. Today it is second nature to view our bank balances or transfer funds on our smartphone while standing in line for a latte. And while Blippy may have found the outer limit of our willingness to share personal financial data (for now), there is no doubt that “social” will continue to impact financial services, as evidenced by social investing companies eToro and Covestor. You can bet it will be startups that innovate around social and the incumbents who mock, then dismiss, then grope to catch up by imitating.
I think we will look back in 20 years and view the smartphone as a technical innovation on par with the jet plane, antibiotics, container shipping, and the microprocessor. While the ever improving processing power and always-on broadband connectivity of the smartphone are the core assets, it has been interesting to see such widespread capabilities as the camera, GPS, and even audio jack used as hooks for new FinTech solutions. While there are over a billion smartphones worldwide, the ubiquity of SMS service on virtually all mobile phones means that billions more citizens have mobile access to financial services 24×7 no matter how far they live from physical branches. Cloud and Big Data processing capabilities are further fueling innovation in financial technology typified by the myriad startups eschewing FICO scores in favor of new proprietary scoring algorithms that leverage the exponential growth in data available to forecast credit worthiness.
Financial institutions have long employed armies of developers to maintain their complex back office systems but until recently the majority of these developers worked in programming languages such as COBOL which have little applicability to startups. While COBOL has not gone away at the banks, more and more of the technical staff spend their time programming new features and interfaces in modern languages and web application frameworks that provide highly applicable and transferable skills to startups only too happy to hire them for their technical training and domain experience. In addition, successful FinTech companies from the early days of the internet such as Intuit and PayPal have graduated experienced leaders who have gone on to start or play pivotal roles in the next generation of FinTech startups such as Square, Xoom, Kiva, Bill.com, PayCycle, OutRight, Billfloat, and Personal Capital.
These are just some of the reasons now is a great time for financial technology startups and why venture capital is flooding in to the sector. In my next post I will offer some suggestions for FinTech revolutionaries.
Here is the video of a panel I hosted at NATPE in Miami on January 28th. It features Rich Greefield from BTIG, Betsy Morgan CEO of The Blaze, Chet Kanojia CEO of Aereo, Alex Carloss from YouTube and Kevin Beggs CEO of Lionsgate. Great conversation about the disruptions facing the TV industry.
It’s a good thing Facebook is thinking of redesigning the News Feed. Because I think a funny thing is happening to Facebook. For me, the news feed no longer surfaces anything of interest. The opaque algorithm behind it is just not able to produce anything relevant and, more important, timely, at least to me. Facebook appears to be turning back into what it once was: a way to research people in non-real time. A look back into the past. A people-stalking product. It’s back to being a personal LinkedIn.
People publish stuff on the (increasingly mobile) web that is timely and relevant. Sharing baby pictures isn’t really one of those. Sharing pics of how you are experiencing life, which is the Instagram use case, is a great example of this. But my News Feed does not have anything like that in it. My Instagram feed does.
People share highly informative and timely links to news articles and blog posts on Twitter all day long. But my News Feed does not contain any of those. And when I share these types of posts on Facebook, I get no engagement. When I share pics of my kids, I get a lot.
People share bookmarks of products and apparel they want to buy on Pinterest all day long. People don’t do that on Facebook.
Facebook started as a non-real-time service. It was a way to check people out. In the face of the rise of Twitter, they responded aggressively with a News Feed product that showed promise. But now I feel they really screwed the filters up that govern that feed, which creates feedback to those of us who post into it and it feels like a vast river of noise and irrelevant posts from people and events who aren’t really relevant to me. Perhaps most importantly, I can’t tune it. The tuning mechanisms are either too subtle (“hide”) or too crude (“report as spam”). I feel powerless.
The irony is that LinkedIn is moving to increase daily engagement by syndicating highly informative posts from influencers. They are trying to become more real-time just as Facebook seems less so.
It’s still amazing for stalking people, though.
It’s finally happening. The Internet is taking over TV. It’s just happening differently than many of us imagined. There are two major transformations underway.
Both of these transformations are successful to date and will only become more-so. Rich Greenfield has a nice summary of why the TV industry suddenly loves Netflix. (Disclosure: I am long NFLX and have been a stockholder for some time.) The first transformation takes advantage of the massive pressure MVPDs place on traditional cable nets to not offer their programming direct-to-consumer. In this case, the HBO’s and AMC’s requirement that you authenticate your existing cable subscription in order to watch their programming over IP successfully persuades the cord-nevers to just avoid the programming on those networks until the hit shows are offered through Netflix or EST. Netflix, once again, looks like the hero. Those empty threats by Jeff Bewkes that he will never work with Netflix turned out to be, well, empty. The second transformation will take longer to fully prove out, but I believe it will happen. As more of our viewership takes place over IP, we lose our allegiance to networks as the point of distribution and allow new distributors to guide us towards content choice.
There is a third budding area of transformation, but I don’t yet see evidence that a business exists: trying to re-package cable TV bundles and sell them over IP. Companies like Aereo and Nimble.TV offer versions of this. I believe we live in a show-based world. Consumers aren’t looking for networks (with the exception of ESPN and regional sports nets) so much as they are looking for shows. Shows delivered over IP allow for the slow unbundling of television. One of the many challenges about this model for traditional broadcasters is that there is no advertising in this world. The traditional cable net business model enjoys two great revenue streams: affiliate fees and ad dollars. In IP-delivered shows, there are no ads.
Who are the winners and losers in this model? Well, show creators continue to flourish. The new distributors enjoy great success. Of course, ISPs, who are often the same companies as the MVPDs, do fine in the ISP business, but I believe the decline in total cable subs will continue. In a world where shows do not contain advertising, why do we need Nielsen? They have been a measurement standard for decades largely because advertisers needed a third-party validator of viewership. You can see why they have a vested interest in insisting TV ad viewership is not on the decline (despite everyone’s experience to the contrary.) I don’t think cable nets are in immediate trouble. They enjoy a great business model now, and also get to reap EST or licensing benefits after the shows air. But the Netflix House of Cards effort shows that consumers will now expect to be able to watch shows whenever they want and not be bothered by inconvenient broadcast schedules. The day is coming when the cable nets will have to respond.
For startups, one of the wide open spaces seems to be in cross-provider discovery. Now that my shows are spread among Netflix, Amazon, YouTube and on my DVR, I would prefer one interface to reach them all. Companies like Dijit’s NextGuide, Peel, Squrl, and Telly are taking cracks at this important space.
It was an honor to be asked to address the 2007 Penn Engineering class as their commencement speaker. The video has been posted on YouTube for years, but I was recently asked to post the text. While it is several years old, I don’t believe the message is out of date.
Good afternoon. I know exactly what you are thinking; what is a guy that you have never heard of doing up here delivering your commencement address? Well, truth be told, I am wondering the very same thing. In fact, when Dean Glandt asked me to be here with you, my fist reaction was, “No. I have not accomplished enough to stand in front of such a distinguished crowd. What wisdom do I have to empart to them?” Well, I will do my best today to share something meaningful with you. Let me assure you though, this is not where I expected to be when I was sitting in your seat 16 years ago, thinking, “now what?”
When you got into Penn Engineering, your parents, like mine, probably breathed a sigh of relief. “At least he’ll have valuable skills and a career – and not just some vague liberal arts degree.” Well, I have some bad news for your parents. Engineering is the new liberal arts. It is the lingua franca of the next generation. Technology has become so pervasive, particularly in western cultures, that we engineers are no longer the geeks in the corner – we are now responsible for nothing less than the economic, media, and communication underpinnings of society. But the good news is, if you speak this new universal language – and all of you do – then your opportunities to contribute – not just to your own success but to society at large – are limited only by your drive, your desire, and your ideas.
When I sat in your seat 16 years ago, I of course knew exactly where I was headed. Had it all mapped out. I wanted to be a rock star – a drummer in a rock and roll band. Granted, that is not the most expedient path to becoming a CEO of a digital music company. But please don’t be misled by my title. Yes, I realize being a CEO opens some doors. It gives me the platform to accomplish things that I might never otherwise do. But CEO is the least important aspect of my career trajectory. It is representative of the fact that I have merged my two passions into my career. And that’s what I’d like you to think about today.
What are your passions and how can you incorporate them into your career? How can you utilize these newfound skills? How can today become a jumping off point for tackling the things you deeply care about?
When I graduated from Penn Engineering, I had two passions: I was really into computers and I was really into music. Like many of you, I was tuned in constantly. I played in bands around campus and here in the greater Philadelphia area. I left the engineering lab as often as I could to practice and play gigs. Yes, I was a musician. But I was also an early adopter of technology. Penn helped open my eyes to that. It was clear where the music was headed – computers – to compose and mix, electronic drums, all the new tools of the trade. But I think I knew then that making a career out of my rock and roll aspirations was a long shot.
I came away with a couple of takeaways from this experience. For one thing, I learned that I had somewhat radical intentions from a very early age. The straight and narrow probably was not going to work for me. But the biggest lesson – and the most empowering one of all – was that it is possible to do what you want to do. Maybe not play Madison Square Garden to 20,000 fans. But I was hopeful that I could combine my passion for music with my keen interest in technology.
So I took the same degree that you are receiving today and I went to work at Apple in California. At that time, Apple was still a huge underdog and its future was by no means certain. I fit in with the culture perfectly. Apple embodied the rebel mentality. It was, pardon the expression, marching to the beat of a different drummer. Working for an underdog and innovator like Apple was a great influence. I learned to “think different.” I learned that consumers will reward you for innovation. And most importantly, I learned that technology could be terribly disruptive to incumbent industries.
Remember the phrase “desktop publishing?” Because of the Macintosh and laser printers, an entire business was upended. Apple (and eventually Microsoft) reaped the benefit. It turned the print industry on its head. I saw a chance to take that very same disruptive psychology and apply it the music industry.
When I was a student here, Penn was an early contributor to the development of the Internet. It was clear that as information and entertainment became digitized, the businesses of distribution and retail of entertainment would be transformed. I already knew that music was my true north. So I devoted my career toward working to accelerate, and hopefully reap the benefits of this transformation in the music business.
After joining the first digital music company and then founding another, and trying multiple times to build a business which would be pivotal in the transition of the music industry, eventually, with some partners, we bought eMusic, an abandoned dot-com company in disarray. Long story short? We turned it around to become the number two digital music service in the world. Second only to my old company, Apple. It’s success is due to the fact that consumers, not the music industry itself, forced a format transition from physical goods to digital goods. All enabled by technology. While the incumbent music industry feared, and even ran from this inevitability, I welcomed the disruptive nature of technology and knew it would fundamentally alter the entertainment industry,
However, I don’t want to set up false expectations that if you stick with the drums, you’ll end up CEO of a music company. Dean Glandt did not ask me here today to talk to you about playing in a rock and roll band. So I asked myself, what can I possibly share with a group as educated and informed as you that would be original and have any possible value whatsoever? I labored over this and as I did, it struck me. It’s not about technology or engineering. It’s about the disruptive nature of it.
You see, you all are sitting in the catbird seat for the next industrial revolution. You can join existing industries and work to build them bigger – or you can be the disrupters. The shapers. The policymakers. Every last one of you can land a job in any technology role. At the biggest and most successful companies! You already speak the language. But is that enough? Do you want to get out of bed every day just to log on? Or do you take this incredible genius you possess – this mastery of bits and bytes – and use it for something that matters to you? Something transformative?
There is an ambassador who comes to mind who also got his start like I did, in music. His name is Bono. You’re probably sick of hearing about him. Why does a scruffy singer from a small country in the North Sea have so much clout on the global stage? Because he took a common language, mastered it, and made it his platform for change. It begs the simple question. What is your platform for change going to be? How will you disrupt?
I understand – you might be scratching your head and saying, “C’mon, it’s happened already. The billions have been made – with Microsoft, Google, Yahoo!, MySpace, YouTube. All the big bets have been placed. Everything has already been disrupted.” But in fact I don’t think that’s true. Those companies are just the building blocks for the next wave. These companies, these web players did not exist 30 years ago. No one knew where it was going back then and honestly, we don’t know, today. That’s where you come in.
How do you take these Goliathan companies and their all-encompassing technologies and turn them on their head? How do you wrap your arms around this knowledge and do something that no one has thought of yet? How do you take this “language” Penn Engineering has taught you and make it stand for something you care about?
My understanding of the digitization of music gave me an inkling that someday the songs I grew up with would be available in formats we could not imagine as kids. The model was changing and I saw that and embraced it and tweaked it and now I get to wake up every morning and spend my days guaranteeing that people can buy it. Any kind of music on any kind of player. Period. That’s what I believe in. That’s where I staked my tent.
Although I’m a computer scientist by degree, I am no quantum physicist or nanotech engineer. I didn’t invent something that is going to save the world. I foresaw a market trend in a field I was passionate about and was fortunate enough to get on board at the cusp of the transition. Sniffing out market trends? This is a very good skill to hone. And you’re not going to find it in any book. Turn to your instincts on this one.
Here are some more examples: Sergey Brin and Larry Page – the guys who figured out how to do “search” better? They got it. Andreas Pavel? How many of you know THAT name. He and his girlfriend tested a new musical device he’d invented, on a snowy day in the Swiss Alps, listening to a Herbie Mann/Duane Allman composition – outdoors! – while they walked! The Walkman was born. Transformational! The way we listen to music has never been the same. And Steve Jobs can’t take all the credit on this one.
Nick Negroponte from MIT media Lab? One laptop Per Child! He is going to change the way children learn and he aims to do so one laptop at a time.
And it won’t just change the way children learn and think. It will change the way countries pull themselves out of poverty. The way emerging markets become self-sustaining. One man’s vision – and the language of technology – is going to change the lives of kids who never dreamt of having a chance – from Angola to Myanmar to Kazakhstan. These people are all using technology to disrupt the natural order, and making something better for consumers – for people – at the same time
Does this mean you have to invent the next big idea? if you have it, fantastic! But I think your mission is greater. You see, as I said at the outset, you are the new liberal arts generation. Technology is now omnipresent in society and you speak the common language. However, there are a lot of you speaking that language and believe me, the pack is closing in. You’re going to need more. You’re going to have to be aggressive, disruptive, and visionary.
I know many of you are thinking about the jobs you will start tomorrow. If I could spark one thought in you today, it would be to look five years out. Ten years out. Ask yourself, what are your kids are going to be listening to? What are they going to read, and watch? What’s their world going to look like? And how are you going to shape it? What industries are going to be completely disrupted by the inventions of today, and how can you, and society, benefit?
So I offer you a challenge. Look at yourself today, and ask what’s going to matter to you tomorrow. Which one of you is going to use your remarkable talent to feed Africa? Who’s going to tackle global warming? Does any one of you really believe, 20 years from now, that we’re going to still be running our cars on thick black crude pumped 2 miles out of the ground from a desert?
You are the 2007 graduating class of Penn Engineering. But engineering is merely the platform for the future. You will be more than engineers. You can engineer the shape of our society and shape the destiny of our lives. You will be inventors. Designers. Architects. Engineers. But through your ideas and design and architecture, you will become the de facto policymakers of the 21st century. You will define our society, all because you understand technology better than everyone else.
Call it a grave responsibility, or the greatest road trip you’ll ever undertake. Either way, you are empowered. There is no turning back. You are truly on the launching pad.
In closing, I offer these words. Follow your passion. Question the status quo. Bang a few drums. Don’t be afraid to make some noise. Take this awesome new language you speak and use it. Put it to work. We truly are on the cusp of a revolution. Get out there and be disruptive. Be responsible and give a damn. And lead. Show us where we’re headed next. It really does matter.
With my mind fully stretched in various different directions, a bunch of thoughts are coalescing, coming out of another fantastic TED. Three main points are loosely stitched together in my mind and they point to a bunch of future opportunity.
First, we heard convincingly from economists like Robert Gordon, Erik Brynjolfsson and Andrew McAfee that America’s manufacturing jobs which, for so long, powered our healthy middle class, are not coming back in any big numbers. Many of us scratch our heads to understand how to fill this enormous hole. At Venrock, largely informed by a similar Hunter Walk observation, we believe this dirth of fruitful middle class employment is leading to so much of the activity in the shared resources sector (AirBNB, etc.), in the peer to peer marketplace sector (PoshMark, etc.) and in the digital labor market sector (Uber, TaskRabbit, etc.) as income supplementation. This will help and is a highly investible opportunity. But still, is this enough?
Second, we marveled at Elon Musk and his unrivaled appetite to tackle the planet’s largest problems through commercial endeavors filled with enormous risk (SpaceX, Solar City, Tesla). He is an international treasure and it simply begs the question…why aren’t there more of him? Of course, there are many fantastically successful entrepreneurs and we celebrate them all. But how many Elon Musks are there on the planet? One hundred? One thousand? Ten thousand? Why aren’t there ten million? What are the specific experiences, personality traits, education paths, parenting, and DNA necessary to produce the planet’s super humans driven to defy the odds on such interplanetary scale? It is clear the planet needs more of them, and so why aren’t we unlocking the answer to the question of how to make more? A speaker reminded us of the Chinese proverb…
If you want one year of prosperity, grow wheat. If you want ten years of prosperity, grow trees. If you want one hundred years of prosperity, grow people.
We need to grow more Elons (and Steves and Bills, etc.)
Finally, Sugata Mitra delivered a compelling argument that our schools are simply obsolete for the task of turning out the kind of people we now need in our modern society. He argues for far more self-organized small learning groups of kids with cloud-based tools and light direction from a teacher. That may be part of the solution, but it is likely only a part of it. If our future doesn’t need line workers but needs more inventors, creators, risk-takers, builders, and makers, where will they all come from? Surely there is no natural limit on the number of people with these strengths in our species, right? Surely we can teach and encourage more people to excel in these areas, right? In order to do that, just how much of our society needs to change? Isn’t it more than just our schools? Isn’t it the goals we set for our kids as parents? Is the over-whelming emphasis on organized team sports in our suburban communities part of the problem? When we reward kids at spelling bees, perhaps the ultimate test of rote memorization, are we not helping? Shouldn’t every kid on the planet be playing Minecraft? How deep must we dig to get at the real root here?
I suspect this is perhaps the greatest issue we face as a society. How do we produce more entrepreneurs?
(Special thanks to fellow TEDster Juliette LaMontagne for the helpful brainstorming.)
The United States is one of the leading countries in technology innovation. Every day businesses all over the states think up new and creative was to tackle some of the world’s most difficult business challenges. Whether it’s inventing new platforms, creating more effective marketing strategies or developing mobile apps that are designed to make life easier, the U.S. is always looking to improve things. However, the current immigration laws have many worried that if things don’t change for the better, innovation will inevitably suffer.
How Current Immigration Laws are Proving Problematic to Innovation
When H1-B visas were plentiful, the U.S. economy was on a steady incline. At the time, no one thought that the reason for this incline was related to the foreign workers. The truth is, foreign workers holding H1-B visas are responsible for creating more jobs for Americans. Critics believe that the influx of foreign workers are hurting the economy by minimizing job opportunities for U.S. citizens; however, there is much proof to the contrary.
The majority of American college graduates major in Liberal Arts, whereas technology and math skills are what’s needed to fuel technology; which foreign workers have. According to Hamilton Place Strategies, 40% of founding roles in fortune 500 companies were created by highly skilled foreign workers and their children.
So what results from the current visa cap? A loss of jobs and a loss of newly created positions, which will in turn hurt the economy and decrease U.S. technological innovation. See below for a look at how the visa caps have trended over the last 30 years.
How Technology Companies Plan to Tackle the Issue
Technology companies in the U.S. are aware of the impact that the visa cap will have and have thus begun creating strategies to circumvent the current immigration limitations.
Some businesses have resorted to hiring foreign workers as “freelancers” working from home offices, while others have even more creative solutions. A company called Blueseed has decided to create a mobile office in the form of a ship to spark innovation. This ship will house a thousand of the most highly skilled innovators from several different countries and will be docked approximately 12 nautical miles from San Francisco (where the water is still considered “international”). This is meant to spark new ideas and create new start-ups that will eventually expand and inevitably end up in the United States. For more info on Blueseed check out this great slideshare http://slidesha.re/12It42j.
As businesses begin to realize the real economic implications of the visa cap, multiple solutions will no doubt follow. This is needed to obtain the skills these foreign worker possess while offering them resources to continue creating more U.S. jobs.
Being the first person in my family born in the US, makes this a particularly important topic for me and I would love to hear everyone else’s thoughts and what other tactics you are seeing companies employ to get around the current immigration roadblocks.
While at CES, I noticed a large amount of connected TVs and connected cars, which led me to think that these devices are ripe for breach from hackers, so I went digging and low and behold thieves in the UK have begun the looting process (http://bit.ly/10PWDyJ). Thus I felt it was a topic worth writing about. Here are my 2 cents.
Why Does Connected TV Security Matter?
Cyber attacks to Android and iOS powered cell phones and computers have increased dramatically over the past five years. Now that televisions are becoming “smarter” by being powered through these platforms, the attacks have become more sophisticated.
Increasingly, televisions are starting to incorporate smart operating systems which enable them to run wifi. From here, criminals are able to hack into the system through an app. Cyber criminals have already discovered a flaw in some Samsung smart TVs, which allows them to listen in and look into households through the television.
Do Cyber Criminals Really Care About Connected Cars?
Cyber criminals care about any smart device that allows them to gain access to your personal details. They no longer just have an interest in stealing your login details to social media networks or your bank account information; cyber criminals are now interested in controlling your car, as well.
Connected cars have wifi connectivity which enables the driver to access GPS, email addresses, and stream movies. Some connected cars offer security features through connective devices which include the braking and door locking systems. Cyber criminals could potentially hack into your connected car system, giving them the opportunity to take control of your engine speed, car security alarm, wifi connectivity, door locking system, and your braking system.
How to Make Sure You’re Safe
Manufacturers of connected vehicles have already been briefed on these threats and are working to create patches and encryptions which make it harder for potential cyber criminals to hack in. The U.S. Dept of transportation is also testing connected car devices to decrease their vulnerabilities.
Downloading security apps and making sure your devices are password-enabled helps to decrease your risk of being hacked; however, some criminals are still able to bypass the systems.
Covisinit, Windows, Cisco, McAfee are all devising ways to reduce the risk of cyber attacks through connected televisions and vehicles. These measures include cloud services that restrict access to connected devices, beefed up security access, SSL encryption and authorization certificates.
Would love to hear further thoughts on the matter and what other companies out there I should be paying attention to?
Spray and pray…. Try before you buy… Foot in the door… Take your pick, these describe the dominant seed investment strategy today in Silicon Valley. The start-up world’s current angst around the “Series A crunch” is in great contrast to my seed experience, where most efforts progress to further financings and several are on their way to being standout successes in the Venrock portfolio.
For me, seed investing is not a low cost, little-time-required option on the A round. It is a big investment of time and effort in order to be intimately involved in the formative stages of a company, despite the fact that the dollars-in and percentage ownership don’t hit usual venture fund metrics. Since the commitment front-runs the money and ownership, it is something we only do when we are so compelled by the people and the idea that we “have” to jump in long before it makes “traditional” sense. Our mission is to help in whatever way we can, in hopes of increasing the company’s speed, likelihood and scale of success. It also allows us to emphasize our approach as long term, supportive, performance oriented company builders. Let’s face it, money is cheap, but time and effort are really expensive – for both entrepreneurs and venture capitalists.
A “deep involvement” approach requires making far fewer commitments than most others who have embraced seed investing in recent years – whether angels or venture funds. I have done about one a year across a variety of the more capital efficient healthcare subsectors – healthcare IT, diagnostics, and services. Castlight Health and Ariosa Diagnostics are among several recent examples that illustrate our approach.
In mid-2008, I partnered with Todd Park (x Athenahealth, now CTO of the U.S.) and then Gio Colella (x RelayHealth), both of whom Venrock had funded previously, to explore the opportunity to create a company at the intersection of web – healthcare – consumer. We worked for six months on the project and, in early 2008, seeded and incubated Castlight Health. In that initial round, we invested $333,000 and proceeded to build the company brick by brick, eventually investing $17 million for nearly 20% ownership. Over the last four years, Venrock has devoted every possible resource and connection possible – countless strategy sessions, customer meetings, management recruiting, follow on investor introductions, and the Board now includes a second Venrock partner in Bob Kocher, who still spends more than a day a week with the team. Today, Castlight has the opportunity to become a pivotal participant in the creation of a functional healthcare delivery market, improving care while saving billions of dollars.
Ariosa is a similar story, but one whose roots are found in an unsuccessful Venrock seed investment. We lost $300,000 after nine months in a diagnostic start-up when the CEO, John Stuelpnagel (x Illumina, a Venrock investment), came to the Board with the message that we all had better things to do than continue to push that particular rock uphill. Soon thereafter, in 2009, we seeded the combination of a terrific first time entrepreneur/CEO in Ken Song, then at Venrock, with John as Executive Chairman to tackle new approaches to prenatal molecular diagnostics. Three years later they are leading the race to provide an entirely new and improved standard of care to expectant mothers – where they can confidently assess genetic abnormalities with no risk to the baby at ten weeks of pregnancy.
Success in venture investing is really hard to come by, and with seed investing even more so. No matter what the strategy, there will be failures and even more pivots before those few that succeed become great. That said, as with Castlight and Ariosa, when it works, it is awesome. You can assist in a company’s formative stage; create close and productive relationships with entrepreneurs; as well as build your ownership over subsequent financings. Early help in the project typically leads the team to want to work with no one else but you – in essence, you have become part of the family. This month I made my seed investment for 2012 – a stealth company, also in the healthcare IT space. I think these entrepreneurs would tell you that our track record as active participants in prior seeds, as described by those CEO’s, was the over-riding factor in their decision to work with Venrock. We will do our best not to disappoint them.
In the end, our, and every VC’s, goal is to create great returns for our LP’s. We believe that a targeted, time intensive approach to seed investing is orthogonal to others’ and increases the chance of creating great companies by affording them resources early on that they would not get in other seed models. But it requires a leap of faith and trust between entrepreneur and VC – a leap we are eager to take.
(Post co-authored by Nikhil Sahni and Bob Kocher. A version of this post also appeared at HealthAffairs Blog.)
America’s health care market does not work well. It is inefficient, asymmetric, and in most cases not particularly competitive. The Affordable Care Act (ACA) legislated a myriad of changes to reform and improve insurance markets with exchanges as a centerpiece. While exchanges and reforms like subsidies, guaranteed issues, age bands, community rating, reinsurance, and risk adjustment are all helpful, a huge opportunity remains to segment the health care market around different categories of patient demand.
Basic economic theory states that a well-functioning market is aligned between supply and demand. Ideally, suppliers and customers align around the preferences of the customers – the unit of alignment is driven by the demand side. When we examine health care, we see demand falling into three segments: healthy people who have episodic needs, chronic disease patients with predictable needs, and highly complex patients with less predictable needs. Given the high variance between the three submarkets, we believe that each of these segments should be thought of as a discrete market and served by different types of insurance products, payment models, and health care providers.
We believe that this is necessary since each of these segments values providers differently. For a healthy patient with periodic needs, convenience and experience are likely to matter more than continuity with a provider and care team. Conversely, chronic disease patients are likely to value clinical outcome attainment, complication avoidance, and care coordination very highly. And complex patients will need and value the customization, access to research, and specialization that the latest medical breakthroughs can deliver. Not only are the sources of value different, but so are the delivery systems and payment models needed to align incentives for value.
Re-Envisioning The Health Care Market
Healthy patients. For healthy patients with periodic needs, an episodic approach is also the most economically efficient. These patients do not require the fixed cost of a large system of care and instead should purchase discrete specific services — ideally a bundle of care to deliver a specific pre-defined outcome. In this model, a patient buys insurance and broad access to providers and, when a health need arises, receives a budget for his or her episode of care. We favor reference-based pricing so the patient can purchase an episode outcome without additional cost sharing while retaining the option to pay more if he or she chooses. The market is thus incentivized to manage to a specific outcome in the most cost-effective way and to compete on delivering extra value for those patients who are willing to pay more.
To meet demand for bundled payments organized around episode outcomes, the supply-side should realign into specialized care units that focus on a few procedures, organ systems, or disease areas — a broad PPO network. This has historically proven successful for elective conditions: the Dartmouth Spine Center has a surgery rate of 10 percent –- lower than the national rate –- with 100 percent of patients reporting their needs were well met. Other examples of episodic providers include ambulatory surgery centers, orthopedic and cardiovascular specialty hospitals. We also foresee capitated systems managing population health procuring discrete episode services from specialty providers, since these providers should be able to offer equal or better outcomes at lower prices than an Accountable Care Organization (ACO), integrated delivery system, or multispecialty group.
Patients with chronic disease. For chronic disease patients, the primary outcome goal is to minimize a condition’s short-term inconveniences and long-term complications. The market should thus incentivize a long-term perspective centered on patient engagement, adherence, and side-effect prevention. On the demand-side, customers should purchase care from a provider able to care for all aspects of a patient’s condition, which creates incentives for all players –- patients, doctors, providers, and drugmakers –- to manage cost. The basis of competition should be the ability to deliver annual health and complication avoidance at lower costs.
In this model, incentives are most aligned when providers are paid using a risk-adjusted capitated payment. To compete, providers should organize in organizations such as ACOs, Patient-Centered Medical Homes (PCMHs), multispecialty groups, or integrated delivery systems with strong capabilities in managing risk, population health, and costs. Examples of these types of systems are Group Health, Geisinger, Kaiser Permanente, Healthcare Partners, and CareMore. In this model, incentives for patients to adhere to treatment plans, and remain in the system of care, are reinforcing.
Complex patients. Finally, there are certain conditions that are too complex to fit into either market, such as complex cancers, high acuity conditions, and rare diseases. These conditions often exhibit both chronic condition and episodic characteristics and are best managed by academic medical centers or high-acuity specialty facilities like comprehensive cancer centers and children’s hospitals.
Our view is that the current fee-for-service system is the best approach for handling these cases. To constrain inflation and encourage competition, fee for service should be coupled with utilization review, incentives to use evidence-based care, and transparency around risk-adjusted outcomes and expected out-of-pocket costs. Paying for these as episodes will not work because high patient heterogeneity exists and the size of the market cannot support competition at the episode-level. Moreover, it is hard to define quality and value for many of these types of patients and conditions.
The Way Forward: Turning Theory Into Practice
These payment models and provider organization approaches maximize value by encouraging healthy patients to get their conditions fully resolved for a fixed price, chronic disease patients to access a care team rewarded for avoiding complications, and complex patients to receive customized care and access from specialists. Furthermore, each of the three submarkets –- healthy patients, chronic disease, and complex and rare conditions –- is large enough to be self-sustaining and attractive. We estimate that the chronic condition market is $1.1 trillion, the episodic care market is $760 billion, and the residual fee-for-service complex and rare conditions market is $900 billion in 2011.
The three markets are growing at similar rates. (See exhibit 1, click to enlarge.) If the economics are aligned, they will also be able to create growing value for patients through productivity gains, falling prices, better outcomes, and far better patient experiences. Fortunately, each of these markets and provider models exist today in many geographies. They are just not widespread enough or coexistent.
Giving consumers more insurance options. Transforming theory into a tangible system presents certain challenges, which we believe will be overcome in the next few years. First, patients need insurance product choices. The advent of state exchanges and community rating are catalytic events that could lead to this reorganization if exchanges permit reference-based pricing plans and allow integrated delivery offerings with narrow networks. The employer market is already moving down this path with the marked increase in defined-contribution health benefits supported by private exchanges, where higher cost sharing and narrow network plans are often offered. We are also seeing many more employers shifting to reference-based pricing and episode bundling approaches for elective conditions to rewards employees for selecting high-quality, lower-cost providers, and to encourage providers to offer a full course of care for a bundled price.
Provider restructuring. On the provider side, theoretically overhead should not increase, but should decrease. The largest providers that can pull in adequate populations will focus on patient and population health, a trend already being seen with groups like Partners Healthcare shifting to an ACO and capitated payment orientation. Competition will also lead to emergence of more specialized providers for acute and episodic care among community hospitals. Already for complex and rare conditions, regional centers like the Mayo Clinic and traditional academic medical centers exist. The push to submarkets should accelerate the provider landscape transformation and reduce the extraneous providers that lack focus and a niche.
The biggest barrier today is linking benefit designs and reimbursement models with patient segments. Once commercial payers approach providers with products that segregate patients into these segments with corresponding reimbursement, providers will rapidly reorganize to serve the segments that they are most competitive at supporting. While this approach does generate more ACOs and PCMHs, the past year has shown that these can be formed relatively quickly to meet demand. The emergence of retail-oriented primary care providers also indicates that episodic care models are able to proliferate and scale in response to demand.
Addressing changes in consumer health needs. One additional challenge will be how patients react when health needs change mid-year. All patients regardless of submarket will have certain basic aspects: insurance, preventive care, and consumer protections. The value in longitudinal care is irrespective of submarket and hugely valuable to reducing the growth of health care costs. As health needs adjust for patients during the year, we see two potential solutions. First, patients will still have access to other submarkets to receive the necessary care. Second, the pool of patients who will need product adjustments will be significant, and the value cannot be ignored by payers. Thus, some supplemental plans may emerge that enable patients to gain access to additional types of providers.
Matching patient needs and demand with specific types of providers and reimbursement approaches is better for patients. If incentives are aligned with the types of value desired by different types of patients, price increases should no longer outpace value creation, and providers will compete and differentiate in ways that are most valued by their core patient constituencies. Doing this through the creation of well-functioning submarkets — instead of forcing a single, ill-functioning market — should also unleash productivity gains as providers specialize around narrower segments and stop investing in services that they do not do well, do at scale, or need.
Overcoming the barriers will be a significant challenge. However, we are already seeing some shifting in the health care landscape, in addition to certain provisions in the ACA which will come online in the upcoming years and add further movement.
Network Effects are magical. They are the pixie dust that makes certain Information Technology businesses, especially on the Internet, into juggernauts. They can be found in both consumer and enterprise companies. Network Effects are special because they:
Network Effects are like a flywheel–the faster you spin it the more momentum you generate and enjoy. But not all markets lend themselves to Network Effects. They are not the same as Economies of Scale where “bigger is better.” To be certain, Economies of Scale can give strong competitive advantage and defensibility to the first to get really big (or Minimum Efficient Scale as the economists call it.) For example, SAP and Oracle benefit from having massive revenue bases which enable them to employ armies of engineers who develop rich feature sets and also to hire huge sales forces. However large these companies are today, though, their growth rates, especially in their early years, were far more modest compared to those Network Effect companies whose growth resembled a curved ramp off of which they launched into the stratosphere.
There are four main types of Network Effects:
Example include Operating Systems like Microsoft Windows, Apple App Store, and Amazon Web Services.
Each of these four types of network effects can be extremely powerful on their own. Yet, even more power is derived when a business can harness multiple types of network effects in synergistic ways. Google, Apple and Facebook do this for sure, but a less well known example is Venrock portfolio company AppNexus that operates a real-time online advertising exchange and technology platform. The exchange aggregates advertisers, agencies, publishers and ad networks for marketplace liquidity, but also offers a hosting and technology platform for other AdTech companies and ad networks to augment their own businesses. And the vast troves of data AppNexus processes every millisecond flows back into the system as optimized and targeted ad serving.
Network Effects are what you want fueling your business. Sometimes you just need to get clever about discovering and harnessing them.
We are big believers in Klout! I was lucky enough to participate in the Series B financing. Since that time, through the hard work of Joe Fernandez and team, Klout has experienced explosive growth. With that backdrop, I am thrilled to announce Venrock’s participation in the Series C Financing.
Klout measures consumer influence across social media. As social platforms continue to grow, it becomes increasingly important to have a standard system for identifying and measuring influence. Klout is this global standard.
The Social Media category continues to fragment with new platforms showing explosive growth. These platforms are quickly becoming real media channels with scale. As with any media channel, businesses need to understand the nature of the channel, the mix and makeup of the audience, who matters in that audience, and how to reach that audience at scale. In a broad sense, I like to think about Klout as the Nielsen of social media. Klout enables advertisers to determine where and whom to target to help gauge the efficacy of advertising. Any consumer-facing company that uses a CRM product will want Klout to enhance their customer outreach. Any application can use Klout to better understand their consumers by using influence scores and categories.
Klout uses the data it collects across different social media sites to identify influencers and segment them according to influence category. Externally, consumers have a single Klout score that measures their general influence online, but behind the scenes these users are segmented according to an incredible array of categories. Klout currently analyzes a variety of sites, including Facebook, Twitter, LinkedIn, FourSquare, YouTube, Instagram, Tumblr, Blogger, Last.fm, Google+ and Flickr, with many more on the way. Advertisers and businesses can access influence data via an API to run targeted campaigns with consumers in different categories of interest.
The imprimatur Klout has achieved with brands and agencies is remarkable. The company has achieved a high level of recognition and has emerged as the standard for influence. As the web is rebuilt around people rather than pages, Klout has become the next critical layer of the analytics and measurement stack.
(A version of this post also appeared at AllThingsD.)
The oldest adage in start-up’s, for entrepreneurs and VC’s alike, is “the key to success is the quality of the people.” Markets and innovative approaches are important, but my experience supports this notion unequivocally. I have had the good fortune to be involved from an early stage with several billion dollar companies, and most found success after a material pivot from their original approach – Athenahealth, Ironwood Pharmaceuticals and Sirna Therapeutics to name a few. “I invest in people” is the start-up ecosystem’s version of motherhood and apple pie, but how do you identify “Great” prospectively?
Whether explicitly or not, everyone has their own answer to this question, and based on the success rates, those answers by and large stink. I don’t have a Magic 8 Ball on the topic, but two things make this the issue I wrestle with most: (1) the often-unpredicted success or failure of “nobodies” or “sure things” respectively, and (2) the outsized rewards for locating great, juxtaposed with the probability of abject failure when settling for good. The A+ entrepreneurs with whom I have partnered have come in unusual packages – simply put, there has been no central casting: a biology post-doc who thought about opening a microbrewery B&B; a large animal veterinarian who went to business school in his late 30’s; an x EMT who was also nephew to the President among others. The best VC’s seem to show the same diversity of background.
I now focus on these attributes:
While potentially controversial today, I have come to believe that great entrepreneurs and great VC’s are two sides of the same coin. Both embody these characteristics. They are maniacally focused on changing the way we live with innovations others thought were not possible. They are passionate about building a great company and put the company before themselves. No great VC takes solace in having a portfolio when an individual company struggles – like entrepreneurs, this is deeply personal and about so much more than just money. Their roles are complementary, like looking down opposite ends a telescope, but those different perspectives to a problem can be extraordinarily synergistic. Great future entrepreneurs can look like great young VC’s, and vice versa – three of my recent investments are stellar companies started by these “crossover” folks.
All venture firms are simultaneously never, and always, looking for team additions. I believe this is a direct result of how elusive it is to identify those who will be not only smart, passionate, personable and high integrity, but also successful in this ever-changing, ambiguous entrepreneurial world where what worked last time is no recipe for future wins – and more likely charts a path to mediocrity. In fact, my own difficulties in finding conviction around potential team additions for our firm is what spurred putting these thoughts on paper.
Update: This is simply a market sizing exercise for people building a business in a market that doesn’t exist. It does not reflect my actual thoughts on value. If you notice, I rewinded to 2009 and only explored one business model for clarity.
The New Market
Yesterday we talked about the established market but the market sizing exercise starts to get really interesting when you think about markets that don’t exist. Let’s take a company like Twitter circa 2009, when there was still a lot of ambiguity around what the size of their market opportunity looked like (some might say this ambiguity still exists today). The executive team probably had a vague sense that there was going to be some kind of advertising supported model to the business and I’m sure their investor decks contained the requisite ad-supported slide: “$300B in advertising spending in the US and only $25B of it is online!”
Like most consumer internet companies, the key market sizing question for Twitter is very simple: what is their annual revenue per user at scale?
Let’s start with a very simple model. Let’s suppose that Twitter will be purely ad supported. The basic market size equation that we’re going to start from is as follows:
Twitter Market Size = (Users) * (number of ads/user) * ($CPM of ads)
We can begin by decomposing the number of users. What does a typical Twitter user look like? A simple assumption to make is that over the next 3-5 years, the typical Twitter user will be somewhere between 15-34, with a lower diffusion rate in the 35-49 year old category and a very limited diffusion rate above 50. The Zynga case might make us question some of those assumptions around people over 50 but let’s play it safe. To begin, let’s start with the following numbers, based on US Census Data from 2000:
· 15 – 34: (79MM people) * (100% possible diffusion) = 79MM users
· 35 – 49: (65MM people) * (50% possible diffusion) = 32.5MM users
· 50+: (76MM people) * (10% possible diffusion) = 7.6MM users
· Total Potential Twitter Users = 119MM users
There are several factors that will influence this number, including what percentage of people have internet access, socio-economic factors, and general appetite for digital media. Clearly, this number can be refined.
From here, we need to think about the number of ads each user will see. This is particularly tricky with Twitter given that a lot of users are on 3rd party clients where it may be difficult to track ad views and CTR’s and where Twitter may not even be able to serve ads into. This is a whole other discussion but for purposes of this analysis, let’s assume that everyone goes directly to Twitter.com. This is where the wheels start to fall off the proverbial VC short bus. Twitter has no idea what the ad units will look like, what is the ideal number of ads served, how much time a user will spend on Twitter.com, or whether ads will work at all. Oh well... The analysis must go on. Let’s assume that our thesis is that Twitter.com will be primarily a source of news distribution. During the week, most users check a news website once in the morning and once in the afternoon, for an average number of daily visits of twice per day. On the weekend, let’s assume that an average user won’t check Twitter at all since they’ve got a lot more time on their hands to read magazines, browse their favorite sites, and won’t need the quick-news-fix that Twitter provides. Given the short format of Twitter, serving 1 ad per visit is not unreasonable. Putting these assumptions together, let’s look at how many ads an average user will see in a year:
Number of Annual Ads Per User = (1 ad per visit) * (2 visits per day) * (20 visits per month) = 40 ads per month.
As a sanity check, this feels a bit low. Just browse the web for 20 minutes and count how many banner ads you see. We’ll want to revise this number upwards later on.
Lastly, what is the average $CPM that Twitter will be able to charge? At scale, let’s assume that Twitter directly sells out 75% of their inventory at a $5CPM and uses 3rd party ad networks to fill the remainder at a $1CPM after revenue-share to Twitter. These are reasonable numbers based on average CPM rates across all categories for banner ads, but there is a huge open question of whether Twitter ads will behave like banner ads in terms of branding value, CTR’s, and other metrics. The ad effectiveness profile could be wildly different, in which case our $5/$1 assumptions could be materially off.
Now, let’s put all of this together to see what the potential ad-supported annual market size is for Twitter in the US:
Twitter Market Size = (119MM Users) * (40 ads / month * 12 months) * ($5 CPM * 75% of ads) / 1000 (necessary to calculate CPM) + (119MM Users) * (40 ads/month * 12 months) * ($1CPM * 25% of ads) / 1000 (necessary to calculate CPM) = $228,480,000 revenue/year.
As a sanity check, is it reasonable to expect Twitter to capture $228MM of advertising revenue, given that online advertising revenue in the US will hit $50B or so in the next 3-5 years? Probably. As I noted, there are a number of areas where the analysis can be refined and it is likely that our core thesis of Twitter as a distribution medium of news is too limited. Beyond that, we haven’t explored a variety of other business models that Twitter could pursue, including subscription, commerce generation, data sales, and so forth. This is where the really interesting discussion points begin.
Hope this was helpful!
Over the last few weeks I’ve had some meetings where the topic of market size could have been a bit more rigorously addressed. It’s a hard issue to tackle – particularly when you’re creating a new market – but the topic is critical in every pitch. There are some occasions where the market size is fairly straightforward. For example, I’ve looked at a few female focused online fashion companies recently and while I know this is a huge market, it’s still helpful to dive into the issue of sizing for a couple reasons:
1. Most companies are going after a slice of the market. The fashion market for 15-44 year old females with household income of $40,000-$80,000 dollars is quite different than the market of all female fashion. This is an obvious point but I’d say that about 1/3rd of the pitches I see contain market size estimates that include sectors that are outside of the focus of the business.
2. The market sizing discussion is incredibly helpful in getting to know how you think. Most of the time the intro pitch is the first meaningful interaction between entrepreneur and VC. I like to think of the market sizing discussion as almost an intellectual discourse between professor (entrepreneur) and student (vc).
With that in mind, I’d like to share a couple different ways that I like to think about market sizing in the consumer internet space. There are a variety of other ways to think about sizing and a lot has been written on the topic. I’d encourage everyone to spend some time on Google and read up on other opinions.
Established Market, New Product
Continuing on with the example above, let’s say I’m starting a women’s fashion company that aims to sell scarves online. Those of you that know me are probably chuckling right now since I’ve been wearing the same 3 scarves for the last few years now and am thoroughly unqualified to run such a business.
Let’s take a first cut here.
Market Size = (number of females in the US in the target market) * (average number of scarves purchased by females) * (average price point)
The types of scarves that I’m selling will appeal to 15-44 year old females with a household income (HHI) between $40,000-$80,000/year. The US census data groups people into segments of under 15, 15-24, 25-34, and 35-44. The data tells me there are 8.7MM females in this category. Not a bad start. Unfortunately, my instincts tell me that scarf consumption varies dramatically by geography. I’m going to make a simplifying assumption and segment consumers into two groups: California People (which also include people from Arizona, New Mexico, Texas, and other states where scarf consumption is de minimis) and Everyone Else. Note that I’m a New Yorker, though, I must admit that some of my favorite people are from California! After looking through a map of the US and segmenting different states into warm and cold climates , I’ve decided that 20% of the US population are California People and 80% are Everyone Else.
Next, I need to determine how many scarves are purchased by the average 15-44 year old female in both of these segments. To do this, I got on the phone and called up 20 friends in each of these groups. Those of you that did not major in History like I did will likely groan that this is not a statistically valid sample. I agree. It’s a start. If you want a statistically valid sample, there are a number of online survey companies that can get you this data fairly cheaply. My very un-rigorous survey reveals that the California People buy 0.3 scarves/year and Everyone Else buys 1 scarf/year. Moreover, I got the sense that Everyone Else takes the quality and fabric of their scarves seriously and probably pays more on average per scarf than the California People. More on this later.
Now we’re on to the final stretch. What is the average price point of a scarf? In my informal survey above, I asked my friends for their average price point but most of them didn’t remember and those that did seemed to give me inflated numbers (so snobby!). To get insights into this question, I went on Amazon, navigated to the women’s clothing section and searched for the keyword “scarf.” Here is the breakdown:
· Under $25: 3,758 (50%)
· $25-$50: 1,728 (23%)
· $50-$100: 1,348 (18%)
· $100-$200: 524 (7%)
· $200+: 107 (1%)
· Total: 7,465
Using this informal technique, let’s assume that the average price point is $25 for Everyone Else and a slightly lower $20 for the California People. These are a decent ballpark approximation but can obviously be refined further.
Taking the data we’ve gathered, our first cut at a market size for my new company is:
(8.7MM females * 80% Everyone Else) * (1 scarf/year) * ($25 average price point) + (8.7MM females * 20% California People) * (0.3 scarves/year) * ($20 average price point) = $187,050,000
Does this number seem reasonable or is it out of line with reality? As a quick sanity check, the next thing I did was go to the Consumer Expenditure Survey maintained by the Bureau of Labor & Statistics and look at the total amount spent on clothing by US households and the look at what percentage of the total clothing market the $187,050,000 represents.
Lastly, I asked myself, what is a reasonable amount of the market that I could capture? Fashion is a particularly fragmented market and even if I become the category killer in scarves, it’s unlikely I’d get more than a few percent of the overall market. Let’s say I can capture 5% of the overall scarf market – an extraordinary number in any fashion related category, then I’d be making around $9.3MM/year given the numbers above.
Note that this is a quick-and-dirty analysis. An actual analysis should be significantly more rigorous in terms of data quality and layer in more refined assumptions. For example, my segmentation of California People and Everyone Else, while entertaining, is too simplistic to withstand real scrutiny. The same goes for my methods of data collection. Tommorow I’ll post some thoughts on how to approach a new market.
I was in San Francisco last week and had fun meeting with lots of companies. I also did a short interview with Bloomberg. Here it is..
It’s a very natural thing to do on your first day of work: fire up your computer, check a bit of email, and read up on the upcoming events of the week. On this particular day, reading up on the events of the week meant looking through the materials for our upcoming Limited Partnership meeting. Contrary to popular belief, the “LP meeting” is not one of those shrouded-in-mystery type events; it’s fairly straightforward. The team presents to the investors on the state of the portfolio, fields questions, and gets to hear from a few select speakers.
It struck me that the job description of the keynote speaker at the Venrock LP meeting was unusually sizable: “Aneesh Chopra’s job will be to promote technological innovation to help the country meet its goals such as job creation, reducing health care costs, and protecting the homeland.” Wow. Kind of puts things in perspective. Aneesh is the Chief Technology Officer of the United States and was appointed by President Obama in 2009. Even more importantly, he is the first person to hold this title (and what a great title it is). Just thinking about this…the ENIAC, which is widely regarded as the first computer ever invented, was built in 1946. Fast forward 63 years and we now have our first CTO. There’s a definite thoughtfulness in the selection approach for this role.
Aneesh covered a wide range of topics in his discussion, but underscoring all the themes that he touched on was the issue of data analysis. The US government generates unbelievable amounts of data across every category you can imagine: packaged food composition, mining production, reservoir water levels, medical facility ratings, and my personal favorite, the American Time Use Survey. All of this data has been coming online over the past few years and there is still a tremendous amount of data that is not yet accessible. A number of interesting companies have already begun to use these datasets to gain a powerful advantage. As @jonathanmendez pointed out, one great example of this is Urban Mapping. I am confident that many more will emerge.
The conversation with Aneesh was inspiring because it brings into focus the reason that I got into venture capital in the first place: to find and invest in great entrepreneurs that are tackling problems of vast importance. Venrock has a long and rich history of executing on this goal and I’m proud to be working with such an accomplished group of investors. With such an exciting entrepreneurial community bubbling here in New York ($2.2B of venture money in NY in 2011!), I’m enthusiastic about what this next year will bring.
On April 14th I am moderating a panel at the Digital Healthcare Innovation Summit in New York City titled “The Hospital as Production Center: Holy Grail or Impossible Dream?” [For anyone who wants a discounted registration rate, see the end of this post.] In an effort not to suck, I’ve put some thought into what makes a great panel. Like many conference junkies in the tech and finance worlds, I’ve sat through hundreds of panels, been on a bunch, and moderated a few handfuls over the years. Here’s a list of a dozen suggestions that I plan to implement:
If you are interested in attending the www.digitalhealthcaresummit.com enter the special key code VNRPR to receive the discounted rate of $695.00. You can also contact Cathy Fenn of IBF at (516) 765-9005 x 210 to enroll.
By the time you read this post, Super Bowl XLV will be over and everyone will be talking about the … commercials. Why? Because most of them are entertaining, some are memorable, and the $2.5 million price tags (for air time alone) pique our curiosity. Why are brands willing to pay so much? Because it is one of the only ways to reach 100 million consumers simultaneously, and because a great 30 second video ad packs an emotional payload in support of your brand unlike virtually any other form of advertising.
Over the past few years I’ve noticed more and more web companies producing great videos to market their companies, often presenting them front and center on their homepage as the introduction to their company. A great video overview can really help explain what you do for customers, how you do it, and present your brand in a flattering light. The best videos go viral and bring you exponential attention and new visitors. And web videos have never been cheaper to produce (at 1/2000th the cost of a super bowl commercial even a start-up can afford them.) So, here are five thoughts on what makes a great marketing video for web companies, and a bunch of examples:
Answer WIIFM: A great marketing video should clearly and convincingly articulate a few simple benefits that customers care about. Mint.com does a terrific job of this, as does Dropbox, both front and center on their homepage. The Dropbox video is particularly noteworthy because it takes an esoteric concept and uses analogy to demonstrate user benefits everyone can relate to.
Show how it works: A great overview video shows just enough of the product and how it works to lend credibility to the benefit statement. Word Lens does a terrific job of this for a product that truly needs to be seen to be believed. A full blown demo would have been less effective than just these short glimpses of the product in action.
Be yourself: Video is such a rich and engaging medium it is perfect for showing the personality of your brand. It is a great way to set tone and speak to your customers and prospects in an authentic voice. Flavors.me does a terrific job of this through music and images alone, letting actions speak louder than words in convincing you that they can make your personal homepage look amazing because they do such a killer job of presenting themselves through this video. Style personified.
Be fun, get remembered: Great marketing videos are fun to watch and somewhat memorable. You don’t have to be knee slappin’ funny or so hip it hurts, just smile-inside funny will go a long way. SalesCrunch and SolveMedia both take pretty dry categories (CRM SaaS and AdTech respectively) and rivet their viewers through entertaining use of cartoons and wit.
Be Brief: Even a great marketing video starts to feel long after two minutes. Shoot for less. This video from Smartling gets the job done in 38 seconds. [Disclosure: Smartling is a Venrock investment.]
These are the five characteristics which I think make for a great marketing video for your web company. If you think there are points I missed, or have other great examples, please comment and add to the list. If you are the production agency responsible for making any of these videos please take a bow by claiming your work. I’m sure others will want to contact you. If you are looking for more of a live action marketing video, SmartShoot and other online videographer marketplaces can help produce custom video for ridiculously low rates.
Today I faced a choice. Should I go out and enjoy the beautiful weather and waves and go for a surf or should I blog about my favorite financial reporting tool? Seems like a pathetic question for a surfer to ask, or maybe this financial reporting tool is really that great. I’ll settle for an answer of “both”.
The tool in question is the Waterfall Chart. It’s a way to compare actual results across time periods (months or quarters usually) against your original Plan of Record, as well as forecasts you made along the way as more information became available. It packs a ton of information into a concise format, and provides management and Board members quick answers to the following important questions:
1. How are we doing against plan? Against what we thought last time we reforecast?
2. Where are we most likely to end up at the end of the fiscal year?
3. Are we getting better at predicting our business?
The tool works like this:
Across the top row is your original Plan of Record. This could be for a financial goal like Revenue or Cash, or an operating goal like headcount or units sold. Each column is representative of a time period. I like monthly for most metrics, with sub-totals for quarters and the full fiscal year. Each row below the plan of record is a reforecast to provide a current working view of where management thinks they will wind up based on all the information available at that time period. Click the example below which was as of August 15, 2010 to see a sample, or click the link below to download the Excel spreadsheet.
Periodic reforecasting does not mean changes to the official Plan of Record against which management measures itself. Reforecasts should not require days of offsite meetings to reach agreement. It should be something the CEO, CFO, and functional leaders like the VP Sales or Head of Operations can hammer out in a few hours. Usually these reforecasts are made monthly, about the time the actual results for the prior month are finalized. When you have an actual result, say for the month of August, $2,111 in the example above, this goes where the August column and August row intersect. On that same row to the right of the August actual you will put the new forecasts you are making for the rest of the year (September through December.) In this fashion, the bottom cells form a downward stair step shape (a shallow waterfall perhaps?) with the actual results cascading from upper left to lower right. You can get fancy and put the actuals that beat plan in green, and those that missed in red. You can also add some columns to the right of your last time period to show cumulative totals and year to dates (YTD). With or without these embellishments you’ve got some really powerful information in an easy to visualize chart.
Two questions an entrepreneur might ask about this tool:
By repeatedly comparing actual to plans and reforecasts, won’t my Board beat me up each month if I miss plan or even worse, miss forecasts I just made? If you are a relatively young company, most Board’s (I hope) understand that planning is a best-efforts exercise not an exact science. Most Boards will react rationally and cooperatively if you miss your plan, as long as you avoid big surprises. By giving the Board updated forecasts you decrease the odds of big surprises because the latest and best information is re-factored in to the equation as the year progresses. They probably won’t let you stop measuring yourself against the Plan of Record, but at least you’ve warned them as to how results are trending month to month and course corrections can be made throughout the year.
Won’t this take a lot of time? Hopefully not a ton, but it does take effort. However, it should be effort well worth it beyond just making the Board happy, because as a management team you obviously care about metrics like cash on hand, and this should be something you are constantly recalibrating anyway. The waterfall is the perfect tool to organize and share this information.
Most of my companies using this tool track five to ten key metrics this way. Typical metrics include:
Whether or not you agree this is the single greatest financial reporting tool ever, I hope you give it a try and find it useful. Now I’m going surfing….
There is much conventional wisdom in venture capital. One such belief is that hospitals are a really horrible market for tech startups to pursue. Back in 2002 when we invested in Vocera, an innovative communications system for hospitals (think Star Trek), many other firms had looked at the deal and passed. Although this was the company’s third round of financing, the company was still pre-revenue and pre-launch, and this was the first round raised subsequent to their strategic shift from a horizontal solution to one vertically focused on hospitals. Most VCs ran from it. Following are some of the reasons potential investors gave for hating the hospital market then, most of which persist as concerns, often valid, today:
1. Hospitals are highly budget constrained
2. Most hospitals don’t have profits motives and are not subject to the same competitive forces as for-profit businesses
3. Hospitals are complex political environments with many forces that influence decision making and purchase behavior that seem counter to rational business judgment. Those who decide, those who approve, those who pay, use, benefit from, can all be different roles in the organization.
4. Sales cycles are very long, often measured in years.
5. Hospitals are technology laggards when it comes to adopting information technology.
6. Hospitals are dominated by large technology vendors such as GE, Cerner and IBM.
There is some truth to each of these, but here’s the counter argument that led us to make a second investment in the hospital market, namely Awarepoint, an indoor GPS system for tracking people and assets in the hospital.
1. There are lots of hospitals. Over 5500 in the US alone, and there are little blue signs pointing you to each of them. Given the annual budgets of your typical hospital, this translates into a very big market. Vocera now serves over 650 hospitals and more than 450,000 daily users, and is still growing very rapidly, believing they have tapped less than 10% of their core market opportunity.
2. Hospitals are sticky. Once your product is adopted, and assuming it works well, they are reluctant to switch you out because solutions get so enmeshed in different processes and systems, and so many employees get used to them. You can’t screw up, or raise prices dramatically, but you may not have to sing for your supper every time a competitor issues a press release.
3. Hospitals are willing and able to spend on IT if it is a priority and they see an opportunity for a large return on investment. This is one of the things helping Awarepoint penetrate the market, and they are not alone. Companies like Allocade , which creates dynamic patient itineraries to improve throughput, are also having success based on the ROI they can deliver.
4. Because hospitals are underpenetrated by information systems, there is lots of low hanging fruit and relatively basic problems to be solved. Electronic Medical Records vendors are having a field day, both because of stimulus incentives but because many hospitals, especially the 72% of all community hospitals with under 200 beds, still don’t have this basic form of digitizing their information. The trend towards Accountable Care Organizations, and the related financial incentives, will require greater clinical integration of care across health care settings (inpatient, ambulatory), greater financial efficiency, and increased transparency and flow of information about the process, costs, and outcomes of health care, all of which will require better healthcare information technology.
5. Hospitals are similar to each other and willing to serve as references to each other. Yes, they do compete in some ways, and each has its unique attributes, but you find a higher degree of collegiality and similarity than most industries where competitors hate each other and each may have very different ways of doing their core activities.
There are a few reasons why the hospital market is ripening for startups and the VCs who love them:
1. Hospitals are feeling financial pressures to run efficiently. With healthcare reform there will be more patients coming in their door requiring services, while price caps will get tougher. And there will be financial penalties for things like readmission rates that often correlate to operating inefficiently, and which technology can help prevent.
2. With the EMR mandates and installations, the Chief Information Officer is now in an elevated position in the organization and even considered a revenue generator. Many EMR installation projects are leading to ancillary projects and opportunities to automate and digitize other aspects of hospital operations.
3. New IT paradigms like cloud based services, open data initiatives (thank you Todd Park @ HSS), APIs, and Open Source means that it is less expensive to build and deliver better products into the hospital.
4. Wireless technologies, and relatively cheap and robust devices like iPhones and iPads, make it easier to reach caregivers on the go, whether nurses at the bedside or Doctors on the golf course. Companies like AirStrip are getting real-time info to the caregiver wherever they are, and caregivers love it. Also, WiFi and Zigbee in the hospitals means your equipment and monitors, and even staff, can transmit their info from wherever they are without wires and expensive, disruptive installations.
5. This current generation of Doctors and are used to technology in their personal lives. They use email, carry iPhones and Blackberries, shop online, etc. And the residents entering hospitals today are Digital Natives. There will be an increasing expectation that hospitals adopt these technologies that most other verticals have embraced.
While we fear the unexpected visit to the hospital as much as anyone, Venrock is looking forward to more investments in companies that serve them with compelling HCIT solutions.