Category Archives: Strategy

Startups, Strategy

Time Scales

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This post is not about starting and financing small businesses or what some call “lifestyle businesses”. It is about starting and growing venture-funded companies that must never become lifestyle businesses. I’ll ignore the issue of “doing what you love” as you’ll need that in either case.

Your time is “scalable”.

While you can’t be in two places at the same time, you can decide where to focus time and energy. Where you focus your effort can have a large (or small) impact, and so these choices are important. I’m not suggesting wringing your hands over how to structure every moment of your day. I’m sometimes guilty of this sort of obsessive optimization, but it misses the larger opportunity to stop and think about the trajectory of your current and future efforts.

When starting a company, solving a small problem often takes as much time and energy (often more) as solving a big problem. The only difference is your impact. It’s an important realization. Recently, I’ve met a number of entrepreneurs looking for venture financing to solve small problems. With great time and effort, luck, and perfect execution, their impact will still be small.

Having raised capital to solve both big and small problems, I believe that whatever one chooses to work on, it should be a big problem that is inspiring to attempt to solve. Most investors distill this “big idea” principle into the question, “how big is the market for X?”. While this is a fair question, it doesn’t motivate the right answer. Since in many cases a market doesn’t yet exist, the better question is, “what are the implications of X solving this problem?”. Market size and disruption are a big part of the answer, but there are many reasons why choosing a big problem in a big market is better than solving a small problem in a niche market.

1. Impact. Again, your time is scalable. Build things that have a meaningful and positive impact on the greatest number of people. In doing so you will undoubtedly focus on big problems in big markets.

2. Market size. Perhaps most important, targeting a large multi-faceted market allows you to approach the problem from a number of angles and pivot if necessary. While better explained in a different post, it is critical to understand how value is really created in your market (if it is an existing market), the magnitude of that value, and how to disrupt the creation of that value. Also, don’t rely on second-hand data when sizing your market.

3. Motivation. I’ve written about Larry Cheng’s concept of missionary and mercenary leaders, but to attract missionaries, you need inspiring problems that motivate great people to work through intractable challenges. Does the problem remain an inspiration through the emotional highs and lows of building a company?

4. Financial Return. By definition, solving big problems creates more value than solving small ones.

Even if you fail to fully realize the vision of your big idea, it will have been worth trying since the effort and luck needed to build a niche business would have been nearly identical. In other words, given identical time inputs, you have massively different outcomes. In expectation, your impact is greater by attempting to solve the intractable, by attempting big things. Time scales, so make it count.

Startups, Strategy, Technology

The Next Big Thingd?

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Thingd (Thing Daemon) is building a structured database of every object in the world and then mapping those objects (and associated metadata) to people and to other objects.  The concept is still in its early stages of being realized, but it is a big ambitious idea and one worth thinking more about.

The easy (and slightly inaccurate) way to put Thingd in context is: Facebook organizes people, Google organizes information, and Thingd organizes things.  The lines get blurry though and I’ve written before about how Facebook and Hunch are creating massive collaborative filters that can improve recommendations for ecommerce and deliver more targeted content and ads across the web.

Thingd approaches the problem differently by focusing on the database itself.  It’s basically a utility in the way that twitter has been described as a utility.  It is a product whose core function is so basic that it can power a multitude of applications.  That is the promise and the reason for the excitement.

For example, Plastastic is a game for toy collectors that is built on the Thingd database (by Thingd).  Because it pulls structured data from Thingd, the site enables extremely granular browsing.  For example, you can browse for toys that are only 5.5″ tall.  More importantly, you signal your purchase interest by clicking “Have it” or “Want it” (similar to Like).  By “Wanting” lots of Handpainted Resin toys, Plastastic could show you other toys that people with similar tastes Like.  So, what’s exciting is not necessarily the collaborative filtering, but Thingd’s structured data (as long as it is of high quality).  Assuming an API is released, anyone could leverage Thingd’s structured data to build completely new kinds of web services.

Since Thingd’s database will theoretically include every object, it could empower anyone to very easily become a buyer and (passive) seller via its marketplace.  One could also imagine extending Thingd to other services: consider how Thingd could be integrated with Facebook profiles.  It would be far more useful than Facebook Marketplace.  Using image recognition, the database could also be used to power affiliate services on sites like Pinterest and Aprizi (similar to how Pixazza works).  While an affiliate business model is a first thought, other more interesting models could emerge.

Thingd also launched a platform for mobile developers called productids.org which provides access to >100 million UPC barcodes tied to Thingd’s database.  So, if you’re shopping for a bike at a store, imagine an app that could scan a bike’s barcode with your smartphone and then browse for similar bikes based on the specific attributes you care about (style, number of speeds, material, color, etc.).  You could check prices and availability online and at physical stores (via Milo).  An integration with Google Goggles would be even cooler: take a picture instead of scanning the barcode.

In addition to ecommerce business models, advertisers and publishers might also be interested in connecting to people based on users’ prospective (Want It) and historical (Have It) purchase habits.  As long as the structured data is consistent and clean (very difficult to achieve if attributes are crowdsourced), there is a lot a developer could do with a Thingd API.

The immediate challenge for Thingd is to continue improving the user experience while building and refining its database.  While the experience on Thingd.com isn’t seamless yet, the company recently launched Fancy, which is a lot more user-friendly than Thingd.com in allowing you to tag images and discover new stuff.  Fancy will make it easier for Thingd to collect data on more objects and there’s no doubt the company will be adding features as it rolls out (would be nice to have a bookmarklet for easier off-site tagging; small design tweaks like tiled images and infinite scrolling).

It’s clear that there is no shortage of options for Thingd, so the question will be product focus and execution.  I’m really excited to see how Thingd develops.  It’s working on a truly massive idea.

Economics, Startups, Strategy, Technology

Coke’s API and the Outsourcing of Innovation

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While he may not have realized it at the time, Asa Griggs Candler helped pioneer the “platform” business model used by thousands of web companies today.  But Chandler wasn’t a tech startup guy, he was the founder of The Coca-Cola Company.

Coke became a platform company almost by accident.  Beginning in 1886, Coke was principally sold to soda fountains and Candler saw little demand for bottled Coke.  Couldn’t you just get a Coke at your local drugstore?  Besides, creating a bottling and distribution operation was expensive, and lower-margin.  The Coca-Cola Company had great margins.  They didn’t even make the Coke that people drank.  They manufactured concentrated Coke syrup and marketed the final product.  It was the pharmacy soda fountains that added carbonated water to Coke’s concentrate to make the drink.

In the late 1890’s, Candler was approached by two Chattanooga businessmen who proposed creating a Coke bottling operation.  Candler signed a contract with the two men, giving them control of Coke bottling for one dollar (Candler never actually collected the dollar).  Whether Candler didn’t see the potential for bottled Coke or was nervous about the risks and costs associated with building a bottling operation in-house, the decision was incredibly beneficial to Coke over the long-term.  Coke was able to focus on its two core competencies while the technology and manufacturing processes required to bottle mass quantities of soda developed in parallel.  Coke benefited massively from the greater volume and distribution that bottlers enabled.

APIs provide a similar function in the programming world.  Platform companies such as Twitter have stuck to developing their core capabilities (their syrup and marketing) while enabling others to innovate around the Twitter APIs.  Basically, it’s a licensing strategy.  As of the Spring, Twitter was generating about 75% of its traffic through third-party clients (its bottlers) utilizing the Twitter APIs.

Apple’s app strategy for iOS is another example.  Apple developed a few core applications (iCal, Safari, Mail, etc.) for the iPhone platform and then enabled the creation of hundreds of thousands of applications via the iOS SDK.  This has enabled Apple to create enormous value for its platform without shouldering the costs of building thousands of applications in-house (which it couldn’t do with the same efficiency and creativity of its developer community anyway).

There are of course benefits and dangers to innovating on top of another company’s platform.  Primarily, there is a hold-up problem with this type of innovation.  For example, Coke could hold its bottlers hostage and force the bottlers to pay higher fees for concentrate.  On the other hand, bottlers could threaten to choke off Coke’s distribution.  The way to solve these hold-up problems and to improve manufacturer-supplier coordination is through vertical integration, and that’s exactly what we have seen from both Coke and Twitter.

Vertical integration allows a company to remove coordination problems and reduce costs by bringing the relevant supplier(s) or partner(s) in-house.  Coke did this by acquiring its North American bottling partner in February 2010.  Twitter did this by acquiring complementary functions such as search (Summize) and mobile (Tweetie).  These acquisitions reduced coordination problems for Twitter, enabling them to accelerate development of their roadmap.   Most importantly, both companies were able to maintain focus while enabling the ancillary innovation that would become critical to their long-term growth.

On a much broader level, the trend of outsourcing corporate R&D to venture-funded companies seems to be accelerating.  Steven Kaplan and Josh Lerner wrote a great paper explaining this trend, noting that venture-backed firms are three times as efficient in generating innovations as corporate research.  Incumbent (and upstart) technology companies can take advantage of this trend by providing entrepreneurs with the tools that accelerate innovation: API’s, open source software, and greater access to data/information.

Startups, Strategy

Open Graph is Facebook’s Beacon Pivot

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Facebook Beacon was the company’s much-maligned initiative that captured and broadcast off-Facebook browsing activities to one’s Facebook friends.  Signing up for a service, purchasing a product, adding an item to a wish list – all of these actions were automatically shared.  The way it worked was that the affiliate would call a JavaScript snippet from Facebook that captured and sent the user’s IP address, addresses of the pages the user browsed, and any actions taken on the partner site to Facebook (deleting FB cookies wouldn’t stop their ability to track this info).  This bit of code even tracked those without a Facebook account, assigning them a unique identifier.

Beacon was pulled due to privacy concerns.  The goal for Beacon was to create an ad/affiliate network that would allow Facebook to make specific recommendations based on users’ actions off-Facebook. Beacon was a way to capture users’ off-Facebook actions and broadcast those preferences (implicit recommendations) to users’ friends. The problem Beacon hoped to solve was one of “intent”: people go to Facebook to see what their friends are doing, not to research with the “intent” to make purchases (as when searching on Google).  Without “intent”, Facebook users don’t click on many ads and CPCs are low.  Alas, Beacon’s attempt to remedy the intent problem failed, but that may have been the best thing to have happened to Facebook.

Enter Open Graph
The failure of Beacon forced Facebook to rethink how to solve its “intent” problem and Open Graph is a brilliant if not worrisome solution.  Basically, Open Graph allows publishers to put “Like” buttons next to articles, products, blog posts, etc.  If you’re signed into Facebook, you can “Like” something on the publisher site and that gets posted on your Facebook page with a link back to the publisher.  Users will also see their friends’ actions on that publisher site.  Unlike the soon-to-be retired Facebook Connect, your Likes will not only be displayed in your Activity Stream, but also persistently stored against your Facebook profile.  Since Open Graph supports semantic markup of objects using RDF, Facebook will know that what you like is a book, song, band, etc. and not just a web page (as of today, the API doesn’t support multiple objects per page).  So, the idea is that Facebook learns and stores what you and your friends Like across the entire web.  The Open Graph API not only writes this information to your Facebook profile, but also allows a publisher to read your profile’s Likes in order to customize your experience on the publisher’s site.  As CEO Mark Zuckerberg explains, this would be pretty useful to a concert site looking to tap into the data FB stores against its users:

“…if you like a band on Pandora, that information can become part of the graph so that later if you visit a concert site, the site can tell you when the band you like is coming to your area. The power of the open graph is that it helps to create a smarter, personalized web that gets better with every action taken.”

Why Open Graph will Succeed Where Beacon Failed
The implications of Open Graph are extremely important.  Through user-generated “Likes”, Facebook will become the central repository for your and your friends’ preferences and that information will be used by FB and its partners to make recommendations (sell things) to you on- and, more importantly, off-Facebook.  Like Beacon, Open Graph attempts to leverage users’ off-Facebook actions so that FB can be there when the user has the “intent” to buy that concert ticket.  But Facebook learned its lessons from Beacon’s failed attempt to (some might say) surreptitiously track and broadcast users’ actions.  Unlike Beacon, Open Graph will succeed by giving “control” to users.  Namely, the Like button will get users to voluntarily share their Likes with friends.  Facebook will then use this information off-Facebook at the concert site when the user’s intent is to purchase tickets.  There is no lack of cunning in this Beacon pivot.

It seems Open Graph has all the ingredients for success.  Publishers will implement it to generate more traffic and improve monetization.  Users will enjoy seeing what their friends Like and will generally appreciate a more customized browsing experience.  Furthermore, it’s easy.  Users have been trained to click Like buttons all over the web and since these buttons are the lowest-common-denominator contribution (vs. rating, tweet, comment, review, picture, video, blog post, etc.), the barriers to participating are low.

Implications for the Taste Graph
Open Graph may also have implications for sites such as Hunch that provide recommendations (on- and off-Hunch) based on what other people like you enjoy (what Hunch calls the “taste graph“).  While less sophisticated (and less fun), Facebook’s Like button is similar to the “Teach Hunch About You” questions that give Hunch the data it requires to make recommendations.  Facebook’s clear advantage over Hunch is Facebook’s massive installed base of 500 million users that will attract publishers to implement Open Graph.  Nonetheless, publishers should consider the long-term implications of implementing Open Graph for a couple reasons.  First, by supporting alternatives to Open Graph, it preserves competition and will help drive continued innovation.  Second, Facebook doesn’t have much experience building collaborative filtering systems and it’s not clear whether a simple “Like” system can generate the type of data necessary to deliver effective recommendations (that drive conversions, etc.).

Regardless, Facebook is positioned extremely well.  They provide an increasingly compelling product to a huge and rapidly growing user base.  While it’s not clear whether Open Graph will be widely adopted, more thought and resources should be directed towards initiatives such as OpenLike and XAuth that could counter-balance Facebook’s awesome success.

Strategy

Thoughts on Hiring a VP Sales and Why Rolodexes are Usually BS

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Hiring a VP of Sales at a startup is challenging.  While others have written eloquently about when to hire a VP Sales, I will focus on what type of person to hire.  Having run a sales team, worked under a VP Sales and Business Development, hired a VP Sales, and served as an adviser to a VP Sales, I am beginning to see some patterns for success (but I don’t pretend to have all the answers).  In one case, I worked with a company that went through five VP Sales plus a handful of interim “consultant” types in a period of four years.  While I wasn’t able to get directly involved in the hiring decision until the last hire, I learned a ton in the process.  Here are some thoughts on why hiring a VP Sales can be so difficult, and some ideas around how to minimize the hiring risks.

Find a Missionary, Not a Mercenary
Larry Cheng wrote a great post contrasting missionary CEOs to mercenary CEOs.  It is obvious that at the CEO level a company requires a missionary leader.  Building a company is far too difficult and uncertain a process for a mercenary attitude to sustain one’s motivation.  While a missionary CEO is an obvious choice, finding a missionary VP Sales is perhaps more important because the internal expectations at a company are that the VP Sales is a mercenary with little concern for product or people outside sales.  As a result, a VP Sales who loves the people (see Cultural Fit below), product and market is great for company morale, particularly when the going (inevitably) gets tough.

Many will argue that having a singularly-motivated mercenary VP Sales is the right choice.  I have been involved with companies where VC board members have pounded the table in favor of hiring a senior “sales animal” without regard for other qualities.  I’m sure there are companies that have successful sales teams built around this type of person, but I just haven’t seen this strategy succeed.  Of course a company needs a smart and aggressive person to build the team and systems required to scale revenue, but while those ingredients are necessary they are not sufficient to create an authentic, resilient and (most importantly) productive sales practice.  To make the dough rise, your VP Sales must also be passionate about the people, technology, the market, and the company’s value proposition to customers.  This is especially true for companies that are still tweaking their product and value proposition.  In these cases, it’s important to have someone who can listen to customers and translate that feedback to the product, marketing, and development teams; in these cases, the sales team is the company’s ears.  In earlier-stage companies, this person doesn’t have to be a “VP Sales” – in fact hiring a VP Sales too early is an unfortunately common kiss of death.

Cultural Fit
In many cases, the CEO/Founder has been leading the business development and sales efforts up until the point at which the VP Sales is hired.  The VP Sales is brought in to scale the sales operations (personnel, comp plans, forecasting, systems, etc.) which might already include one or two account managers and someone running business development.  Taking the step to scale up sales can lead to a lot of internal strife if the cultural match is off.  If the VP Sales’ style is so different from that of the CEO/Founder, the culture can easily splinter into dysfunctional fiefdoms.  One thing I’ve found that seems to quickly divide cultures is curiosity, or the lack of it.  Founding teams are by nature curious people who enjoy solving problems.  It makes sense to hire for this trait in the sales function, too, particularly when your efforts are just taking shape.  You will want more of a BD person with technical and market knowledge who can execute a handful of deals with early partners/customers.  However, if the BD person is also the person you intend to have scale the sales team, that person must also have experience managing a team and using a data-driven approach (using Salesforce or similar) to build and manage a pipeline, determine conversion rates, etc.

Rolodex and Domain Expertise
If a candidate sells you primarily on their “Rolodex”, chances are they are full of it.  The best VCs have senior management or board-level contacts at prospective customers and partners and these VCs can be very helpful in opening doors for you.  However, salespeople – even very senior sales people – generally cannot.  Unlike someone focused solely on sales, VCs have multi-dimensional relationships with senior managers and board members.  In many cases, VCs are providing valuable information or other intangible assistance to these operators – there is an exchange of value.  In most cases, senior salespeople do not have the same type of multi-dimensional relationships and thus have fewer levers when calling in favors.  While a few career VP Sales have strong relationships that translate into sales, I find that those who boast “extensive Rolodexes” very rarely generate results.  Just because a prospect bought something from a VP Sales at her last startup doesn’t mean that the prospect will buy again on relationship alone.  Most VP Sales have one or maybe two relationships that can be counted on to generate sales.  So, while relationships certainly can be helpful, they should not be relied on – your VP Sales has got to have the leadership, energy and aggression required to open up new markets and secure new clients.

Trust and Judgment
This should be of obvious importance, but will your prospects, customers, and salespeople trust and respect this hire?  Will you have faith in his or her judgment and forecasts?  Let scuttlebutt inform your due diligence but trust your gut and ask for at least five references to confirm your impressions.

Career Track
I think the best VP Sales are the ones who aspire to be CEOs.  They tend to have a better appreciation for how the sales function fits into marketing, development, professional services, and support.  The challenge is to identify these folks earlier in their careers and that’s difficult to do.  In many cases, you’ll need to take a risk on someone who may not have “done it before”, but will crush it if you give them a chance.  Finding “stage-specialists”, for example those who have repeatedly taken companies from $3-5 million in revenues to $25 million, is difficult although these pros do exist.  Basically, you do best by hiring someone who has an ambition to achieve something larger (beyond simply a larger paycheck) and this ties back into finding someone who is a missionary and not a mercenary.  This last principle applies across every role in the organization – you want missionaries.

And if You Make a Mistake, Fix it Quickly
Lastly, it’s critical to correct bad decisions quickly.  If you have done everything to make a good hiring choice and your VP Sales is not working out, you need to part ways as quickly as possible.  This is true for any hire, but given the expense and impact of building a sales organization, it is particularly important.  Great sales teams energize and motivate an organization and bad ones poison the pool.

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Strategy, Technology

Will Apple Bet the Farm on Quattro Wireless?

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Apple‘s recent purchase of mobile ad network Quattro Wireless may signify a much more significant shift in Apple’s business model than it would otherwise seem.

So, why did Apple buy Quattro (Apple earlier sought to buy market-leader AdMob, but ceded the purchase to Google once the price became too rich)?  Apple has always focused on providing well-designed, tightly-integrated software and hardware to customers willing to pay a premium for these qualities.  The focus has always been profits over an indeterminate quest for market share and that strategy has proved very durable.  With that in mind, my guess is that Apple will initially use Quattro to better monetize the large number of free apps (perhaps 9:1, free:paid) in the App Store.   While free apps help iPhone/iPodTouch sales by making the devices more useful, Apple’s 30% take on free app sales is still $0.  Beyond iPhone/Touch, being able to monetize content via an ad-supported model will become more important as publishers begin to distribute content on the iPad.  While the iPhone/Touch/Pad SDK enables app developers to charge for incremental purchases within apps, Apple will need an ad platform to satisfy the needs of various publishers, particularly on the iPad.   These are all practical tactics that make a lot of sense in the context of Apple’s strategy to monetize “closed” platforms that benefit from tightly integrated software and hardware.

Apple’s critics have faulted the company for not being more “open” with the iPhone/Touch/iPad OS (“open”, meaning device agnostic, with no app approval process).  Critics say Apple is making the same mistakes today as it did during the OS wars.  The battle then was Apple’s “closed” model that exclusively paired Apple software to Apple hardware, versus Microsoft’s decision to allow its software to run on any hardware device (with certain controls).  We all know the result: Microsoft has something like >85% of the OS market vs. ~10% for Apple.   The argument is that Google’s “open” Android platform will eat Apple’s lunch just as Microsoft did, and Apple will be relegated to distant second place in mobile.

Others argue (using Clayton Christensen’s theory) that Apple does not need to open up since customers will continue to value higher-performance mobile devices over lower-priced commodity ones for the next decade or so. It’s hard to argue against this, but it is difficult to time innovation to anticipate customers’ needs, especially when you’re targeting global markets each with unique demand.  More importantly, the competitive attribute may not be device performance, but app costs (i.e. look at the substitutes: free turn-by-turn GPS on Android vs. $59.99 for TomTom‘s US GPS app on iPhone).  Couple this with the fact that the iPhone’s gross margins are decreasing and that iPhones account for more than 30% (!) of Apple’s ’09 Net Sales, Apple may be in a tighter spot sooner rather than later.

Before Quattro, Apple’s mobile business model could not compete with Google’s ad-based model because Apple’s incentives to sell more iPhones and paid apps simply did not enable it to do so.  Google benefits from an open platform because it gives Google broader reach to sell more ads.  More importantly, as Bill Gurley points out, Android offers a “less than free” business model to carriers that want to license Android.  Carriers that license Android split ad revenues with Google, so instead of carriers paying to license an OS, carriers are getting paid to use Android.  And with traditionally expensive apps such as turn-by-turn navigation becoming free on Android (ad supported), it will be difficult for Apple to continue making money off of app sales commissions.

While Apple has remained “closed”, the Quattro purchase will enable the company to pursue a more open strategy that would enable Apple to benefit financially (ad-supported) from ubiquity.  A more “open” system would allow the iPhone/Touch/Pad OS to run on non-Apple hardware (managing this ecosystem would be more complex) and enable developers to launch apps more easily. Of course, this would go entirely against Apple’s long history of tightly integrating its hardware to its software, but Apple has done 180’s before (Perhaps in a calculated way.  Jobs once said something like, “nobody will ever want to watch video on a small screen” before they launched the iPod with video).  The decision to open up would look highly unlikely in the context of Apple’s recent decision to remove certain adult-themed applications from the App Store.  Nonetheless, while Apple is rightfully focusing on getting its phones on more carriers worldwide, Quattro Wireless could be the genesis of a more “open” (but bet-the-farm) strategy at Apple.

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Strategy, Technology

How Square is Building a Two-Market Platform One Market at a Time

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The innovation in mobile is really getting exciting, especially as it relates to advertising and payments.  My last post touched on this but I wanted to dig a little deeper.  The experience of paying for things now, particularly face-to-face transactions, leaves a lot to be desired.  When I frequent a local business, I’d like them to know that I’m a repeat customer and to know what I’ve bought in the past.  Local businesses would love to know this stuff, too, so that they could reward loyal customers with targeted offers and provide more personalized service (“How’d you like Factotum?  You might also want to check out Oracle Night if you haven’t read it.”).  There are social opportunities for local businesses as well.  For example, I might want to recommend purchases I’ve made to friends and family members a la Blippy (but perhaps in a more private way).  There is a lot that can be done to make payments more accessible, useful, and rewarding, and I think we’re going to see a lot of innovation targeting these features.

The incumbents in the payment market have historically focused on the transactions themselves: how to process them faster, make them more secure, and convenient.  The incumbents include the card issuers, acquirers, credit card associations (Visa, MasterCard, etc.), POS manufacturers, companies such as PayPal, and related service providers.  Beyond the services offered by companies such as Catalina Marketing, there hasn’t been a lot of innovation around the purchase experience or the data that is generated during the transaction (location, item-level purchase data, an individual’s purchase history, etc.).  And while there has been progress in improving card issuers’ “online billing” sites, those sites are still terrible at presenting information and making that information useful.

It’s conventional wisdom that PayPal is best positioned to lead the next cycle of innovation in payments but I’m skeptical of this.  Following its acquisition by eBay, PayPal’s culture of innovation was subsumed by the far more measured innovation ethic at eBay.  At PlaceVine we are users of PayPal’s APIs – including the recurring billing features – and the experience has been exasperating at best.  Other developers I have spoken with have found the APIs similarly frustrating.  While PayPal has the huge benefit of a large installed base of customers and recently announced its new global payments platform, PayPal X (“X” was also the name of Elon Musk’s payments company which merged with Peter Thiel’s Confinity (PayPal was its flagship brand) to become PayPal), there is opportunity for upstarts with fresh approaches unburdened by legacy platforms and business models.

It is notoriously difficult for payment platforms to achieve ubiquity (how many other PayPal’s do you know of?) but one company is taking an interesting approach to payments: Square.  While Square – the payments company launched by twitter-creator Jack Dorsey – has received a lot of recent buzz, it’s not all hype.  Square enables anyone with an iPhone, iPod Touch, or Blackberry to accept credit card payments via a dongle that plugs into the device’s headphone jack.  The service also bundles in a merchant account that doesn’t require monthly fees (Square’s initial plan will be to make money on transaction fees).

I imagine the dongle will only be one of many ways Square will accept payments (here is a demo of Square running on Apple’s new Linea Pro iPod Touch POS from Infinite Peripherals), but the strategy to focus first on accepting credit cards is a smart one.  The company is making a number of solid strategic moves.

How Square is Building a Two-Market Platform, One Market at a Time
Leveraging the Installed Base of Cardholders
The credit card business is a two-market platform (aka two-sided market) as it requires cardholders (to buy things) and merchants (to accept holders’ payments).  PlaceVine is another example of a two-market platform as it requires both content producers and marketers in order for the platform to create value.  Diners Club was the first charge card company and they started off by mailing a thousand or so cards to affluent New Yorkers while convincing a group of restaurants to accept them.  Simultaneously building a two-market platform is a classic chicken-and-egg problem and it takes brute force and (usually) a lot of capital to get both markets onto the platform.

Square wants to “design” the purchase process and we can assume they would like for people to eventually pay with Square (instead of paying with Amex, MC, etc.).  But it’s too expensive (and slow) for them to try and acquire  payers directly (as Diner’s Club did with cardholders).  So, instead they are focusing on under-served merchants (which will also be expensive to acquire, but less so) and leveraging the enormous installed base of credit cards in the hands of payers.  In other words, Square doesn’t need to build the payer side of the platform in order for Square to be useful.  Payers can buy from Square merchants using credit cards at first and Square can roll out a service for payers later on.  Assuming that Square can gain traction among merchants, Square can begin to short-circuit the major costs and challenges of simultaneously building a two-market platform.  How will they do this?  Receipts!

Receipts Will Help Drive Square Adoption Among Payers
As Dorsey mentioned, receipts offer a huge opportunity for innovation.  Currently, receipts are just little pieces of paper without a whole lot of use.  However, when a payer buys something from a Square merchant, the payer can have the receipt emailed to her.  This feedback loop is critical because the receipt is a perfect touch point to expose the customer to what can be done with this data via Square.  The greater the number of Square merchants, the more receipts, the more services that will be built on top of this data, and thus the more frequently customers will be exposed to Square (this process will take years to gain critical mass, but it’s important).  If customers come to value the payment process provided by Square merchants, payer demand could be a positive factor in helping accelerate adoption among merchants.  The next step will then be to design payment capabilities for the payers (the other “market” in the two-market platform) so that they can ditch their credit cards and begin using Square to buy things.

Removing Friction Points to Gain Merchant Acceptance
So, Square is removing as many friction points as possible in order to build this two-market payment platform.  Leveraging the installed base of credit cards is one move.  The other is providing “free” merchant accounts and dongles to a category of merchants that have been under-served by incumbent technology and service providers.  By making it inexpensive (assuming the transaction-based fee structure is competitive) and easy for merchants to use Square, the company can focus on gaining traction from traditionally under-served merchants without rocking the boats of competitors focused on high-end POS deployments.

Focusing on Design, Social, and Open Systems
Creating a robust and ubiquitous payment utility is an enormous challenge, but Square is being built by a team that understands the benefits of simplicity, the social graph, and open systems.  The incumbents do not have this in their DNA.  Square is a classic disruptive technology but is unique in that it: 1) satisfies a need in the market that older POS technology could not fulfill (at least at Square’s launch; now there are competitors); and 2) as a software utility with (future) open APIs, it has the potential to move upmarket and take share from incumbent POS providers (ie those focused on major retailers) that may have initially discounted Square for its downmarket focus (again, the Apple Linea Pro/Square demo is a good example of where this could go).  #2 is especially powerful because developers will be looking to build on the most flexible and open platform.  When Foursquare begins building payments functionality in so that it can tie FS ads/check-ins to actual purchases (*the* local ad category killer IMO), what API will it implement?  It won’t be PayPal’s (and it’s not just because Crowley and Dorsey have invested in each others’ startups).
To the three people who have read this far, I can only apologize – this was too long!  More to come on this topic, but that’s all for now.
Strategy, Technology

How Blippy Can Help Foursquare Monetize Check-Ins

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Foursquare‘s great for a number of reasons.  Like a lot of people, I use it to keep track of my friends when I’m going out, but it’s also a fun way to discover new restaurants and other spots based on friends’ check-ins.  Since I go to great lengths to find awesome Chinese, Indian, Thai, Vietnamese, Korean, etc. food, Foursquare makes it easy for me to share these gems with my close friends.  It’s also a good way to keep a running log of where I’ve been.

While the “check-in” is already becoming a commodity (Yelp recently released check-in functionality and Facebook will, too), Foursquare has focus and timing on its side.  Back in 2006 I might have friended someone on Yelp because I liked a bunch of their reviews, but since I don’t know these people beyond their food rants I don’t want to share my real-time location with them.  FB will have a similar problem since a lot of people have hundreds of “friends”.  Unless FB can make it easy to select what friends you want to share location information with, it’s going to be such a noisy mess that it won’t have any value (let’s all hope FB check-ins will be opt-in).  The point is that people are figuring out the best way to use social networks and Foursquare’s launch happened to coincide with the steeper end of this learning curve.  Most Foursquare users I know are far more selective about who they accept as friends (typically one’s “real” friends) vs. who they friend on “older”, non-native-mobile social networks.

Whether it be mayorships, scavenger hunts, coupons, or other marketing or promotional offers, there seem to be a number of ways that Foursquare can begin to experiment with monetization.  The problem with most of these monetization schemes is that they’re a little klugey and require too much work for either the user and/or the business.  Coupons would be a challenge for Foursquare, because traditionally coupons are distributed by the manufacturer to the consumer and then redeemed at the point of sale with the help of the merchant.  There are three entities in this transaction, all of whom benefit at specific parts of the coupon value chain.  The merchant honors the coupon and gives the customer the discount but then the merchant has to submit the redeemed coupon in order to get repaid.  This works because the consumer has an incentive to use the coupon (to get the discount), and once it’s used, the merchant has an incentive to get repaid.  The manufacturer is happy because it got a sale it might otherwise not have received.

Now, consider what happens when a hypothetical FS coupon is redeemed at a small business (not a Best Buy which has sophisticated POS systems).  You’re at a packed bar and you show the bartender your coupon for a free beer.  The bartender (who is usually not the owner and has less incentive to keep track of these things) will need to somehow process the coupon so that you can’t reuse it.  Let’s say there’s a simple code he types into your phone (that’s awkward and slow) or maybe he just swipes a finger across the screen to process it.  The problem actually isn’t the processing, it’s that unlike in the supermarket example, there is no third party that will repay the business owner for the coupon.  If the bar pays FS directly for each coupon redeemed, the bartender has little incentive to process the coupon.  If the bar is paying for each coupon that gets redeemed, a less-than-honest business is not going to process (and pay for) the coupon once it’s already acquired the customer.  A CPM-based coupon system isn’t a great alternative either since it’s difficult to tie the ad to a specific action and thus to charge much for the coupon.

The point is that check ins don’t necessarily translate into dollars, but sales obviously do.  The real value for businesses (and for FS) is to harness the social and loyalty aspects of Foursquare and tie them to sales.  One way that Foursquare might do this is by partnering with a company such as Blippy that publicly tracks users’ purchases.  Blippy is still early in its development (launched about a month ago) and doesn’t have an API yet, but consider how a Foursquare check-in could be tied to the bar bill you forgot you racked up at Clandestino?  Businesses could begin to tie their mobile advertising spend to specific customer check-ins and related purchases.  You could then begin looking at people’s networks to better understand who the influencers are – the people who by virtue of their check-ins attract high-spending, loyal friends to the business.  If you’re interested in digging deeper into network science, you may want to check out Professor Michael Kearns‘ posts about his incredible class, Networked Life (if you happen to be a student at Penn, I highly recommend it).

The other way to do this would be to integrate a mobile payment API into Foursquare.  A service such as Venmo or Square could be a neat addition and it would solve the problem of tying the check-in and social features to the customer’s purchase.

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Economics, Strategy

Boxee Payments: Good for Content Owners, Competition for MSO’s and iTunes

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Content owners aren’t the ones who need to be worried about Boxee Payments, it’s the MSO (cable), satellite, and fiber networks and online distribution platforms such as iTunes, XBox Live, and Netflix (to the extent that Netflix sees itself as a platform).

The reason for this is scarcity – plain old supply and demand (most business issues can be boiled down to this).  Content (film, TV, games, music, etc.) owners are well-positioned as they have the scarce good in this equation.  Since The Office doesn’t have any close substitutes, it is in higher demand, and people will want to consume that content where and how it is convenient for them.  This creates competition among distribution networks, driving the price of the content up.  Incumbents such as the MSO’s have less and less leverage because the barriers to entry for content distribution are eroding and distribution options are proliferating.  This is why Comcast has been trying to get into the content business (with its failed bid for Disney in 2004), having finally succeeded by acquiring NBC Universal last year.  MSO, fiber, and satellite companies’ massive networks also require lots of capex to install ($2-3k per household to run fiber to the home), maintain, and upgrade.  As a result, these companies are more vulnerable to lower-cost distribution channels such as WiMax ($20-25 per household to install; see Comcast’s investment in high-speed wireless networks in Oregon and elsewhere via Sprint/Clearwire), and online distribution platforms such as Boxee, iTunes and Netflix that disintermediate them (see Comcast’s opposition to net neutrality).

The success of iTunes has proven that people are willing to pay for content if they can legally and conveniently consume it as they wish.  Boxee’s move to provide a payment platform will appeal to those preferences.  It will also pressure iTunes given that Boxee has stated that it will charge less than the 30% that iTunes charges content owners.  Content owners will love this as they are increasingly concerned about Apple‘s growing control of online distribution.  Content owners will be glad to try working with an alternative to iTunes that is eager to share a greater cut of revenues.  The worry for the Boxee’s of the world is that competition for content could drive their margins to commodity levels unless they are able to differentiate and deliver real value to their users and partners.  It’s the same reason why Comcast is now in the content business.  Boxee understands this and that is why they have a focus on design, hiring someone like Zach Klein (the guy behind Vimeo’s beautiful video player), to head product.

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