Category Archives: Consumer Internet

What We’re Curious About at Homebrew…

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Every day we meet amazing founders sharing their ideas for how the future will evolve. In fact, we see about 150 new companies each month. Where do these teams originate from? Roughly 65% are referred to us by other founders or people we know. 25% are introductions via investors – either angels or VCs. The remaining 10% are a combination of cold inbound/outbound sourcing, often based upon a specific area we’re investigating. So recently we asked ourselves a question “is there strategic value in keeping our list of interests to ourselves?” That didn’t seem like a very good idea if our goal is to connect with thoughtful founders or inspire conversation. And thus http://bit.ly/HomebrewWhatIfs

What Ifs will be an dynamic list of ideas, questions and technologies that we are curious about and specifically want to connect with entrepreneurs to discuss and learn. We’ll edit, add and remove items as appropriate and link to our longer blog posts when it makes sense.

If you’re a founder in one of these areas or someone with domain expertise, we hope you’ll reach out. Do we hope to find new investments this way? Sure, but we’re also happy to just learn and hopefully help.

The only way to raise money: Make them believe

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Ignore what you’re reading about the current investment climate.  Yep, there is plenty of VC money out there and it’s aggressively looking for a home.  But that doesn’t mean it’s so much easier to raise money than in prior years.  The number of startups vying for those dollars is greater than ever.  With so much noise in the market and so many companies in which VCs can invest their cash, raising money is still about the one thing it’s always been about: making a VC believe.

There are many perceived reasons for why VCs make investment decisions.  But the reality is that it’s actually emotion that leads most VCs to invest.  A VC only invests when she finds a quality in a startup that touches upon something personally meaningful or important to her; a quality that creates an irrational belief in the startup’s ability to succeed.  I refer to this feeling as “emotional resonance”.  There are only three qualities that enable a startup to create emotional resonance with an investor.  If you don’t create “belief” based on one of these things, take your pitch and go home because there’s no term sheet coming your way.

People: The best way of creating emotional resonance is through your team.  Despite popular opinion, VCs are people too!  Just like entrepreneurs and employees, they also want to surround themselves with people they love to work with and can learn from.  They want to support founders who they deeply feel deserve tremendous success or who compel them to believe in the likelihood of their success.  Belief might spring from any number of team characteristics, including the team’s story, chemistry or insights.  Given this, it’s no surprise that most VCs will tell you that they invest in people first.  And that’s true.  It’s the emotional connection to those people that leads to the investment.

Potential: The second way of building an emotional connection is via the potential of your business.  The potential might be captured by the mission or the market opportunity or the product.  But somehow you need to leave the VC feeling that he or she absolutely wants the problem you’ve identified to be solved or what you’re doing to exist in the world and that it will be big.  This is why VCs have a hard time investing in products and companies that aren’t targeted towards them.  Something that’s not relatable is impossible to connect with emotionally.  It’s the promise of an early stage startup that can help a VC make the emotional decision to ignore the difficult reality that most startups fail.

Proof: If you’re an early stage company, you don’t have it.  Move on.

So have only one goal in your pitch to VCs.  Make them believe.  Create emotional resonance with your people or your potential.  If your story doesn’t do that, rework it so that you focus on establishing one of those connections.  Present the opportunity in a way that reinforces the excellence of the team or the enormity of your potential.  Because the only path to a VC’s money is still through emotion.

Better isn’t good enough

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I previously wrote about what I think is required for a successful mobile product.  With all of the activity in the social messaging/communications/networking category (Whisper, Confide, Secret and Wut being the latest buzzed about apps), I thought I’d dig into one of the key points I made, which I believe is even more true in this category.  It’s not good enough to be better, you have to be different ─ in a way that helps address an entirely different use or possibly a similar use case dramatically differently.

In the case of messaging, it’s not enough to innovate along an existing dimension.  You need to create an entirely new product dimension.  It’s clear when you look at the breakout messaging apps that they clearly did something different relative to the apps that came before them, and in most cases that helped those apps address different user needs.  Facebook popularized status updates within a private network.  Twitter made status updates public (changing who sees the update).  Instagram made status updates visual (changing the format of the update).  WhatsApp made status updates (via SMS) free.  Snapchat made status updates ephemeral (changing the permanence of updates).  And what of the apps that were hyped and have seemingly gone away?  What new dimensions did Path, Frontback and MessageMe introduce?

Of the “hot” new apps, it remains to be seen which will pass the test of time.  Whisper makes public status updates anonymous (changing who sent the update).  Confide has made text status updates private and ephemeral.  Secret has made the anonymous status update visible only to a semi-private group.  Wut has anonymous, private and ephemeral status updates(?).  Are any of these apps introducing new dimensions that address different use cases or needs?  Fortunately, or possibly unfortunately, social messaging companies doesn’t typically fit our Bottom Up Economy thesis.  So we don’t have to bet which of these products will become the next Facebook, Twitter or Instagram.  But if I had to bet, I’d pick the one that does the most different thing best.  Because better just isn’t good enough when launching a product.

Four truths about mobile products, user mindset and achieving scale

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Like many others, I’m spending more and more time on my phone, and I’m not making more calls.  I’m getting information, buying stuff, collaborating with others and much more.  There are a handful of mobile apps that I use religiously to do these things.  Why do I use these specific apps as regularly as I do?  I suspect that the answer for me and for many others who have the same behavior (a few select apps used frequently) boils down to a few simple things.

Scale is the outgrowth of doing just one thing really well.  WhatsApp, Instagram and Shazam are great examples of products and companies that expertly address a single, well-defined need in a simple way that satisfies a large number of people.  They haven’t added tons of new features to address additional use cases or at least they didn’t begin to do that until they had already significant user scale.  A single-purpose app makes it easier for a user to remember why she should use that app at the moment that she has a specific need.

Users inherently have a tendency towards mental inertia.  Once a user begins thinking of an app as addressing a particular need, it’s really hard to get him to think about it or use it differently.  An app developer who adds lots of features to an app risks confusing users and detracting from the core use case that the app is meant to address.  Unlike the desktop web, where tabs, menus, filters, etc. can be used to add features, it’s likely that in the mobile world the only successful way to add features will be to build entirely separate apps (see Twitter’s Vine and Facebook’s Messenger), often under separate brands.  Can you think of a single app that you use that does many different things well?

Better isn’t good enough.  Once a user begins to think of an app as addressing a need well, it’s really hard to get him to switch to another app to address the same need, even if it does it “better” (see Facebook’s Poke vs. SnapChat).  It’s not enough to be better in mobile, you need to be first to get to scale or you need to be different to fight inertia (not to mention switching costs, network effects, etc.).  WhatsApp continues to thrive in the face of increasing competition because it was first to address a specific need well.  SnapChat and Instagram succeeded not only because they did only one thing extremely well, but also because they did something different from Facebook and Twitter.  They addressed entirely new use cases and didn’t settle for competing via marginal feature innovation (which seems often to be the case in the messaging category, as one example).

Great products unlock user acquisition.  How did Uber grow virally?  The challenges of mobile app discovery and distribution have been well documented. App store distribution, pay-per-install ads, incentivized referral programs, etc. all face obstacles in mobile.  If you don’t have a product that requires users to invite others to benefit from the app (i.e., Facebook), there is only one true answer to the distribution problem.  The best distribution strategy is to build a killer product that generates tremendous word-of-mouth.  Uber, HotelTonight and Mailbox are examples of mobile apps that delivered amazing user experiences that in turn led to viral growth via word-of-mouth.  More than ever before, being the first to deliver an elegant solution to a user problem can be the key to dominating distribution and hence an entire market.

Surprisingly, when I thought about the points above, it seemed that what is true in mobile has largely been true on the web as well.  While technology changes, human behavior is pretty ingrained.  The mind craves simplicity and consistency and resists complexity and change.  Mobile app developers who want to achieve scale will be well served by satisfying the mind.

Re-commerce: The reinvention of e-commerce

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With the announcement of our investment in Groupon, it makes sense to provide some context for why we were compelled to make the investment at this time. Josh Kopelman has recently written about, the innovation that is taking place in the e-commerce market. At Battery, we’ve been following this same overall trend of innovation and referring to it as “re-commerce”, the reinvention of e-commerce. We believe that Groupon is a major player in this reinventing of the huge and growing e-commerce industry.

For the past 15 years, the Internet has been centered on community, content, collaboration and commerce. Community has been revolutionized by social networking. Content has been changed forever by user-generated content. Collaboration has been re-imagined by myriad online services. Until recently, the modern online shopping experience was nearly identical to shopping online many years ago. We believe that there are fundamental changes taking place in the e-commerce world, similar to what happened in offline retail over many years, with the advent of discount retailers, big box specialty retailers and warehouse clubs.

There are many innovations that we have seen over the course of the past few years, but there are five that have been particularly exciting for us at Battery (*Represent Battery investments) .

  • Private flash sales (Gilt, RueLala)
  • Collective buying / demand aggregation (Groupon*, LivingSocial)
  • Customization (J. Hilburn*, CafePress)
  • Crowdsourcing (Threadless, Modcloth)
  • Democratization (Fingerhut*, Etsy)

The new models of e-commerce that are emerging are not fads. They are tapping into all of the same trends that are impacting the broader web, including social, personalization and gaming. Most importantly, they are yielding e-commerce businesses that deliver better experiences for consumers and are more profitable than their predecessors. Many investors look at the valuations of public e-commerce companies and dismiss the entire sector. You can expect Battery to invest heavily in the sector as we view re-commerce as an opportunity to create enormous wealth by reinventing an industry that has been stagnant for too long.

Why OpenGraph helps Facebook become a $100 billion company

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I had the good fortune of being able to attend Facebook’s F8 conference today. While I’ve been quite the Facebook (as a business) fanboy for some time, after today I’m absolutely convinced that with OpenGraph, Facebook has finally exposed the true power of its platform in a way that will help it create incredible value in the coming years. Today’s discussion at F8 didn’t directly touch upon the value of OpenGraph to Facebook, but I believe that the value of the data that Facebook will collect and organize via OpenGraph will allow it to build search and advertising businesses potentially more powerful and sizable than those of Google.

I’ve written before about the importance of data in advertising and the trend towards buying audience rather than impressions. Facebook’s OpenGraph will create the richest user profiles yet, enabling advertisers to target specific audiences based on their friends, Likes, and activity, anywhere that audience can be found on the web. This kind of data and targeting differs from Google’s search-based intent data in that it helps advertisers reach their target consumers earlier in the purchase funnel, enabling what Facebook has called demand generation. This data, combined with the potential of earned media via Facebook and its social plugins, could be the key to shifting billions of dollars in brand advertising spend to the web.

Potentially more important is what I consider to be an entirely new category of search, which I refer to as “subjective search”, that may finally be realized because of OpenGraph data. While Google will likely continue to dominate search for queries where there are objective results, my view is that Facebook will become the default search provider for queries that are subjective in nature. After all, with a graph of my preferences, those of my friends and those of the broader web population, won’t Facebook be in the best position to tell me what Italian restaurant to eat at in Palo Alto, what action movie to see on Friday night or where to go on vacation with my family?

I’m not sure that anyone could have honestly envisioned that we would see another Google-type business in our lifetimes. But by wielding the power of OpenGraph, Facebook could build yet another incredible business based on search and ads. My frequent comment that Facebook will be worth $100 billion sometime this decade has regularly been met with laughter and ridicule. I wonder if that statement will still get the same response after today.

4 sources of long term differentiation and competitive advantage

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Despite the slowdown in venture investing during most of last year, it seems like venture activity picked up significantly in Q4. The data is consistent with my own experience during the quarter, where I saw a huge increase in companies seeking financing, the return of multiple competitors for every investment opportunity and incredibly compressed fundraising processes. I fear that we’re returning to an investing and startup environment much like the one prior to October 2008. One impact of this behavior is that we’ll likely see, as before, the funding of many companies in the same market or with similar offerings (many people point to location-based social networking companies such as Foursquare, Gowalla, Booyah, etc. as a good example). That’s led me to try to outline what I think are the only ways for web technology companies to truly have long term differentiation. Clearly, with time and money, talented people render most software and user experiences alone indefensible. So how do Internet and digital media companies create sustainable competitive advantage? 

Network effects: Businesses with network effects have products or services that increase in value as more customers use them. When a network effects business achieves scale, it can have incredibly lasting differentiation because recreating that network poses significant challenges to competitors. Microsoft Office, eBay and Yelp are good examples of these types of products and services. Some network effects businesses can have both positive and negative network effects. For example, as many social media businesses grow in use, the volume of content to filter and absorb can become overwhelming.

Switching costs: Products or services that make it difficult or expensive to use an alternative product or service have switching costs. Creating this kind of lock-in is a true barrier for competition. DoubleClick’s DFA product is a great example of a product that had tremendous value because it was embedded in the agency online media buying process and was used by many people within agencies.

Scale: For a product or service, differentiation can be derived from scale in customer usage, capital expenditure or data. As an example, Google enjoys incredible differentiation and competitive advantage from all three sources. Hundreds of millions of people conduct billions of searches on Google each day, leading websites that want to integrate search to turn to the de facto standard in the industry. Google has spent untold sums of money on hundreds of thousands of machines in datacenters around the world to deliver the fastest, freshest and most relevant search results to its users. The hundreds of millions of clicks generated each day on search results provide Google with a vast quantity of data and insights that help improve search quality. Any new search competitor not only has to deliver a superior consumer search experience, but it also has to spend enormous amounts of money recreating the underlying infrastructure and data that makes Google such a powerful competitive force.

Culture/People: Given that web technology itself is largely indefensible, the greatest source of differentiation and competitive advantage is often execution, and that is predicated on people and the culture in which they operate. Whether it’s the culture of innovation at Google, the culture of customer happiness at Zappos or the culture of freedom and responsibility at Netflix, I’m certain that the management teams from those companies would point to the employees and the DNA of the organizations as the primary reasons for their success. I find that when the culture of a company is well-defined, it is usually a direct reflection of the founder(s) and their conscious decision to establish a well-defined company culture from the start. I only know of a few instances where the culture of an organization was either instilled in the organization at a later point in the company’s development or successfully recast by new leadership.

When choosing what investments to make, I try to keep these sources of differentiation top of mind. It’s easy to get caught up in the appeal of a sexy new consumer application or a seemingly novel approach to a business problem. But lasting, significant equity value is often only created when one or more of these differentiating factors are at play. Are there other sources of differentiation that you would add to the list?

If you build it, they might not come

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A while back I wrote a piece for The Battery Charger, my firm’s quarterly newsletter, about our investment focus within the Internet and Digital Media sectors. As I noted in that article, we invest in both consumer-facing media properties and enabling technologies. In my meetings of late, I’ve noticed a disturbing trend amongst companies that belong to the first category. While almost all of the presenting media companies have slick demos and whiz-bang product features, very few of them have gone to the trouble of outlining their strategy for possibly the most important and difficult piece of building any successful media business: acquiring consumers.

 

As a VC, one of the fundamental questions I ask when meeting entrepreneurs is about the unit economics of their business. How much does it cost to acquire a consumer and what is the lifetime value of that consumer once you acquire him or her? Most thoughtful entrepreneurs have considered this issue and can offer an answer. However, when I ask what strategies they are using to acquire users at the cited costs, I’m surprised by how often the response I get is a simple statement about some combination of SEO, SEM and viral marketing. Without fail, the entrepreneurs cite examples of other products that have been built on largely word-of-mouth alone.

 

I would argue that the next level of detail is critical to a well-thought out strategy for user acquisition. What are the specific tools and techniques that will be used to improve and optimize your SEO and SEM results (e.g., avoid dynamic URLs, use descriptive page titles, etc.)? What other steps will you take to create awareness for your product or service (e.g., blogging, content syndication, email marketing, etc.)? Which aspects of your product encourage sharing and linking or generate network effects? Good investors or advisors will not only ask these questions but offer some tips and tactics or relevant contacts of their own. They’ll also look to understand the overall quality of the traffic that is being generated, seeking that coveted shift in traffic from paid sources and organic search to direct navigation. My rule of thumb is that 30% direct navigation indicates the beginnings of brand loyalty and that 50% is evidence of strong traffic quality.

 

Admittedly, tackling the problem of user acquisition is extremely challenging and complex. But that doesn’t mean that it should be ignored or given short shrift. There are many resources that can help identify best practices for various consumer acquisition strategies and tactics. For example, Google itself publishes some good SEO guidelines and other helpful hints can be found on SEOmoz.org and SEObook.com. However you identify the strategies or whatever the approaches you choose, the crucial thing to remember is that a good product typically isn’t good enough, especially if you’re competing against incumbent players. Investors are certainly aware of that fact and entrepreneurs should demonstrate that they are as well.

The short form vs. long form video holy war

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As a board member of a company in the online video advertising market (FreeWheel), I regularly get to chat with many video content producers, owners and distributors. Without fail, the fervent “holy war” between short form and long form video zealots arises as a top of conversation. Without getting into the nuances of the debate, the short formists argue that the web audience wants its video in bite-sized chunks, unlike a traditional television viewing experience. They inevitably point to the popularity of YouTube as evidence for their perspective. The long formists maintain that short form video only dominates online video viewing because long form content has been slow to come online. Of late, long formists have cited recent data from Nielsen that shows the growth in the online video streaming of Hulu. Neither side seems willing to open their minds to the possibility that there might be a little grey in their black and white worlds.

 

I’ve found religion and my faith lies with the availability of high quality online video of any length. The only thing that matters online, like across all media channels, is the value that someone gets from the content. There are vast audiences for both books and magazines, arguably the long form and short form, respectively, of the print world. On television, I can get my comedy fix from 23 minutes of Seinfeld or from short sketches on Saturday Night Live. Why can’t the same coexistence of content be true for online video? After all, I’m just as happy to watch two minutes of low production value Riegel & Blatt as I am 43 minutes of Lost in high definition because each video provides me with (very different!) entertainment value. Content producers should not be occupying themselves with discussions about the appropriate duration of online video. Instead, the path to salvation is will be found by focusing on creating quality content and on working to get that content distributed, discovered and monetized.    

 

 

 

Dude, that’s so meta

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In recent weeks, everyone that I have spoken with claims to suffer from some form of information overload related to digital media. As content creation has become cheap and simple for the masses, and the cost of building online businesses has dropped, the volume of online content, activity and communication has grown enormously. According to a recent Deloitte & Touche study, nearly half of all U.S. media consumers are now creating content for others to see. People are not only explicitly creating content for consumption, but they are also increasingly broadcasting their online and offline activity via services like Facebook and Twitter. All of this information has led to the development of “meta layer” applications and services to help consumers filter and organize information so that they can find and consume what is most relevant and timely for them.

Examples of these meta layers can be found in many areas. Digg and Google News are meta layers for news. Friendfeed and Socialthing are meta layers for social networks. Bloglines and Google Reader are meta layers for blogs. Mint and Wesabe are meta layers for personal finance. (Even ad networks have meta layers, such as Rubicon Project and Pubmatic.) Unfortunately, the challenge for online consumers remains. Seemingly, the number of meta layers will soon present the same problem as individual sources of information do currently. Further, these meta layers take varying approaches to filtering and organizing information for the consumer. Fine-tuned algorithms, wisdom of the crowds, trusted networks, expert curation, explicit consumer actions and implicitly derived interests are all techniques utilized by meta layers.

Ultimately, consumers only care about the value that they get from using a meta layer and not the approach taken to providing that value. Consumers will want many different filters for content but will want to control when and how content is filtered and presented. Networks effects will be the true differentiator that separates the winners in the meta layer wars from the losers. If a person extracts greater value whenever another person uses the same meta layer, both the value proposition and the adoption of the layer will grow exponentially. Depending on the meta layer application, scale in the user base can provide consumers with higher quality benchmark data, greater market liquidity, more relevant results or unexpected personal connections. I haven’t come across a meta layer that really provides differentiated value via network effects. Until I do, and despite the need for them, I’m skeptical that any single meta layer application or service will reach the critical mass needed to provide outsized venture returns.