Venture Gabble

All this buzz about big data!

Earlier this year, I was reading an interesting report about a case where Target, the retailer was able to predict a high school girl's pregnancy before her father did. Meeting with a Target manager while clutching some printed ads that had been delivered to his home, the customer was outraged by their product placement aimed at his young daughter. Like any service oriented company would, the store manager apologized and then followed up with a phone call to him later on, to apologize again. By this time, the man had had a talk with his daughter and the teen girl had acknowledged her pregnancy and the father apologized to the store manager for his outburst.  

Logo of Target, US-based retail chain (Photo credit: Wikipedia)

Welcome to the new reality! Increasingly, more and more companies are looking at data inputs from a variety of sources and making intelligent decisions from who to target, how to target, how to price and how to service customers and more.

Target it appears clues in on sales information on items such as vitamin supplements, large quantities of lotion, and hand sanitizers, typical to many pregnant women, to make predictions about other items the consumer may need. A couple decades ago, this kind of work was mostly the domain of a few credit-rating and mailing-list management companies (ah! the hey days of database marketing). Then the new age technology companies such as Google, Facebook and Yahoo built similar capabilities to improve and influence user behavior on the internet and it was largely limited to the online world. They tracked user behavior and what you were searching for across the internet and made the right ad placements at the right moment for users to click on.

Not anymore! The abundance of data in the world of today combined with advancement in technology has made next generation analytics within the grasp of everyone and every enterprise in this world. In other words, this is the democratization of high-end analytics. Not to be leftout of the party, venture capital has embraced big data in a huge way! The buzz around Big Data has raised a lot interest for venture funds. In 2011, Thomson Reuters estimates that US venture companies invested a total of $2.47 billion into new big data, database and data processing technologies.  That’s up from $1.53 billion in 201 and $1.1 billion in 2009.  Total venture capital investments in 2011 were $28.43 billion and $23.26 billion in 2010. While, most investments have so far been focussed on analytics, I would like to see more action on "data sets" itself. That is where the long term competitive advantage for startups will be.

All this stuff about data and how companies are leveraging it is inherently changing the way businesses and customer, suppliers and others interact. It is changing the way we think about society! Over the last year, my interest in this area has grown exponentially and in some ways feels like 1998-1999 all over again!

 

Related articles

• Investors are pouring funds into big data (networkworld.com)
• Surging demand for big data tools attracts investors (infoworld.com)
• Why Big Data Applications Adoption is Accelerating (sys-con.com)
• Big Data hype? (dbms2.com)
• Big Data - A Sea Change of Capabilities in IT (sys-con.com)

Speed is the new stealth

The beauty of startups and new product ventures is in market opportunity. Constant changes in the wants and needs of consumers and businesses drive the need for new products and services.

An important characteristic of an entrepreneur or a leader is to sniff these opportunities and make a business out of it. Most startup cofounders and high tech leaders are good with the first part and less than 1% can do the second. It is not that they don't know how to create a business put of it, but they just run out of time.

In this age of information everywhere, all the time, to anyone who wants it, it is a very difficult to one company to think they could have an competitive advantage over others for long - whether it is some kind of proprietary info, coolest of ideas or technology advantage. In other words most competitive advantage has a shelf life and entrepreneurs and product managers would be well advised to take notice.

Here is an example. A couple of years back, a startup team known to me came up with a really cool product idea. The team was so focused on building a great product for the first beta launch, they missed deadline by several months. In those few months, their competitors caught up with them and even some of the larger competitors introduced similar features on their platform. When the startup launched the product, the ideas weren't new or fresh anymore and it was difficult to make users switch to a new platform even though the product on a feature-to-feature basis was superior.

Consumers and their needs are real. But the competitive marketplace waits for no one. Speed is the new stealth!

source: dilbert.com

Lessons and aphorisms from Angel Excelerator 2011

Last week, I was at the Angel Excelerator Conference organized by Hyde Park Angels in Chicago. There were several key note addresses by some really smart folks - Howard Tullman from Flashpoint Academy, Brad Feld from Foundry Ventures and Tech Stars, David Hornik from August Capital and discussion panels comprising Chicagoland VCs.

Image via CrunchBase

Obviously, a lot of insightful information to ponder over. One thing however stood out for me. There is significant difference in the investment approach by valley based investors versus others. Valley investors spend much of their focus on sniffing out and cultivating the coolest of ideas – key mantra for the angel being value add before and after the deal is done (more focus on financial, operations, network introduction and less on structure), while it seemed that most of local VCs/angels discussion was about structure, communication between investor and entrepreneur etc. I agree that all these areas are important, but it is more of a question of where does one focus to make the right investment and also make it work. For me, it was an easy decision on what I would want to do.

Another thing that I loved during the conference was the aphorisms being let loose. Aphorisms are very common in the venture community and says a lot about how people think. So instead of blogging about everything that everyone talked about, I have decided to share with the readers some aphorisms that I heard. So here goes..

1. One needs to be irrational to become an entrepreneur.
2. Some of the best entrepreneurs are bipolar and are on meds.
3. Mentally kiss your money good bye, the day you write a check.
4. Angel investing is like owning a boat. The two best days of a boat owner are the day they buy it and the day they sell it.
5. Successful venture investing is about resolving conflict between the investor and entrepreneur.
6. If you are one of those who does a long rectal due diligence on an investment, it is a sign that angel investment might not be for you.
7. In venture investing, you have to compete and that means to value add.
8. VCs are simple animals who like to scratch and sniff stuff.
9. In the startup world, treat everyone like your best friend.
10. Founders need to be shown empathy. You would find managers who would mortgage their house to get the business out of a hole.
11. Venture investing is a fair amount of poker mixed with humanity.
12. When entrepreneurs call you, then you have become effective as an investor. 
13. I would rather have a piece of a watermelon than a whole grape. 

I liked the last one best. If you like to read more such aphorisms, I would recommend Maxims Morals & Metaphors – A Primer on Venture Capital by Scott Chou. It is a light read and is a lot of fun!

 

Related articles

• Foundry Group's Spoof Video: "I'm A VC" (blogs.wsj.com)
• Entrepreneurs Thoughts On VCs And Angels (askthevc.com)
• Ron Conway on mega-trends, non-bubbles and the joys of angel investing (twilio.com)

Reality Check on India e-commerce

This panel discussion is worth a listen to understand e-commerce reality in India - though it is pretty long. I am not sure if there is a compelling value proposition that is being communicated to consumers in India about the adoption of ecommerce.  More over, unless there is a true regionalization and multi-lingual commerce strategy, it would be difficult to scale profitably.

 

Expectations from Technology Users of Tomorrow (Gen Z)

The other day, I was watching my 6 year old use the internet to find information she was looking for. She opened up Google, typed in the search terms, used the auto suggest feature to pick the right words that she wanted, found the right website and navigated effortlessly around the site and printed the stuff that she wanted. Not to outdone, my other kid who is 15 months, uses his finger to swipe to change photos on the iPhone.  All this makes me wonder if the kids of the current generation are of different breed altogether. They are so plugged into these things, and technology changes that have to be learnt by so many of us seems very intuitive to them.

Image by WnY .'. via Flickr

That set me thinking as to how the next generation of users might use technology - and by next generation, I do not mean the current 5 year olds, but the current teens to 20 year olds. I believe that a new generation of technology users emerge every 5-7 years, and their technology needs and how they leverage it in their everyday life is vastly different from the previous generation of users. Just in the past decade or so, we have had three huge technology shifts based on user preferences. The first half of the previous decade was the generation of the savvy online user (the Google generation). The second half was the generation of the social users (the Facebook generation) and the current generation is one of ‘everything mobile’ and we are in the middle of it.  

So what would the next generation of technology users look like and what might their expectations be? Here are some bold predictions.

1. Mobile broadband becomes utility and hand-held devices become omni-potent – According to a recent Booz & Company study among younger Europeans, 52 percent already say they feel disconnected from the world if they don’t have their mobile phones with them, and 91 percent of all mobile users keep their phones within arm’s reach all the time. With WiMax and LTE technologies just around the corner, hand held devices will become omnipotent. It will be a source of communication, information, entertainment, currency and more. Don’t leave your home without it and keep it with you at all times.
2. Internet is the default remote storage medium – The next generation will realize that personal data and information stored within the four walls of your house has the same level of security (or insecurity) as that of it being stored in the cloud. So the default storage medium will be the internet. This will also facilitate access to personal data anytime, anywhere. Check out DropBox.com, for what it might look like.
3. Digital and physical worlds overlap – Much unlike the current and previous, the next generation wouldn’t differentiate between how they interact in the digital and physical world. They would be equally comfortable transitioning seamlessly between the two worlds. They would want it that way and communication technology would have to enable it. 
4. Privacy concerns are of less importance and information sharing is ubiquitous – Don’t need to say no more.
5. Efficient social network management – Users will want to manage efficiently, multiple social networks that they are part of - friends, family, business etc. For example, comments, jokes etc. that one might want to share with their friends will stay only within that network and mom doesn’t need to read the WSJ link that they shared with your business colleagues.

These are just a few trends that I think will catch on in the coming years.  They forebode tremendous opportunity for new technologies and ventures. One should thank the users for expecting more all the time.

Related articles

• After Generation Y? (managementpocketbooks.wordpress.com)
• Mobility Seeds The Cloud (blogs.forbes.com)

Technology fast tracks business model obsolescence

Image via Wikipedia

Recently Blockbuster (the DVD rental company) was planning to go up for sale months after it filed for bankruptcy. The sticker price was a measly $300M. That is such a steep fall for a company that had over 5000 stores and 60000 + employees, revenues of over $4 Billion and was profitable as late as 2009. Blockbuster’s decline started a few years before with the arrival of Netflix and its disruptive business model. But wait, Netflix was given a run for its money by RedBox which opened self-help DVD rental kiosks at numerous locations and rented new movie DVDs for $1 per night. However, RedBox wasn’t able to hold on to its short term success and with the increasing popularity of Video on Demand streaming services over the internet, Amazon, Netflix 2.0, Hulu Plus and iTunes are taking over and will continue to surge ahead.

Image by Getty Images via @daylife

This is a lot of action and churn within a short period of time (5 years) for an industry, and the credit goes to technology, how fast it keeps improving and how it disrupts older business models even before they mature. In the 21^st century, business model obsolescence sets in much earlier than what we had assumed before traditionally, and this is especially true in technology and technology enabled businesses. Typical venture models assume 3-7 years in the (venture phase), 3-10 years in the growth phase and a stable value phase beyond that. I think this is no longer true and cannot be used as a default scenario for most ventures or early-stage tech companies. The time lines are getting compressed in each stage.

This is especially true for companies whose product/service value proposition is a better solution than what is available, to a current problem for the customer or user (“better mouse trap” type of ventures). That is not to say that these are not great product/service ideas – but one should realize that the life expectancy for such ventures would be shorter than previously assumed and an appropriate growth and exit plan developed, or the business plan should include developing better “mouse traps” time and again. How one can sustain competitive advantage in the long term by continuous business model innovation, while not short changing short term profitability is a key question facing most tech executives of today.

 

Related articles

• Blockbuster and Borders: Two of a kind? (teleread.com)
• How Netflix Bankrupted And Destroyed Blockbuster [INFOGRAPHIC] (NFLX) (businessinsider.com)

Online services in India - this is just the beginning!

It is to the surprise and frustration of many (including me) that in the last ten years, India has not produced a blockbuster online services company. A much celebrated and reasonable success in 2010 was the IPO of makemytrip.com – an online travel portal. This is a little bit of a disappointment since India with its 1.15 billion people with its unique culture and diversity would be an ideal canvas to build new companies with large online user base addressing local market requirements. China, a similar market like India has had more success in building locally focused large online communities.

 

The reason for lack of success in online businesses in India has been discussed by many and for a long time. It primarily comes down to two things. One is the limited availability of internet connectivity (especially broadband) for the masses and two, is the lack of demand for new online services from users. Here are some facts that support the above theories.

-      India has around 50 million active users with 80% of them in the cities (10% household penetration and less than 5% of Indians have access to internet). 

-      83% of users access the internet through DSL and Dial-up; Half of DSL users have speeds less than 256kbps.

-      Global websites Google, Yahoo, Orkut etc are more popular and get more traffic than local websites which are part of a long tail. In other words, content accessed by users is limited to just a few global sites.

But all this could be changing quickly and I see some very encouraging signs in the Indian market in the coming years that could address both limitations mentioned above. Many of the Indian ISP’s are planning upgrades in their broadband infrastructure and that is a good thing. BSNL and MTNL, both government run ISPs which together account for 70% market share, are getting ready to roll out WIMAX. Other players such as Reliance are embracing LTE and reports indicate that pilots are being planned. These investments would make India’s broadband infrastructure comparable with other countries. Assuming that the pricing is affordable, it would encourage millions of users (almost 83% of total users) to switch from dial-up and DSL based internet connectivity and copper wire limitations, to a much newer technology.

From a demographic perspective it is estimated that India has over 200 million people in the teens and young adult age group. A considerable portion of this segment is in urban areas and pretty much grew up with technology. Many have their own laptops, mobile phones, Facebook/twitter accounts, play Farmville and get their daily dose of information mostly online. Also, trends indicate that increasingly more ‘online users’ are turning ‘online buyers’ and are more receptive to marketing efforts.  The demand for newer products/services and appetite for e-commerce from these segments will only increase with time.

With some of the constraints for adoption going away in the near future, there is huge potential for online services in India, if done right. Already a new breed of online services websites such as letsbuy.com, flipkart, Naaptol, Exclusively.in, buytheprice.com and motorexchange.in have launched recently and more startups are being conceived every day. I am hoping that this also ushers in a new breed of young entrepreneurs. In the last decade, we saw how quickly and widespread (with over 500 million users) the Indian market absorbed mobile technology. Though a decade late, this could be the time for online services in India to claim its rightful place.

 

Related articles

• UPDATE 1-Pearson raises stake in Indian online tutoring firm (reuters.com)
• India Has Its First $1 Billion Dot-Com: Is 2011 the Year of the Indian Internet? (dailyfinance.com)
• Wired and wireless broadband in India, the next big thing (zdnet.com)

Seed stage valuation bubble does not bode well for tech startups in the long run

Tech startup valuations have gone up significantly in the last year. One research indicated that stock in leading private tech startups was up 54% in the last six months. This trend is across stages and that is a worrying trend especially for early stage ventures. It is one thing for Facebook, Groupon and Twitter to be overvalued and a completely another for a seed stage company to be overvalued. For the biggies, it just valuation correction, but for the seed stage companies this could mean harakiri! 

Case in point, a seed stage web services company with zero revenue and product in development was looking for funding at a pre-money valuation of $2.5 Million and is getting traction from some angels. Gone are the days when any seed investment valuation was in the range between $500K to $2 Million. Seed valuations have doubled in the last year. Most of this is driven by supply side economics of availability of angel capital for startups.  Companies have embraced this trend and the general approach seems to be to raise as much capital as needed for at least a few years of operations (that includes founder salaries, office expenses etc.). For entrepreneurs, this could be great in the short term to raise significant capital by giving up lower equity. But I think they might be setting themselves up for failure for the long term and here is why. 

:: One, higher seed valuations translate to high expectations - For example, if a company raises 500K at pre-money valuation of $2 Million, the investor expectation is that this venture would be worth between $40-$50 Million in the next 5 years. That would mean revenue expectations of at least $8-$10 M per year. That is a huge expectation from a company that has barely gotten its original value proposition and market position clearly defined.

:: Two, if the young company does not hit the ball out of the park the first time or even otherwise needs additional funding, future rounds (from institutional investors or other angels) would come if at all, at a deep discount much to disappointment of initial shareholders and founders. This in turn significantly reduces the incentive to succeed for the founders and hence would be sub-optimal. 

An alternate and more effective approach would be for entrepreneurs to raise only as much capital as needed (in multiple rounds) to hit the next milestone, while using realistic valuations.  First place to start would be to establish realistic revenue and EBITA goals for the young company. If a startup is able to prove its value prop and generate $2-$3 Million in revenue within the first 3 years, I think it would a great foundation on which something tangible can be built on. Otherwise it is just vaporware! Also, when done in a very low cost way - no or minimal salaries for founders, and either low salary and equity combination or offshore staff, tangible enterprise value can be created in an efficient manner. Such a company would be much more credible and attractive for institutional investors down the line and have a much better probability of becoming a successful venture. 

Recent trends in Web2.0 and cloud based infrastructure has made it much more easier for new ideas to germinate. There are a lot of great ideas and good ventures being launched every day. If startups can embrace the notion of 'deferred gratification', we might be able to create something very special. Happy Holidays to all readers!

Related articles

• Facebook's $56 Billion Valuation and More Signs of the Tech Apocalypse (thedailybeast.com)
• Seed stage investment bubble? (dondodge.typepad.com)
• Internet start-ups: Another bubble? (economist.com)
• NY Investors Want to See Some Bubbles Pop (observer.com)

Improvements in HTML5 will reduce clutter in mobile apps

Recently we had a discussion in our team about the direction web service startups needed to go to mobile enable their service. The discussion revolved around building a native mobile app (android or iPhone app) versus creating a mobile version of the site using HTML5 and accessing it on a mobile browser.

As I looked around the web for my own enrichment, I was pleasantly surprised to see rich user interfaces created with HTML5 that looked very similar to a mobile app. Just check out popular sites like YouTube (m.youtube.com), CNN (m.cnn.com) on your smartphone and you will understand what I talking about. HTML5 now offers some really cool things that developers can incorporate such as geo-location features, application data caching etc. In fact, I like the mobile version of YouTube running on a mobile browser better than the app on my iPhone. Netflix leveraged HTML5 as well in their design for the new user interface on PS3 platform and it looks really cool!

Does this mean that HTML5 is a direct threat to native mobile apps on the iPhone and Android? I think so. Maybe not right away, but definitely in the near future, as wireless bandwidth constraints are eliminated and 4G becomes more main stream, HTML5 can be expected to challenge the app world directly.

Image via CrunchBase

I've always disliked the idea to download apps that provide only content delivery or services (like CNN, eBay etc.) I would rather download apps that uses the phone’s intrinsic features - such as games, or those apps that are computing intensive or network related. Also, the hassle of downloading an app and periodic updates is an irritant to say the least for most people (not to mention those app downloads that stop mid way). HTML5 could be an option for sites and web services that primarily need to deliver content to mobile users.

Finally, the native app scene is getting too crowded (300,000+ iPhone apps and 100,000 Android apps). The average smartphone user typically already has between 25-40 apps on their phone and hence it is becoming increasingly difficult for new apps to make them download new ones. Adopting HTML5 to develop a rich mobile version of the site would be an attractive option for new entrants.

So stay tuned for more HTML5 and a new bunch of sites with cool features and services.

 

Related articles

• YouTube's New Mobile Web Site Is HTML5-Friendly, Higher Quality than iPhone's Native App [Cellphones] (lifehacker.com)
• Netflix to use HTML5 as the technology behind its mobile apps (intomobile.com)

Understanding how customer acquisition cost impacts viability of a business model

Business plan presentations and pitches from early stage companies in Web Services, SaaS and Mobile applications have been on the rise (and rightly so). Most pitches seek capital to expand marketing and sales dollars to grow the business. It is always intriguing to see in these presentations, revenue and EBITDA projections along an exponential curve. A common implicit assumption behind those numbers is viral growth (i.e. one signed up user brings in other users/members at no cost to the company), which very few companies can actually accomplish. Most companies typically would have to spend a lot more on marketing and sales to hit their projected revenue numbers and that is where most business models and EBITDA projections break down.

Understanding how much it would cost to acquire and retain customers is critical to the viability of the business. To elaborate, the cost to acquire and retain a customer should be less than the revenues realized from them. Otherwise the venture would not be profitable and managers would need to rethink how they make money.

Say for example a Web Service company drives customer acquisition through online advertising paying $1 for each click and 1 in 5 clicks result in a user signing up. So that makes it $5 to acquire a new user. Let’s assume that the cost to retain a user is 1/5 that of acquiring them (you still want to advertise to your existing customers!). So add another $1 in costs to retain this user over their lifetime. So the cost to acquire and retain a user is $6. Now not all users who sign up will generate revenue for a company. If we say 1 in 10 users who sign up actually pay for the service/buy a product, then the cost of acquiring a revenue generating user/customer becomes $60.  So unless the revenue generated from that customer is more than $60 over their lifetime, the business model is not viable and needs to be fixed. SaaS companies might have different types of costs, but the principle is the same.

One can address the situation by reducing the cost of customer acquisition (try something other than online advertising) or tweak the business to generate more revenue per customer by cross-sell or other means.  But the key point here is entrepreneurs and managers need to think and understand this clearly before coming up with growth projections. This lends a lot of credibility to the business plan itself. A good practice is to check if your business model supports recovering the customer acquisition costs within the first 12 months. Then you are on safe ground.

 

Related articles

• SaaS Startup Strategy - Three SaaS Sales Models (cloudave.com)
• 6 characteristics of successful Freemiums (techvibes.com)

Venture experiment with Daily Deal extension services

As you might know, one of the successful ventures in the last few years or so has been GroupOn – a site that negotiates huge discounts on popular local goods, services and cultural events. I blogged about GroupOn earlier this year and the post continues to gets hits every day even now. I have always been interested in new business models that challenge status quo and GroupOn and its innovative marketing machine was a cool idea, in my opinion. I had predicted at that time that there would be a wave of new startups that would be launched in this space and today there are 130+ GroupOn clones only in North America – not the kind of startups I was hoping for.

My venture partner Mike and I noodled on this trying to come up with something different that just be a GroupOn clone. After a few beers and some nonsensical discussions, we came up with dealigee (www.dealigee.com) - a marketplace to buy & resell Daily Deal vouchers from GroupOn, LivingSocial, and others. With initial investment from my side and a great deal of effort from Mike, dealigee went live a few weeks back!

Image via Wikipedia

Our hypothesis is that since Daily Deals make customers to buy on impulse, there is potential for buyers remorse once the deal is over. On the other side, for every person who has the time to get on a site like GroupOn and buy these deals, we predicted that there would be many more who can not do so. So we decided to experiment with a marketplace concept to facilitate buying and reselling Daily Deals. We made sure to include marketplace features that facilitate easy and safe buying and selling practices. Considering the explosion in the number of daily deal companies, we think the secondary market will only grow. 

I like our venture experiment because it is a win-win for all stakeholders. Daily Deal sites win because customers who otherwise might have had second thoughts if they would actually user the Daily Deal, would now buy it since dealigee takes away the risk of getting stuck with it. The customers win because they don’t lose money on deals they bought, but can’t use. dealigee is free to use for anyone and all one needs is a Facebook Id to sign up.

Here is a short video of dealigee and what it offers. Try it out and let us know your comments.