Seems to me the tech startup world and the music business have more in common than either would probably like to admit. They are hit-driven businesses. Like record companies, venture capitalists invest in 10 companies hoping for one huge hit. I’m not sure what the numbers are in the music business, but I imagine they’re similar. VCs are, in certain ways, like music agents – though instead of hanging out at smoky bars and high school talent shows they lurk around hackathons and Stanford. But there’s a similar hunt for “one-in-a-million” stars and certain investors who seem to have an almost sixth sense for hit-makers.
So in these hit-driven businesses, is there anything other than just “general gut” that can point to winners? Since I fall more on the tech side, I can’t help but think that there has to be some way to mathematically model the future popularity of a service. This post is the beginning of that quest.
Of course by “model” I don’t mean manipulate real, actual metrics like number of users, daily active use, angle of hockey-stick growth curve, etc. – any intern with an Excel model can do that. It’s more subtle than that. Instead, if you can somehow ascribe numerical value to the non-measurable attributes of a startup (or perhaps a musician) that might give a more complete picture of future adoption.
In the academic world, I have seen this refered to as memetics – the growing field that uses principles from several disciplines to gauge how quickly something will spread. As one author describes it: “At the center of this overlap lies cybernetic theory, but it also entails strategies from marketing, psychology, social networking, cultural analysis, rhetorical principles, and biological theory, (specifically viral and epidemiological models).”
For these qualities – I’m not really talking about useful but boring services. I’m much more interested in those few products that for whatever reason do a good job of capturing attention/consciousness (ahem, Twitter).
In other words, is there a way to quantify je ne sais quoi in the world of consumer tech? I suppose there are worse ways to spend a Sunday.
I came up with a list of levers/attributes that I believe contribute to popularity. The next step would be to take these qualities and begin to assign values – though I’ll leave that for another, far nerdier post. Here’s the working list – and I’m definitely looking for more suggestions:
Product: The product itself is extremely important – I hope the rest of the post does not indicate that I think otherwise. All of the established product prinicples – about making something people want, cherishing your users, finding product-market fit, etc. all apply. I suppose I am more trying to debunk the “build it and they’ll come” idea that the fight for users begins and ends at the product stage. From what I’ve seen as an outsider, this is far from true.
Tech: The tech cannot suck. The product must work and it should be fast. Every single dollar spent on amazing engineering talent is worth it.
Market Trends: Macro trends are important – there are certain general umbrellas that investors, journalists and consumers will find compelling. Don’t pursue niches that are overexposed – which right now is group-buying (Groupon knock-offs!), social gaming (Zynga) and location-based social networks (Foursquare). Instead, find a niche where there are indicators that it will be a huge market. If I knew what these were I’d be starting businesses in them, but talk to any investor and they can give you some theories.
Early Users: This is incredibly important. There’s a great post from Tara Hunt about how many marketers assume that if you just spam the “influencer” types that that can make a product. That’s fine, and sure I’d love it if Beyonce wants to endorse whatever I’ve made, but it seems like it’s actually better to get more rabid fans early on and court the influencers later. (Have you read “1000 True Fans” yet?)
Internal and External Storytelling: Two angles here – how the startup tells its own story and how it presents itself to the outside world, and the second, and perhaps more importantly, how the product/company’s story is told by third-party sources – whether that’s early users, journalists, or just a person-to-person interaction at a conference or in a coffee shop.
Graspable Depth: What I mean here is that your service has to be complex enough to be interesting to early-adopter-types who have “seen it all” but simple enough to be appealing to your average consumer. Wolfram Alpha suffers from too much depth, while the plethora of group-buying sites are now uninteresting.
Rawness: Perhaps I have saved the most important for last. I wasn’t sure really what to call this, but it’s that pang of guilt and curiosity that comes when you see a new service that is somehow mold-breaking. Do you remember the first time you signed on to Facebook? When you saw that the person in your math class loves Wes Anderson movies as much as you? Previously, this information was only attainable through person-to-person contact (there were other social networking sites, yes, but it wasn’t the same sort of feeling). There’s a certain excitement in an interaction becoming automated. Or Chatroulette. Did you really think I’d write a whole post about popularity and not mention Chatroulette? The first time you see it, you’re like “I SHOULD NOT BE LOOKING” – but you do anyway. It is the willingness to sit at the intersection of appropriateness and lunacy – that is what I mean by rawness.
I think there’s this big misconception in the tech world that good tech can save you. If you make your site faster or use the hotttttest new web framework that that will somehow make up for the lack of other attributes (this is related to “product-market fit” in a way). I don’t buy it – amazing technology is assumed. I would relate it to the whole Lady Gaga phenomenon – her music on its own is pretty pedestrian, but her willingness to embrace ridiculousness and create a story around herself that shows both depth and actual musical talent has propelled her past pop musician to superstar.
So what will be the next mega-hit in the world of consumer tech? If I had a few million bucks, my money would be on Blippy. Sure, tech-heads already know that the company has some interesting buzz, but to me the case for Blippy is more complex than just general chatter coming from all the right places. When I look at the list above, it all seems to fit – the rawness of looking at someone’s financial history, the interesting macro talk around financial and social data, especially in light of the recent Mint acquisition, the simplicity of sharing your accounts combined with the gravity of what it actually *means* to do so, the evangelism around the product and the fact that their tech seems to be awesome (though I don’t have any info on whether it actually is or not).
And, oh yes. The fact that one of the founders had a tech-bubble website called FUCKEDCOMPANY. Do you need more evidence that this is someone willing to challenge widely-held perceptions of what is and is not appropriate on the internet? Even if the gi-normous round of funding Blippy apparently just raised (according to TechCrunch, no official confirmation) is just a rumor, I am not surprised at all.
The seven qualities above are just the beginning – I’m very interested in feedback and criticism on popularity modeling. With startups, looking beyond the product itself is difficult and not always a productive use of time, but to me it’s where you can find all the most interesting indicators of future success.
School starts up again in ten days.
Despite the fact that this is more than likely my last “first day of school” EVER (scary thought) I am still dreading the “OMG how was your summer?!” bombarding that one gets at the beginning of the school year. Here’s my summary for your consumption. I’ll try to include more than the required sound byte: “I was in NYC working here, and it was great.” Cause I was, and it was.
So what did I get out of a summer working in VC?
Three main take-aways:
1. A summer is just long enough to figure out that you’ve got a lot to learn
Ten weeks go by, and right at the moment when you feel like you’re starting to “get it” it’s over. I am pumped for the class “Early Stage Capital” this fall where I’ll continue to chip away at the intricacies of term sheet math and excel models. For someone whose finance experience before school was exactly zero, this sort of thing excites me. Perhaps I should not admit to such things in a public forum.
2. New York Startup Forecast: Rosy
If the launch of the First Growth Venture Network wasn’t a huge give-away that there’s a lot of excitement around the NYC startup scene let me say it again: THERE IS.
After starting off the summer at Internet Week, I went to one packed-house event after another all summer until it was beat into my nay-saying little head that yes, people DO want to start companies in one of the most expensive cities in the whole world.
While New York lacks the informal advising/hacking culture of the Valley, it makes up for this through the fact that every other industry has solid representation in NYC. A clothing startup that wants to do deals with designers? You can just trot down to their studios. An art website that wants to feature gallery work? The subway to Chelsea will get you there.
Ultimately, startups need something that will provide momentum. I think - contrary to the popular Valley-centric belief that it’s “here or nowhere” - there are a lot of different ways to create momentum and one is having access to the best + biggest players in many, many different industries. No place better than NYC for that.
3. Early-Stage Investing is about People
What I found so heinously unattractive about finance jobs (for the 2.5 seconds that I was considering working at a bank) is that I saw it as high-class paper pushing. You don’t get to really know people. It’s about excel and ratios and presentations and deals, but not really about people. Early-stage investing is mostly people-focused. It’s about getting to know a team and assessing not only what they’re building but how they will build a successful company.
I believe this is what separates really good VCs from the rest - the ability to not only spot a market-crushing business model or technology but the ability to pick out a winning team.
This is not something one can learn in a summer.
So that was my summer. There were some other key moments, but I need to leave some items for the first-day-of-school excitement. I even got a new haircut.
Stephen Marcus had an interesting piece on the New Atlantic Ventures blog (disclosure: I am currently a summer intern at NAV) about seed financing. After drilling down into institutional seed financing between January 2006 and June 2009 by region (New England, NYC, San Francisco, and DC - the four regions with the most VC money floating around) his data showed that while seed financing - which he defines as less than $1m - is down an insane 80.2% in Silicon Valley in the first six months of 2009 versus the same period in 2008, it’s up in both DC and NYC. See the graph for a better picture - it seems that the Valley and New England have put more capital toward larger rounds and have cut back on seed-stage deals.
Why the shift toward larger rounds? Safety. If a company is getting a $5m+ round of VC financing, chances are they are fairly established and therefore less of a risk (or rather, a different *type* of risk) for the investor. I see it as a knee-jerk reaction to the economic crisis - VCs were more inclined to put money toward more “proven” investments.
As a new admirer of the NYC startup scene, I’m happy to see New York (and DC as well) embracing seed financing - it only adds to the argument that Silicon Alley is booming once again.
[Click it!]:
(Image Credit: Stephen Marcus)
I put together a piece for change.org this weekend on dealing with rejection. I’ve been meaning to write on the topic for a few months - I think you can tell a lot about someone based on how he/she handles rejection.
Remember: if everyone wanted to drink your kool-aid, it would be water.
Thanks to Flybridge Capital, I was able to attend the AlwaysOn Venture Summit East today at the Mandarin Oriental in Boston.
I am not exactly a veteran of VC get-togethers, so I am subtitling this post “confessions of a VC conference newbie.”
Highlights:
1. Widespread and unabashed optimism. I watched probably 5-6 panels and despite the pervasive and hard-charging recession going on for everyone else, many panelists said they believe it’s a “great time to start a company.” I’ve heard that phrase now so many times at so many different events and conferences that I wonder why my friends haven’t quit their steady jobs to become cloud experts (see next topic!).
2. Love of the cloud. I had not heard the phrase “pay-by-the-drink” before (shame on me) to describe cloud computing - though apparently Bezos has been throwing it around since at least 2006 and probably way before. It makes sense and is catchy, so I am excited to welcome the phrase into my lexicon of buzzwords. For those of you not hip to cloud computing catch-phrases, “pay-by-the-drink” refers to one of the most compelling parts of the cloud business model: dynamic/horizontal scalability and the customer’s ability to pay for only what they use.
Example - server space. You could buy an entire server for your startup and use some of it or all of it. When you get that spike in traffic that you were hoping for (viral social media marketing success!) your server might crash, negating any benefit that might have come as a result of the traffic spike. OR, you could sign up with a nifty “cloud” service like Amazon Web Services (AWS), Rackspace or Mosso. They charge based on how much server space you use. When you need a lot, the capacity is there and they just charge your credit card - see the “SmugMug” case study for more info.
There’s a lot of momentum surrounding cloud computing and “software as a service” and additionally, these businesses generally fit the capital-efficient + huge upside potential model that VCs look for, so it’s not surprising that talk of “the cloud” was so pervasive.
3. Quality of deal-flow is better. One quote I wrote down: “There are a lot of people who want to start companies, but they’re not necessarily entrepreneurs.” When VC money was more free-flowing (ahem, 2000) many of these wantrepreneurs got funded and the “noise” level became unmanageable. Now, the combination of tighter VC wallets, folding funds and newly unemployed former entrepreneurs has resulted in an increased number of serial entrepreneurs getting back in the game and putting together quality early-stage companies.
4. The importance of angel networks. My favorite panel of the conference was about the state of Angel and Early-Stage investing moderated by Michael Greely from Flybridge. The panelists were John Landry (Lead Dog Ventures), Elon Bloms (LaunchCapital), Bijan Sabet (Spark Capital) and Paul Maeder (Highland Capital). A surprising amount of VC deal-flow comes from Angel networks. This shouldn’t be too shocking - how many people are there in any one city with piles of cash (their own or others’) to invest in startups? My point: it seems like many startups seek VC funding too early - take advantage of the Angel groups in your city first and if you’ve got a winner that will likely lead to VC anyway.
5. Changing the VC model. There was also much chatter around the idea that huge mega-funds are on the decline and the VC model will move toward smaller funds and continue to favor capital-efficient business models (ie it doesn’t cost you $1m a month to stay in business). YouTube-type exits simply are not the norm; average VC exits are around $70 million. One of the panelists on an afternoon panel suggested reading a memo about the formation of Valhalla Partners. I found it on the Valhalla website and although it’s dated May 2002 it’s surprisingly relevant to the current pains in the venture industry and definitely worth a read.
Overall - good energy at AlwaysOn. Now if you’ll excuse me, I’m going to get back to writing my world-changing cloud-computing business plan.
I have been thinking a lot about bit.ly’s funding round that was announced a few weeks ago. There has been a lot of attention lately on URL shortening, especially with the explosion of Twitter (Twitter on Oprah!) and the introduction of the Digg bar.
Why did bit.ly get money? There are a ton of URL shorteners out there - and my initial thought was that if Twitter ever introduced the ability to hyperlink I would stop using services like bit.ly completely.
But bit.ly’s appeal to investors rests not in its URL shortening, but rather its tracking system and analytics. By using a bit.ly link one can tell how many clicks his/her links are getting and where the clicks are coming from - even inside of social networks like Twitter and Facebook. Bit.ly can get where Google Analytics cannot, which is great for bloggers/content creators.
If the original Google search algorithm was constructed based on a system of hyperlinks/pagerank, there is potential in the data collected by bit.ly to create a collection of “live hyperlinks” where you can track how a link is passed among people/websites. This would dovetail nicely with the [somewhat] burgeoning “semantic web” (ok, burgeoning since 2001, but still) in that it would provide more human, dynamic, and real-time input on hyperlinking.
That type of data, if presented right, has huge potential for online advertising.
OK, I’m convinced.
