Archive | May, 2013

Linkedin & The Future of Recruiting – Part I

30 May

I’ve been thinking quite a bit about Linkedin and the talent/recruitment market lately.  Linkedin is on an absolute tear on all fronts.  I’m a huge fan of its product and use it multiple times a day.  Financially, the company beat Wall St. estimates on both top and bottom line last quarter, and its stock is up over 2x since it’s public debut 2 years ago.  Linkedin’s rapid revenue growth is being driven by the fact that it’s an indispensable tool for recruiters and candidates alike.  This has led to significant changes in the recruiting landscape over the last few years and will continue to do so.

To understand Linkedin’s current positioning and future opportunity set, it’s important to understand what the recruiting universe was like pre-Linkedin and what it’s like today.  Before Linkedin, there were two major tools for corporate recruiters.  One was job boards like Monster.  The other was professional search firms like Korn/FerryHeidrick & Struggles, etc.  More on this below.

A quick word on some terminology.  In recruiting parlance, there are two classes of candidates.  One are “active” candidates.  These are people who are actively searching for employment, either looking to switch positions or they are unemployed.  The other class of candidates are “passive” candidates.  These are people who are gainfully employed and not actively looking to switch jobs.  They may, however, be open to considering new opportunities.  Most candidates for higher end jobs (i.e., professional, higher paying, top employers, etc.) end up being passive.  Think of say a Director of Finance at a large company who’s happily employed, but is then approached by a hot new startup that convinces him/her that they have a great opportunity he/she should at least consider.

JOB BOARDS
There are by some estimates +100k job boards available online.  They run the gamut from huge generalist players like Monster and CareerBuilder, to niche boards focused on specialized recruiting in any function/industry you can think of.  Job boards for nurses, miners, construction workers, and so on.

Job boards provide recruiters with two main products.  The first is job postings.  Companies typically pay a monthly fee to post a job on the board’s website.  This is a pure listing fee, not a performance-based product.  It’s also a “pull” or “outbound” product in the sense that it requires candidates to proactively apply for a position.

The other traditional job board offering is the resume book.  Most boards allow candidates to submit their resume to their site for free.  Some boards will charge candidates to include their resume in their database.  Recruiters are then able to search this database for resume profiles that match their req.  The recruiter then has to proactively reach out to the candidate to test the candidate’s interest in what they are offering.  In this sense, it’s the opposite of a job posting.  Recruiters typically receive some type of resume access along with the fees they pay for job postings, though it can be unbundled as a separate product as well.

The resume books that job boards provide have a few downsides.  One is that many of the resumes are out-of-date.  Someone submitted their resume 4 years ago, but they haven’t maintained a relationship with the site and the resume is now out of date.  Also, outside of the really large players like a Dice.com, most job boards will have a fairly limited number of resumes, or in other words a small percent of the total available candidates in a given speciality.

On the other hand, resume books can be quite valuable to recruiters, even in the age of Linkedin.  Recruiters can filter by resume submission date to ensure that the resumes they’re using are updated.  And if someone submits their resume to a job board, that usually implicitly means they are an active candidate.  This is valuable to the recruiter because the recruiter now knows that the candidate is actively looking for employment, more likely to return their call, etc.  Also, recruiters really like the fact that resumes provide a candidate’s email address and/or phone number.  This makes it much easier to reach out to a candidate rather than having to go through InMail, Linkedin’s messaging system.  This is especially true given the high volume of InMail’s some high-demand passive candidates are receiving.  More on some of the shortcomings of InMail in the next post in this series.

Finally, a word on job board marketing and user acquisition.  A key challenge for any job board is attracting users.  It’s the age old chicken-and-the-egg problem.  Employers aren’t interested in your offering if you don’t have traffic or resumes, and candidates aren’t interested in your site if you don’t have job postings.  How do you solve this?  The classic answer most boards have followed is to focus on content, either job search related (e.g., “How to write a great resume”) or industry specific.  Bring people in for the content and then monetize with your job offering.

That’s a quick overview of the job board product and business model.  In terms of key trends in the job board market, a few stand out:
  1. Applicant Tracking Systems (ATS) have allowed HR depts to much more efficiently allocate their recruiting spend.  Without going into all the details on the ATS market, ATS’ are basically a piece of software that allows recruiters to manage their recruiting pipeline.  Building a resume database, scheduling interviews, collecting feedback on candidates, posting jobs to your company website, and many other functions are provided by ATS’ from the likes of JobviteTaleoThe Resumator, etc.  Any decent size organization will have an ATS and those that don’t are adopting them quickly.  Most ATS’ have some basic analytics that allow HR depts to easily see what their best sources of referrals are – where do leads come from, which leads are highest quality, etc.  People are reallocating spend based on these findings.
  2. ImageJob boards aren’t dying, CareerBuilder and Monster are.  CareerBuilder and Monster are the (once) giants of the job board space and they are really suffering from several concurrent trends.  One is that the ATS analytics described above increasingly show that smaller, specialized job boards provide better results than generalist boards.  Also, Linkedin is of course putting pressure on generalist boards since Linkedin is really the mother of all generalist job boards/resume books.  Sites like CareerBuilder have become simply irrelevant to people in many higher-end professions.  Finally, the rise of Indeed.com and SimplyHired have given recruiters a better way to reach the same audience as generalist job boards, but at a cheaper price.
  3. Indeed and SimplyHired have put enormous pressure on job boards, especially generalist boards.  If you aren’t familiar with Indeed or SimplyHired, think of them as metasearch for jobs.  They aggregate postings from thousands of individual job boards and layer a Google AdWords-like CPC model on top.  If you’re a job board, you can pay Indeed for better placement in search results.  Job seekers are typically taken to the site of the original posting, but Indeed has become such an important player (it reportedly did $150m in revenue last year) that increasingly recruiters are posting directly to Indeed.  The CPC model and Indeed’s huge traffic volume is very powerful because now instead of paying a flat monthly fee to post your job on xyzjobboard.com, you can now post directly to Indeed and get access to the same audience of job seekers but at a much lower price.
  4. Specialized job boards seem to be doing OK.  While the generalist boards are taking a beating, more niche players seem to be surviving.  One proxy we can look at is Dice.com, the leading job board for mostly “mid tier” technology professionals.  Dice did $155m in revenue in 2008 and $195m in 2012.  They’ve done some acquisitions, but even stripping that out revenue and margins have held up well.  Also, anecdotal conversations with recruiters reveals continuing interest in certain types of specialized boards.
PROFESSIONAL SEARCH FIRMS

These, in short, are headhunters.  These are people-driven, services businesses akin to law firms, consulting firms, etc.  Their business is segmented by vertical, geography, and search model.  There are two main search models.  One is retained search and the other is contingent search.

Retained search is when a professional recruiter is contracted by a company to fill a given opening.  They get paid regardless of whether the position gets filled or not.  Typical retained search fees would be ~30% of the target first year salary for a role.  Retained search is the most sophisticated, most expensive form of executive search.  It’s typically used for very senior and/or high profile roles – C suite, board of director, key hires, etc.

Contingent search is where a recruiter is contracted to fill a role on a success fee basis, typically 20-30% of the candidate’s first year comp.  Contingent search is typically used for the next tier down of roles in a company from those covered by retained search.  It’s also used for specialized roles like Tax professionals.

For the most part, the retained search business hasn’t changed much over the last decade.  These firms suffered with the recession starting in 2008, but most of that downturn is related to a lessening of hiring at top levels than any major move away from retained search as a service.  This is maybe the hardest segment of the job search market to disrupt.  I don’t think Linkedin or other technologies can play well here, and I don’t expect them to try to.

Contingent search, on the other hand, is facing pressure as a business model.  Headhunters’ historic advantage has been their proprietary networks and resume books.  Pre-Linkedin, they had a real value proposition to offer.  Imagine you’re a small business trying to hire a new Director of Engineering.  Ten years ago, you had three options: (1) the job board; (2) your own network; (3) the headhunters network.  In a world where contacts and relationships were much more proprietary, the contingent recruiter had a clear value proposition to the hiring company.  With Linkedin, this has changed.

HR departments are increasingly building up their own in-house recruiting functions to save costs, bring recruiting closer to the business, etc.  Why not simply hire recruiters yourself instead of paying out contingency fees?  Linkedin is a big reason why companies are able to do this.  As we’ll see in the next post, Linkedin allows in-house and 3rd party recruiters to fish in the same pond.  Everyone has access to the same profiles and pool of talent.
SUMMARY
A couple quick takeaways:
  1. I think certain types of job boards and professional search firms are here to stay.  They will face increasing pressure from Linkedin and others and their share/size of the market will dwindle, but let’s not overstate things and call them “dead.”
  2. Linkedin isn’t the only new technology changing the recruiting landscape.  The rise of the ATS, Indeed’s prominence, and other factors are all challenging established players and creating new opportunities.
  3. Recruiting is becoming more scientific and technology led rather than networking-led and service-oriented.  That’s not to say that there’s no longer a human element, but rather that the field is being leveled.  There are more tools available to allow recruiters to reach more candidates than ever before.

Linkedin has become the thousand pound gorilla in the recruiting space.  If it isn’t already, it is rapidly becoming a must-have, indispensable tool for any recruiter, whether in-house or third party.  Will explore why in the next post.

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Apple, Taxes, & the Silly Investment Argument

22 May

Image

Apple CEO Tim Cook testified before Congress this week regarding the low overall amount that Apple pays on its earnings, much of which is overseas.  Some quick thoughts:

  1. The corporate tax code (and personal as well) is insanely complex.  This complexity creates an untold number of deductions, exemptions, etc. for companies to utilize to lower their tax rate.  Complexity in rules creates opportunities for avoidance.  The code should be simplified.  It would make it easier for the government to enforce, easier for companies to structure their tax policies, and would offer a win-win for companies (reduced compliance costs, better transparency, etc.) and the government (more revenue, easier enforcement).
  2. It’s not the job of Apple or any other business to decide the right level of taxation, set optimal social policy, etc.  The system is set up in such a way that it asks companies to maximize revenue and profit to the extent that they aren’t doing anything illegal.  If we want to change the system, fine.  But Apple is only playing its role (maximize profit to the extent legal) within the framework that we/Congress have created.  
  3. Similarly, if we want Apple or American businesses to pay more in taxes, we should change the tax code.  Nobody is accusing Apple of doing anything illegal.  They’re simply following the law, which happens to be extremely complex and allow for the type of tax structuring that Apple has followed.  If Congress is unhappy with Apple, then change the rules.
  4. Finally, this whole episode is bringing up the issue of what we should do about overseas cash that companies have sitting in offshore accounts.  In a nutshell, multinational US companies earn money overseas.  If they repatriate that money back to the US, they have to pay US corporate taxes on the overseas earnings, whereas many other countries don’t tax earnings outside their borders.  So cash sits overseas.  US companies have over $800b of cash sitting abroad.  Apple has about $100b of it’s $145b total abroad.  We need a way for US companies to bring some of this overseas cash into the US.  

There’s no sign that under the current regulations any US company plans to repatriate cash.  This is bad for the companies and it’s bad for the government since we’re earning no tax revenue on these earnings.  I don’t know what the right rate is for these overseas earnings, but it should be something that’s broadly acceptable to most companies as well as the government.  

Having said that, I don’t buy the argument that simply letting companies repatriate their cash with a lower tax burden is going to somehow spur new investment.  US companies, including Apple, are already sitting on record levels of cash here in the US.  If they want to invest in the US, they already have plenty of cash to do so.  The reason they aren’t investing isn’t a lack of cash, it’s a lack of aggregate demand from consumers and other businesses for the goods/services that businesses are selling.  Changing tax rates won’t solve this.  

We could lower Apple’s tax rate to 0% tomorrow and that won’t change the investment decisions they make.  Businesses are rational.  If Apple saw growth opportunities they could capture by investing in the US, they would do it irregardless of tax rates.  They have plenty of cash to do so.  

This also gets to some of the arguments around businesses and employment.  Many people argue that if we lower the corporate tax burden, this will kickstart hiring by companies.  The same argument applies.  The reason companies aren’t hiring more aggressively isn’t a lack of cash/margin to do so, it’s principally a lack of demand and other factors like increasing productivity from existing workers.  If order books, foot traffic, etc. were growing at a brisk pace, companies would hire to meet the demand.  Absent that, why would they hire additional workers?  

Some of this logic might not apply to small and medium size businesses.  For business with less scale, lowering their tax burden might provide those businesses with the additional capital they need to make investments.  Would love to hear a strong argument why this is also the case with large businesses.  

The US Market is Underappreciated

20 May

Unless you’ve lived or worked extensively outside the US, I think you don’t appreciate enough some of the major advantages that the US market provides businesses.  This is especially true for new businesses, whether in technology or other industries. 

One major advantage is size of markets, as the US has the 3rd largest population of any country in the world.  Choose any reasonably established market in the US and its large.  Online advertising, dog food, financial trading systems, etc.  This is perhaps obvious, but rarely recognized.  Most markets are large on both an aggregate dollar size basis as well as on a per capita basis (where relevant, eg for a consumer products business).  You don’t need to own half the market to build a big business.  In some industries in some countries, you will never build a big business.  The market isn’t there.  And yet you still see entrepreneurs starting businesses in those markets.  

One nuance on market size that people sometimes miss is that it’s not simply about a large population or aggregate market size, but also per capita.  In other words, you want individuals consumers to have a high ability to purchase your goods and services, and you want consumption power to be distributed.  India’s population is 4x the US’, but on a per capita basis the consumption power of a US consumer is many orders of magnitude larger.  Low per capita GDP really limits your addressable market and can complicate your go-to-market strategy.  For instance, in some countries your target population may be small but very spread out geographically, so you have to have a national presence to build scale whereas in the US may be able to build a big business in a single state.  

Also, while incredibly diverse, the US is homogenous in some important ways.  One is language.  You team, marketing materials, website, sales reps, etc. for the most part only need to speak English and in some business maybe Spanish as well.  Dealing with multiple languages doesn’t have to be a huge obstacle, but it creates additional friction.  Similarly, differing currencies and rules/regulations can generate friction.  

Finally, I think the average US consumer is pretty forward thinking when it comes to experimental consumption.  There are a lot of first adopters willing to try new goods and services.  

This is especially true and critical in technology.  One of the big challenges facing startups (especially tech startups) in less “developed” environments is the lack of early adopters, both in terms of consumers and enterprises   These startups are unable to test their products to make sure they have product-market fit.  This is one of the big reasons why startups and big trends often start in cities like San Francisco and NYC.  There are just more first adopters.  This effect is magnified when you think across countries.  

In the technology arena, you really see this in the enterprise space.  The spread of cheap smartphones and global platforms like Twitter and Facebook means that consumers around the world are getting more and more sophisticated when it comes to their personal technology usage.  I’m not sure that the same can be said of enterprises in many countries.  In Europe, small and large enterprises have been behind the US in adopting new technologies (e.g., SaaS, cloud delivery, etc.)  Take a more difficult market like India and it’s worse.  

Some of the above helps explain the US’ success in leading the world in new technology formation.  But it certainly isn’t the whole story.  Will save that for another post.  

Stop Freaking Out – The Deficit is Fine

15 May

Important new projections are out from the CBO showing that the US budget deficit is shrinking at an unexpectedly fast rate and will stabilize over the next decade (via CNBC):

…estimating that the deficit for this fiscal year, which ends on Sept. 30, will fall to about $642 billion, or 4 percent of the nation’s annual economic output, about $200 billion lower than the agency estimated just three months ago.

The agency forecast that the deficit, which topped 10 percent of gross domestic product in 2009, could shrink to as little as 2.1 percent of gross domestic product by 2015 — a level that most analysts say would be easily sustainable over the long run — before beginning to climb gradually through the rest of the decade.

“Revenues have been strong as the economy has outperformed a bit,” said Joel Prakken, a founder of Macroeconomic Advisers, a forecasting firm based in St. Louis.

Over all, the figures demonstrate how the economic recovery has begun to refill the government’s coffers. At the same time, Washington, despite its political paralysis, has proved remarkably successful at slashing the deficit through a variety of tax increases and cuts in domestic and military programs.

You can read the full CBO report here.  I’ve pasted the key chart below:
CBO Budget ProjectionsThis should lay to rest the constant clamoring from some that we are somehow facing an imminent debt crisis that requires debt spending cuts.  The biggest problem facing the US right now is high unemployment and a general lack of economic demand, not unsustainable levels of deficit spending and debt.  Bottom line: in the medium term, we’ve basically addressed the deficit.

One of the biggest threats to the economy right now, though, would be continued, premature cuts in government spending that further exacerbate the unemployment problem.  It’s somewhat ironic, but one of the biggest threats to growing the national debt would also be premature cuts in government spending.  If growth and consumption are hurt by government spending cuts, this will depress revenue and grow the deficit.

This shouldn’t be controversial.  Look at the UK and Europe to see what happens when you make deep cuts in government spending in the middle of a fragile economy.  Unemployment, no growth, rising deficits.   It isn’t pretty.

Google Glass: half empty or half full?

12 May

ImageLots of discussion of Google Glass recently.  Overall, I think it’s way too early to try to prognosticate one way or the other whether this new technology is the next iPhone, or it’s more akin to something like the Segway.  I certainly wouldn’t outright dismiss it as stupid or silly – that’s been done before too many times with technologies that ended up being transformational, whether it’s Twitter or the internet and computers themselves.  

To a lot of people who aren’t technophiles, the idea of walking around with computerized eyeglasses is silly.  In the case of Google Glass, the initial aesthetics exacerbate the problem.  Let’s be honest, they look a little ridiculous.  At this point, you do have to be a huge dork to walk around with these things.  Having said that, let’s not be so quick to dismiss this product because of it’s aesthetics.  Anyone remember what early cell phones looked like?  time, Glass’ component parts will get smaller and there’s potential for Google to partner with a design house to make these things look more fashionable.  Image

Another clear barrier to adoption of Glass right now is price.  Taking the cell phone analogy further, the first cell phones were insanely expensive.  Any new technology, especially when it involves hardware, starts out extremely expensive and follows a natural cost reduction curve over time.  PCs, storage, cloud computing, solar panels, digital cameras, etc. are all examples.  Glass will of course follow this curve.  There will come a point in time when price isn’t a factor in people’s purchase decision.  

If the aesthetics and price are fixed, I really think consumer adoption will come down to the applications that are built for Glass and their usability/utility.  Right now, cost and everything else aside, for most people there isn’t a compelling reason to buy this device.  This could change.  Third party developers are starting to build for the Glass platform and there will no doubt be some interesting applications that come out of this.  Look at what developers have done with smartphone applications, and then add in the visual eyeglass element and there’s a lot to play with here.  

It’s too early to tell whether there will be broad consumer adoption of Glass or not.  Having said that, I think there’s a much clearer argument for Glass to get business/workplace adoption.  In areas like medicine, law enforcement, warehouse management, etc. there are countless uses you could see for Glass.  Google at its heart though is a consumer technology company and this is meant to be a consumer device.  I don’t know how far they will continue to push Glass if it ends up not resonating with consumers.  Time will tell.  

Where is the iconic Indian internet company?

9 May

China has multiple large internet companies.  Baidu, Alibaba, and Tencent lead the pack.  There are multiple others – Sina, Sohu, Youku/Tudou, 51job, etc.  Russia has two huge successes as well in Yandex and Mail.ru.  India on the other hand has yet to see any internet companies emerge with the scale and valuation of any of these companies.

There have been a few notable Indian IPOs, but they are relatively small companies that face major challenges.  InfoEdge/Naukri, the leading Indian job board (think Monster or CareerBuilder), IPO’d in 2006.  The business faces competitive pressure (Linkedin) and issues around growth (despite a huge population, India’s organized labor segment is small).  Similarly, MakeMyTrip is the leading Indian OTA and debuted on the NASDAQ in 2010.  It’s now trading at half the valuation at which it ended its IPO debut.

So where is the proverbial “Indian Baidu” or “Indian Yandex?”  Why hasn’t it emerged?

The easiest explanation is that India is far behind other emerging markets in terms of economic development.  India started its economic reforms later than China and has grown less steadily.  GDP per capita is lower, and the enablers for a vibrant internet economy lag other emerging markets.  Broadband penetration, internet usage, smartphone penetration, etc. all lag behind China, for example.  Whether it’s digital ad spending or e-commerce, market sizes in India are small, albeit growing quickly off a small base.  Without key enablers and larger markets in place, there hasn’t been the raw material for a Baidu or Alibaba to emerge.

I think a second factor that is often ignored is language.  For instance, doing Google style search indexing of Chinese and Russian language sites is hard.  Despite Google’s overall dominance, Baidu and Yandex have been able to take a focused approach to their respective languages and carve out dominant search businesses in their countries.  The Indian internet, in contrast, is primarily English-speaking.  There is less rationale for local competitors to try to challenge the dominant international search players.  And keyword search is a huge and powerful business model.

There has also been more protectionism/favoritism of local internet companies in some markets than there has been in India.  This is especially true of China.  Witness Google’s struggles in China around censorship rules and rumors of “government protection” of Baidu.

Finally, India’s nascent internet market has emerged later than China’s.  This has meant leading US internet companies like Google and eBay have been able to learn from their mistakes in other markets and apply them to India, making it harder for local alternatives to emerge.  Witness eBay’s failed efforts and JV in China, and contrast that to their strong position in India.  The leading internet companies lost China, they weren’t going to let that happen in India.

While India lags other emerging markets in creating iconic internet companies, there’s no question that this could change in the coming decade given strong fundamentals.  I certainly wouldn’t bet against it.  The growing availability of cheap broadband and explosion in smartphone penetration driven by cheap Android devices will be key.  Already a new crop of Indian internet companies are getting ready to IPO – JustDial (local search), BharatMatrimony (dating/matrimonials), and HomeShop18 (e-commerce) and rumors of others.

Startup Email Spam

8 May

SpamStartups send too much email.  It’s becoming like display ads, I just tune them out.  Delete, right away.

After subscribing to a service, you get an email welcoming you.  Delete.  If the service isn’t public yet but you submit your email to get a private beta invitation, you get a “thank you, coming soon” email. Delete.  When there’s some “new, exciting product feature” or other announcement, another email.  Delete.  Even when you unsubscribe from an email list, you get an email telling you you’ve unsubscribed.  Delete.  And most annoying of all, even when you’ve unsubscribed from all mailings, you occasionally still end up getting emails from the company down the road.  Delete.  

Most of the time this is simply annoying and dilutes the startup’s message.  But occasionally I think it violates the user’s trust.  When I “unsubscribe all” and you still email me later on, it’s sleazy.  Don’t do it.  

Innovation Debate: Take Two

7 May

Yesterday I posted the video of a recent debate between Marc Andresseen and Peter Thiel regarding the state of “innovation.”  One of Thiel’s contentions is that breakout innovation leads to big ideas which in turn ends up creating huge companies.  To support his thesis that levels of innovation have declined, he points to the fact that the total market cap of tech companies founded in the 1990s is significantly larger than the combined market cap of companies created in the 2000s.

A couple thoughts and questions on this:

  1. There is a time effect here that needs to be adjusted for.  There’s natural market/GDP growth that older companies will have benefited from.  Salesforce has a $25b market cap today, it’s completely plausible it will be 2-4x that in a decade. Ditto for Facebook, Workday, etc. etc.  This effect, however, probably isn’t large enough  to explain the variance on its own.
  2. How much of this effect is one company – Google?   Google’s market cap today stands at around $285b, dwarfing the next largest company in the analysis set (Amazon at $116b).  Google is a special company that’s going to skew any comparison like this.  Google was also incorporated in September 1998.  Move that forward 16 months and suddenly Thiel’s comparison reverses.
  3. While the aggregate public market cap dollars created might have declined between the 1990s and the 2000s, my sense is the the absolute number of tech companies reaching a $1b valuation has definitely increased (anyone have the analysis to back this up?).  It certainly wouldn’t be any surprise given the lowering of startup capital requirements, huge increase in internet users and IT spend, etc.
  4. Fewer companies are going public today, which Andresseen noted in his comments.  A proper analysis would need to adjust for M&A transactions and valuations of well-established private companies like SurveyMonkey.

My point here isn’t to argue that Thiel’s comments are necessarily wrong.  I just don’t know that looking at public company market caps leads to the easy conclusion he’s trying to make.

His overall question still stands though.  Are the big, low hanging opportunities in tech already taken?  Are there still $100, 200, 300 billion opportunities available?

Note: spoke to a friend after this.  He made a great point, which is that it would be interesting to do Thiel’s analysis for other sectors.  Which sectors show the opposite effect?  My guess would be Healthcare, Biomed, and maybe Energy/Commodities?

Video

Marc Andresseen vs. Peter Thiel on Innovation

6 May

This debate between Marc Andresseen and Peter Thiel on the state of innovation globally is worth a watch.

Our view on “innovation” tends to be tech centered since that’s where a lot of the largest and most obvious innovations happen. But a lot of the most impactful advances in the past have been outside of pure technology in medicine (antibiotics, anesthesia, etc.) and transportation (airplanes, automobiles, etc. ) It was nice to see them discuss whether or not we are seeing a deceleration of innovation in not just Tech, but sectors like Energy and Transportation as well.

One question I would like to have seen them touch on is whether we’ve reached a point where the “low hanging fruit” is gone. Are there diminishing returns to innovation? Does future innovation necessarily have to be more incremental in nature?

Houzz: A Bright Future

5 May

Houzz Logo

One of my favorite services that I’ve recently started playing with is Houzz, a home remodeling/building platform.  The product quality is exceptional, and as a result the service is growing quickly on all fronts with 12 million unique users and 160k home professionals on the platforms as of January .

I think there are a number reasons why Houzz’s platform works so well:

  1. A highly fragmented market.  From interior designers to landscape architects to lighting specialists, there are hundreds of thousands of home professionals spread across the US.  In addition to specialization by skill, they tend to be focused on serving particular geographies.  All of this means that consumers have lots of choice and that home professionals have to compete for new business.  Traditionally, consumers and home professionals would connect via word-of-mouth.  Houzz is taking this fragmented, referral driven market and making it searchable from one place, reviewable, etc.  
  2. Highly visual.  For lack of a better word, Houzz really is “house porn.”  If you enjoy architecture, design, etc. then you can literally spend hours on their platform browsing and collecting photos even if you’re not “in market” for a home renovation/build.  Perviously, you would have had to cut out pictures from paper magazines like Architectural Digest to create “idea books.”  Houzz simplifies and supercharges this by centralizing a huge number of photos in one place and making it easy to create these idea books.
  3. High picture quality.  Houzz benefits from the fact that most home professionals already have some type of portfolio of their work, which would contain professional or semi-professional photos of previous client work.  These portfolios would have been in printed books that professionals would show their client and/or would have been on the professional’s own website.  Houzz centralizes this content on their platform.  Flipping through amateur photos (poor lighting, badly staged, etc.) would take out the visual appeal.  I wouldn’t underestimate how important this is to the product’s quality.
  4. Big and unique enough of a market that it requires its own platform.  Generic review platforms like Yelp don’t really work for this market.  Yelp works well for local service providers where the transaction size is pretty small – restaurants, dry cleaners, dog walkers, etc.  But the “home market” really requires its own unique platform.  The number of providers, specialization by type, organization of photos by type, home focused message boards, etc. can’t happen on Yelp.  Similarly, Pinterest doesn’t work well for this market either.  Pinterest has lots of great “home porn,” but it’s not organized by category, project, etc. in the same way Houzz is because Pinterest lacks the deep vertical specialization.  It’s more for casual “picture collectors” than for people serious about planning a remodel/build and finding professionals.
  5. High ticket size.  Building a house or undertaking a renovation is costly and time consuming.  It’s also a big emotional investment by the consumer.  These aren’t projects that you undertake casually.  Hours and hours of thought and preparation are required, which means consumers will be highly engaged on any platform that’s delivering them value in the planning process.  I’m not privy to the company’s internal user metrics, but I would be they have a very high average time spent on site per visit.  In particular, for people actively planning a project, I would be Houzz’s engagement metrics are off the charts.  On the other side of the equation, since the amount consumers spend on home renovations/builds is so high, home professionals have a big incentive to interact with Houzz’s platform and to upgrade to paid tools in order to drive new leads and ultimately conversion.  For many types of home professionals, even one new customer will more than offset the time and dollar investment on Houzz.  

Houzz reminds me a bit of two other sets of companies that have helped to organize highly fragmented markets.  One is real estate and services like Trulia and Zillow.  Trulia and Zillow are both successful public companies.  They also monetize through a set of premium tools for real estate agents and an AdWords style model agent search.  This is clearly the route Houzz is headed down in terms of monetization.

The other is creative talent and the startup Behance, which was acquired by Adobe for $150m last year.  Like Houzz, Behance is highly visual and centralizes creative types’ portfolios in a single, easily searchable database.

If the success of these services is any indication, Houzz has a very bright future.

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