IBDNetwork's "Under the Radar: Consumer Technologies"
Valerie Cunningham was kind enough to invite me to the IBDNetwork "Under the Radar: Consumer Technologies" event on Tuesday, May 31st 2005. The all day event was held in Building 1 on the Microsoft Campus in Mountain View, California. Building 1 is a rather drab but huge & functional building, decorated with muted hues of gray juxtaposed against vast expanses of black. This mirrors exactly what my current mental model of Microsoft is these days ... However, the building is not the story here, but rather the event it housed. And it did that rather well ...
American Idol for Startups
You can think of this event as a sort of "American Idol" for Startups, and this was in fact the running joke throughout the day. Company principals, mostly CEOs & Founders, would perform a 5 minute company pitch in their best singing voice, a cappella, to a panel of three Venture Capitalists for each area: Search, Social Software, Mobile Applications and Home & Entertainment. Ok, they didn't actually sing, but for some contestants it may have helped their efforts tremendously. You see, singing involves rhythm, precision timing, and a good ear. And when done well, it results in several minutes of audience reverie while the artist interprets a lifeless score and gives it meaning and impact. There's alot to learn from those crooners on Fox's America Idol ... but at least the judges at this event were more like Paula Abdul than Simon Cowell. Lucky for all of us!
I focused on the Mobile Applications and the Social Software Tracks. However, I believe that without naming any names, the following observations would apply equally well to the Search and Home & Entertainment Tracks. So, here goes ... 'ah one', 'ah two', 'ah three' ... [cue the horn section] ...
Mobile Digital Lifestyle Blah Blah Blah ...
Too Complicated, Too Few Customers! At this point, I must admit I'm a bit jaded regarding near-term money making opportunities with mobile applications. But it was definitely NOT encouraging to see multiple startups in the mobile applications space trying to build highly complex business models relying, at least in part, on the kindness of Carriers (see below). The issue is that the more complex your model is, the more fragile it is, especially in the mobile space. Oh sure, many companies were claiming to simplify anywhere / anytime access to [take your pick] photos, music, video, your friends & colleagues, etc. And they all claim to deliver a streamlined and zippy user experience.
But the reality is that the current penetration of capable high quality media devices is not ubiquitous in the U.S. and neither are the wireless networks. Further, the user experience and usage models are not correlated to actual operational data, but are merely speculative and based on notions of mobilization of non-mobile media. Yep, that's what a startup is all about, venturing forth into the unknown. However in this case we know that in the U.S., the penetration of high quality media handsets and the high bandwidth wireless networks are not up to par with what is needed to deliver this 'Jetsons / Dick Tracy / Star Trek' vision (aka hallucination) of a user experience. Suggestion: Live In The NOW. Or at least in the so-called near future, i.e. within 18 months or so ... about the same timeframe as a handset replacement cycle. And wait for the wireless high speed data networks to grow up and out (bandwidth & coverage) ... and please state this explicitly in your business models.
Carriers, Friend Or Foe?
Every time I see a business model where a mobile startup depends upon a major carrier or systems operator actively participating in their go-to-market plan such as taking a major role in customer acquisition, I get queasy. Or worse, perhaps there are multiple dependencies such as technology integration in the network and / or devices, unique metering & billing system & back office integrations, and even ecosystem integration dependencies with carrier developer programs. This approach is trying to make money the hard way, if you make any at all.
Network integration with a carrier can be very costly and quite time consuming. Device integration is even worse, has lengthy lead times, and most carrier developer programs are less than progressive. Do not make your business model's success contingent on obtaining a carrier as a close business partner. Attract carriers via the strength of the economics of your demonstrable business plan, i.e. via its operational economics. If you require such tight integration with the carrier, then perhaps you have a carrier-specific project and not an independent venture ... and there is nothing wrong with that as long as everyone is clear regarding your focus.
Carriers Or Carrion?
And what do carriers want in terms of desirable business partners, anyway? Simple: premium transactional traffic with low cost delivery requirements. This can take many different forms, and can be metered & billable in a number of different ways and combinations, pre-paid, post-paid (contract), etc. But the essential component which distinguishes winners from losers is the ability to generate premium fee-based traffic and avoid so-called 'junk traffic.' Think premium downloads, content subscriptions, games, m-commerce, communication services, etc.
Business models which marginalize the system operator's role into that of a dumb pipe or that breech the carrier's established "walled garden" will be severely rejected. Similarly, models which rely on 'unlimited data' plans will ultimately fail to scale, although in the short term may be used to encourage & promote data service adoption as a 'loss leader'. But these types of promotions will continue only until network capacity is threatened with 'junk traffic' i.e. applications that require an excess of network capacity and return insufficient transaction fees to cover the carriage costs.
Carrier 'walled gardens' exist to allow economical customer support to be deployed by certifying (and locking) handsets and restricting content in order to validate the end-to-end user experience with specific devices and specific content. All this is done to avoid getting swamped with customer service calls. As 3G & 4G networks and devices are deployed in the U.S., the nature of a carrier or system operator changes radically as well. Support requirements for standard devices and network certified wireless data services become severely complicated by a plethora of highly capable devices and unique "trans-carrier" data services. This has the potential for chaos on many fronts, especially from the customer's perspective.
Business models which bypass or somehow disrupt the carrier's walled garden will necessarily need to address many of the same issues that the walled garden was meant to originally deal with in the first place, not the least of which is user experience & service satisfaction of 3G & 4G wireless data services. And properly addressing these issues is expensive and could easily sink such a naive business model. The bottom line is that customer support requirements do not really go away, they are simply shifted somewhere else in the value chain. Ignoring these requirements does not make sense when trying to build a sustainable business.
Don't Be A Tool ... Be A Service!
"You can't make money selling tools" was mentioned several times by the Venture Capitalist judges. I basically agree with this position, however it should be pointed out that in any "gold rush" you can always make a quick buck or three selling picks and shovels to miners. The business won't last, but you may not care if you make enough profit in the short run. Since we are all presumably trying to build sustainable businesses, let's forgo the quick buck scenario and greater fool theories, and try to focus on the crux of the biscuit, namely, that tools are used to build services and services are how value is delivered to customers.
Many tools of reasonable quality can be found in the Open Source world. This puts enormous pressure on innovators who are developing proprietary methods of doing some task better, cheaper and/or faster. It isn't enough to deliver value to developers via a proprietary tool that is only marginally better than its Open Source equivalent. The difference in real and perceived value needs to approach an order of magnitude in order to overshadow the inevitable Open Source knock-off. And the current preference these days is to deliver and participate in Open Source solutions whenever possible, since solutions built with proprietary tools have created support and legacy problems all by themselves, not to mention some unfair pricing strategies.
All this points to value creation via services that use tools, both proprietary and Open Source, in order to support realistic company valuations. So-called technology companies must rigorously prove that they indeed deliver huge value via their proprietary methods and that their approach is sustainable in the face of the Open Source onslaught, i.e. "... 800 million Open Source programmers can't be wrong ..." Well, at least not for long. Just wait until the next nightly build.
Patent This!
Several presenters proudly pointed out their patent applications for their business processes. After the first few, I found it harder and harder to contain my amusement. Actually, I don't blame the founders as much as their advisors for putting them on the "patent gravy train". Unfortunately for the founders, they themselves are supplying the gravy.
Patenting business processes is definitely the old-school approach. Establish a body of intellectual property, file it with the Patent Office, and then obtain patents ... all for the cost of tens of thousands of dollars USD per U.S. patent. And don't forget the International rights. But wait, the fun has just begun! What happens if there is an infringement? What about countries that routinely ignore patents? How much are you willing to spend to defend your patents? $500K USD, or more? What is the opportunity cost of your company's capital at this early stage? And what was actually protected in the process? Were your competitors held at bay? Did your business grow? And exactly who got rich during this process?
Enough said.
Feed Me, Seymour!
It's all about the feeds. You know, the feeds! The revolution in personal publishing. The new new media. Giving everyone a voice. Talking back to the web. Conversations everywhere! Real-time media. The demise of main stream media. The ascendency of citizen journalist.
How novel! :-)
And how short is our collective memory. Everything old is new again! Back in 'the day', there was NNTP, NetNews, Newsgroups (both moderated and 'alt'), Netiquette, NewsReaders & Aggregators, and so forth. You could chat, conduct commerce, socialize (even date), find a job, a place to live, and get your porno for free. Sounds like I'm talking about craigslist, doesn't it? Well, I'm not.
Technology loves to reinvent itself, to better itself and evolve to a higher standard ... just like former President Clinton. Always optimistic about the future, it generally rediscovers difficult problems that were never really solved in the first iteration... things like security, identity credentials, accountability, privacy, etc. So, we get to sit back and watch them go by once again on the social technology carousel. However, this time private investors rather than the government & military are footing the bills for the brass rings, and the costs are quite significant. Although the names have been changed to protect both the innocent and charlatans alike, the fundamental social issues remain. "... You can put lipstick on a pig, but you still have swine to deal with ..."
Technology-centric overlays on social needs simply mask deeper issues. Technology is never the end but the means to an end. Some ends are noble and others crass. It is up to investors to sort the wheat from the chaff and place the appropriate monetary bets. Having said that, I should note that we are spiraling our way upward toward an optimistic future, where information transparency and ubiquity will fundamentally shape society. And at the same time, there are downward forces that will prey upon any weakness in the system (e.g. the cybercrime epidemic) and will challenge innovators and public policy officials alike. But best of all, the potential for social change is now so rapid and pervasive that huge opportunities to add value are created on a daily basis. Plenty of room for everyone to prosper, so please try to ignore the hype if you can.
Online Advertising Is BACK, BABY!
For a little while during the bust part of the technology cycle, we had a respite from online advertising in the sense that it did not and could not play a large role in startup business models. This was a false lull since it was exactly during this period that Google became cash flow positive using its new form of paid placement ads, in contrast to the banner-mania which preceded it. So advertising as a revenue stream never really went away ... it just morphed a little bit. Now Google is a gigantic contextual advertising delivery mechanism, utilizing its near monopolistic position as a uber-search engine to tune its algorithms even further. Google has also branched out into email, shopping services, mapping and so forth to build a contextual advertising behemoth fueled by personal information from users like you and me to deliver advertising messages targeted better than absolutely anyone else. And Google's valuation supports this observation (over $79 Billion USD, currently). Adds new meaning to their "Don't Be Evil" slogan, don't it? For some definition of 'evil', that is.
So like the proverbial lemmings to the cliff, invariably the business models of many recent consumer-focused startups highlight advertising as a major revenue stream. Many are actually distributors of Google syndicated ads, ads much like the ones which surround the blog post you are reading now. This is not to say there is fault with this approach. However, one must be realistic regarding the sustainability of this revenue stream and the ultimate value to the consumer of ad-soaked content. Pick up a newspaper or a popular magazine and see how close new new media is to mainstream media in terms of ad placements. Everything old is new again. The so-called demise of mass media advertising is simply overblown. It has changed, that is quite certain. But wherever masses of consumers gather to consume media (or publish it), advertising opportunities will abound. The difference these days is that you will get embedded ads which are more likely to personally annoy you rather than ones that are easier to ignore. Progess?
Search The Future ...
When building a company, everyone starts out with an initial idea and vision of the future. Sometimes that idea is huge, and sometimes it is simply a germ of a much bigger idea. In any case, the world is filled with ideas, large and small, good and bad, original notions and cheap imitations. The entrepreneur's ability to focus resources and efforts on truly unique and fundamentally valuable ideas is what separates highly successful ventures from those which simply "go through the motions" and consume investor capital.
The difficult question to answer as a company founder is, "Is this venture a company, a product, or just a feature?" By fundamentally understanding this, it is possible to direct efforts at the proper level and with the correct players, and avoid wasting everyone's time and resources. The romantic emotionalism of an independent venture is quickly soured by the harsh reality of a term sheet that accurately spells out these stark differences. This is not the easiest way to learn, but many company founders have gained this knowledge in precisely such a blunt manner.
So the advice here is to be both honest and optimistic. Look carefully at the value chain and your company's role in it. Put the egoism on hold (but it will come in handy later during company promotions) and search the future for how the world will be different when your company is operational and is part of the value chain. Do not take too many leaps of faith, but a couple well timed jumps can get you very far very quickly. And try not to work without a good net, i.e. actively build a support network of partners, customers, advisors, and ultimately, investors.
But What About Google And/Or Yahoo! ... ?
A constant refrain that was heard from the judges table throughout the day were the lamentations regarding Google this ... or Yahoo! that ... Well, consider this:
Google [GOOG] market cap is currently over $79 Billion USD
Yahoo! [YHOO] market cap is currently over $53 Billion USD
For more perspective, consider further:
Apple Computer [AAPL] market cap is currently under $33 Billion USD
Sony [SNE] market cap is currently under $35 Billion USD
General Motors [GM] market cap is currently under $18 Billion USD
Yankee ingenuity of startups vs. incumbent billion dollar valuations? Well, it's definitely possible to quickly win big with consumer technologies and rapidly grow a billion dollar business using innovation and ingenuity. However, sustaining such valuations over the long haul is the real trick. And we're doing it these days with outsourced 'Yankees' from around the globe, and dealing with unique challenges that need to be addressed that transcend conventional notions of culture, tradition, public policy and historical market expectations. The basic message here is that anything is possible ... and this is both a blessing to some and a curse to others. And of course, it's great to have ready-made buyers flush with cash looking to gobble up innovative competitors via M&A maneuvers.
Everybody's A WINNER!
So without further ado, the envelope please! This evening's winners (picked by the VC judges) are:
Search: FatLens
Social Software: PeerFlix
Mobile Applications: GoTV
Home & Entertainment: PureDepth
Best of Luck to all the principals who presented their companies, and especially to their respective investors! And thanks again to the IBD Network for producing such a wonderfully high quality event!
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