A Parable for 3rd Party App Developers
It used to be that a startups were islands. At the onset of a venture an island consisted of a sandy beach, a jungle, 2 founders, and 2 computers. At first the founders, and then all those who came to work on the island (employees, management, investors, etc..) were focused on building the island into a city the size of Manhattan. Everything that was built on the island was 100% owned and operated by the island. Everything they learned, and everything they did stayed within the island. The reason: in order for any new island to become Manhattan, it had to compete to attract millions of people to its population (users/customers). In order to maintain an edge over the competition, islands did not open up their learnings (data) to new and competitive islands.
The islands that most quickly developed (built out indoor plumbing, public transportation systems, etc)…became the most desirable islands to live on, and their populations began to grow. The first island with a public transportation system began growing fast. As its population grew, the demands of inhabitants began to outpace the rate at which those working to build the island could develop solutions. Inhabitants demanded a hospital, but the founders and employees of the island were still building roads. The smart founders realized that they could not build a hospital fast enough on their own, so they sent a ship to Manhattan, found the guys who built Mount Sanai Hospital (3rd party application developers), and brought them back to the island to build one (3rd party applications) that would be owned by the hospital builders and not the island. The founders and the island supported the hospital builders with local knowledge (open API and dev support), the hospital opened, and the inhabitants were happy. Because they were so happy, inhabitants began to call their extended friends and families on other islands with invitations to come join the island with a new hospital. The island’s population doubled in 2 months, the public transportation system generated 2x the revenue it did pre-hospital, and the island flourished.
A neighboring island, who had not yet built a public transportation system, but that had the best local fruit of any island in the sea, saw the success of this new hospital, and inquired as to whether these magic hospital builders would come build a hospital for them. The hospital builders visited the island, saw that there were 1/10 the inhabitants on fruit island, and explained that they were concerned about their ability to operate a profitable hospital on an island with so few potential patients. The fruit island founders explained that the fruit on their island was going to attract 10 times the inhabitants of public transportation island. The hospital builders, lacking a competitive project at the time agreed to take on the new project, built the hospital, and fruit island’s population grew on a similar trajectory to public transportation island. They island sold 2x the local fruit, and they flourished.
All new islands began to perceive the value of having a hospital (3rd party application), and the hospital builders all of the sudden had more islands calling then they did time and bandwidth to complete the projects. The builders decided to prioritize the projects by which islands had the most inhabitants (user/customers) that would become patients the day the hospital opened its doors. These islands would be the ones where they could recoup their development costs the most quickly. As such, it became harder and harder for new islands to build hospitals, and thus harder for new islands to attract inhabitants.
Public Transportation Island saw a symbiosis in its relationship with the hospital builders, and decided to invite school builders, power utilities, and pretty much any builder from Manhattan to come and build out businesses and infrastructure. All visiting builders could own and operate their projects on top of the island. This time, every other island saw Public Transportation Island’s move, and now understanding the benefits of this concept, immediately extended the same invitation. Public Transportation Island had the largest population, and so had no problem attracting these 3rd party builders, and the question became: how do less scaled islands compete to create the necessary infrastructure to attract inhabitants despite the scale of Public Transportation Island.
Promises of future growth, like that of Fruit Island’s to the hospital builders, became a dime a dozen, and then a group of visionary islands had a break through. They said, “why do we ask these builders to come build our island, create the infrastructure that will help us scale our population, but still consider them visitors and not a part of our island? We believe in cementing our relationship with those that help us grow. From this day forward, those builders who build our hospitals and schools will become owners of our island, a part of our island, and enjoy not just the benefits of their own project’s growth, but the benefits of our entire island’s growth.
Public transportation was not prepared to match this offer because they were already so large, and builders started to leave Public Transportation Island, to build for islands that recognized them as true members of the community…The visionary island chain was able to attract builders who gave up near term revenue opportunities on Public Transportation and other scaled islands, for a piece of the visionary island’s growth (stock options), and this is how a small island was able to grow faster than a scaled island.
Lesson: It’s time for platforms to think of 3rd party developers as team members. Carve out a piece of the rock, reward those who create the most value in your ecosystem with equity in your platform…we understand that Twitter and Apple need to make money, but let the companies on who’s back you built enjoy some of the upside as your platform scales. If you don’t, they’re going to start scaling other environments to supplant you.
Read Full Post | Make a Comment ( 3 so far )Twitter Slows, What Blippy Thinks It Knows
Premise: Twitter’s fundamental innovation was a lowering of the effort required to establish a public voice.
So if you looked at the universe of public content creators, imagine a series of concentric circles, each representing an expansion in the volume of published voices.
Concentric Circles of Publishers
The inner circle would represent traditional journalists and authors. It used to be the comittment and effort required to publish your voice was a dedication of your entire vocation to that effort. Blogging platforms like wordpress and blogger then came along and lowered the required commitment from a vocational dedication to simply creation of long format articles that mirrored the structure of professional content creation, but without the effort of establishing employment/partnership with a 3rd party publisher for distribution. That innovation increased the universe of content creators from XX professional writers (lets call it hundreds of thousands), to XX+YY writers+bloggers (I just read an estimate that in Feb 2006 (pre microblog explosion) there were an estimated 200M blogs in existence). The addressable market for blogging platforms like WordPress and Blogger was constrained by the effort/time required by a user desiring a voice to consistently create long format (multi paragraph) content. At some point, their penetration reached a market of consumers who fundamentally desired a public voice, but who were not willing to put in the time and energy to maintain a blog. Then along comes Twitter and other mircroblogging platforms with an innovation that reduced the comittment required to have a voice from hours per week (on blogging platforms) to minutes per week. Twitter established the next concentric circle of publishers who desired a voice and were willing to put in a few minutes a week, but not a few hours per week, in order to maintain it and reach an audience.
Which brings us once again to the limits of Twitter’s addressable market, as defined by the population of people who may still desire a public voice, but who are not even willing to allocate the amount of effort/time that twitter requires in order to establish and maintain it. So Twitter’s addressable market of users in confined to the total number of people in the world who desire a public voice and the percentage of those people willing to put in the required active effort to maintain it (leaving aside the user who is only consuming content on the site but not creating it…which is a whole other discussion). I have no idea if the graph below is indicative of the company pushing up against those limits, or if there is some other explanation for the slowing in their growth curve, but I have no doubt that there are services on Twitter’s heels that seek to reach the next concentric circle of consumers desiring a voice, but who are too lazy even to actively engage in a microblogging platform.
One such service that seeks to reduce the active effort required to publish a “voice” is Blippy.com. Amongst the venture/startup world, I would say there is a lot of anticipation around blippy, which I believe many are incorrectly viewing as the platform which could create the next concentric circle of publishers by making a feed of content that is almost passively (read: zero active effort) broadcast to a user’s “reader base.” Once you sign up to Blippy, a feed of your purchases is published to followers. So the user does not have to actively put any ongoing effort into publishing content (not even writing 140 characters), so long as they let Blippy pull transaction level data from the creditcards, online accounts, etc…While that may be interesting to a body of readers in a similar way as to how ones tweets are interesting to followers, I would argue that a stream of purchase data is not a true “voice” and does not empower users on the publisher side to “speak to an audience,” which is the value that I think sustains blog and microblog platforms. So Blippy might look like a “micr0-micro blog” that would blow out another concentric publishing circle, but I don’t think that’s gonna be the case. Now, there may well be other forces that contribute to Blippy’s growth and allow it to become an interesting consumer service, not the least of which, is people’s general desire to communicate their consumption behavior (“i bought this expensive thing, and i want everyone to see that I did because it says something about my success and ability to spend”), but that type of value proposition does not seem to have the same potential scale as a true innovation in the race to give a wider universe of consumers a public voice. If anything, I’d guess that this type of passive data capture (also at the core of the burgeoning location based services market) will end up being a feature/input incorporated into true “voice providing platforms” like WordPress, Twitter, and whatever is after Twitter, as opposed to standalone replacements to the existent publishing platforms.
Read Full Post | Make a Comment ( 8 so far )Seed Investor’s Guide to Finding the Next Twitter
I had breakfast this morning with my friend Ben Lerer. He, and his dad Ken Lerer, have recently put together a seed fund to make angel investments in early stage consumer companies. He asked me a question, which two years ago, I would have been able to answer in a heartbeat, but today caused me a moment of pause. He asked me what companies are on Twitteresque growth trajectories that would be worth investing in regardless of price. The reason I paused was because working at a venture capital firm for a few years, you get to a point where your thinking is probably 6-12 months ahead of the curve. But lacking thousands of data points on blazing markets and the companies within them, I have probably lost that 6-12 month advantage. I still read a ton, and spend time with smart folks from the entrepreneurial and VC communities, but the fire hose of information isn’t quite as fat.
Part of the job of an Associate at a venture capital firm is to identify new and emerging spaces that are worth investing ahead of, and exposing those opportunities to the partnership. Microblogging in 2007 was one of those spaces. To this day, Joel Cutler (who happens to be absolutely brilliant) at General Catalyst will tell you he owes me “a good drink of wine” for passing when I insisted we should fight to bet on Twitter, despite what seemed like a hefty price tag in the first venture round that Union Square Ventures ended up leading (the round got done at a $20M valuation, and two years later Twitter was just valued at $1 Billion).
That’s sort of the nature of being a junior guy at a venture firm. Because you have less responsibility with the existing portfolio, you are able to spend more time than the old guys taking in new data and expanding the firm’s thinking into untouched markets. You develop theses around that data, and when you find something you truly believe in, you need to pound the table so that the Partners who have not spent the last 3 months learning this new space with you will listen and understand the opportunity. Even still, there is a very good chance that nobody will be willing to use one of their bullets on your idea. Each partner at a venture firm gets to make 3 or 4 bets a year (might vary a bit from firm to firm depending on size of fund and number of partners), and a firm probably looks at 2,000-5,000 deals a year. Passing on winners is part of the business. Bessemer actually has a great page on their site where they display the firm’s Antiportfolio. The Antiportfolio is a list of all the massively successful companies they could have invested in, but didn’t. A star studded list of billion dollar logos is accompanied by hubristic quotes from the “passing partners,” explaining why they would never invest in the likes of Ebay, Apple, Google, Intel, Paypal, etc…
So in the absence of an immediate answer to Ben’s question, I can perhaps supply a recipe for any early stage investor who is trying to get ahead of the curve. This is my process for finding the next Twitter:
1) Read: Macro (i.e. Economist) and micro (vertical blogs) content ingestion (30%)
2) Try: Personally experience as many products and services as possible in markets of interest, identify game changers (15%)
3) Experts: Develop and test theses with thought leaders from industry and academia (15%)
4) Entrepreneurs: Speak/meet with every entrepreneur attacking a given market, identify current state of the market and who is best positioned to capitalize on sea changes and future direction (40%)
5) Repeat steps 1-3 over time and across markets
Oh, and if you’re the next Twitter, and investors haven’t found you…you can email me, I’ll try to put you in touch with the right folks…
Read Full Post | Make a Comment ( 3 so far )
Jordan Cooper's Blog: startups, venture capital, etc... 