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Explaining the Snapchat valuation

19 Nov

There was a lot of buzz this past week about reports that Snapchat turned down a $3b all-cash offer from Facebook and a subsequent $4b counter-offer from Google.  It’s admittedly an extremely rich valuation for a young company with no revenue.  But I think there’s some nuance to note:

  • I think the investor psychology and math here is important.  VCs are more worried about missing out on the next Facebook/Twitter/Workday/etc. than they are in investing in the next MySpace/Bebo/etc.  For say a $500m fund, the cost of not being in one of the 2-3 huge outcomes that drive investor $ returns every year is higher than the cost of writing a say $30m investment to $0.  Investors, moreover, are probably more keenly aware than ever of the power law dynamics at play in tech investing (see here and here)
  • There’s been some handwringing over how Snapchat will monetize.  I wouldn’t be so worried about this.  Consumer internet companies don’t fail because they can’t monetize.  It seems unlikely that you’re going to have a highly engaged audience of hundreds of millions of users and not enough opportunities to make money.  Consumer internet companies are adept at finding ways to monetize with ads and advertisers are keen to experiment with new potential ROI.  The common early refrain on Facebook, Twitter, Instagram, etc. was that “they didn’t make enough money.”  That, of course, turned out not to be true.  There is a risk though that it doesn’t monetize as well or as quickly as its current backers hope (see Tumblr as an example).
  • Part of the challenge for Snapchat is that it’s grown its user base so quickly so fast.  The company is less than three years old and the rocket ship took off less than 18 months ago.  It hasn’t had an opportunity to explore monetization.
  • The concern of Snapchat’s team and investors should be around the product and making sure its audience stays engaged.  It’s captured the teen and 20-something audience, which is also probably the most fickle set of users.  I think the concern is whether these users move on to some other app over time.  But I think it’s reasonable to bet otherwise as the network effects in a business like this are incredibly powerful.
  • There have been some rumors that Snapchat is going to be raising another large round of funding, much of it going into secondary purchases of founder shares.  I’d be a bit concerned about this.  The founders already took $10m each off the table in the last round.  If the rationale for pre-exit founder liquidity is to give founders the ability to go for big wins, I’m not sure how another large secondary cash out makes sense, especially given that the company isn’t monetizing.  It’s one thing to sell down your stake as a founder when you’re a later stage, EBITDA-generating company.  But I don’t see how it aligns investor, founder, and employee interests at this stage.

How Do You Make SaaS Defensible?

4 Oct

I’ve been thinking about SaaS and what makes it defensible.  SaaS is an extremely broad term.  Evernote, Linkedin’s recruiter product is SaaS, Basecamp, Salesforce, etc. are all SaaS and are all very different.  But I think many of these products share a common challenge.  If someone comes up with a new SaaS product and it starts to gain market traction, these products can be and often are copied.

Let’s look at the HR software market as one example.  HR and the associated “Human Capital Management” software space is a massive segment with billions of dollars of annual spend by companies large and small.  Any company small to large in size has some potential need for HR software.  Inside the HR software suite, there are lots and lots of different types of products.  Applicant tracking software for recruiting.  Performance review and tracking software.  Time sheet management.  Org design tools.  Benefits administration software.  Employee on boarding and off boarding software.  Etc etc.

Many times these components are bundled together into a single suite of SaaS products, which is what you find from the bigger players like Taleo (now part of Oracle), SuccessFactors (now part of SAP), SilkRoad, Workday, and others.  Other times they are separate point solutions.  For instance, there are literally dozens of providers of point solutions for Applicant Tracking (ATS).  Why?  Because it’s fairly easy for even a single good developer to copy the design and functionality of existing ATS products in order to put together their own serviceable SaaS offering.

The result may not be as feature rich or stable as more established products, but can be enough to gain some market share, albeit often small.  When you have a large enough market, there’s enough spend to support several large players offering  variations on essentially the same SaaS product.  And that same large market can support a very long tail of smaller copycats.  The latter may not be large, VC-supportable growth companies, but they can be very nice, profitable enterprises for their owners.

Another example of this is in the customer service management software space.  Zendesk created a “next gen” SaaS product for customer service agents to better manage customer service tickets through multiple channels (email, phone, social media, etc.) from anywhere.  Freshdesk, an India-based company, started in 2010.  While I’m not a user and I haven’t looked at either company in detail, best as I can tell there is limited differentiation between the two companies.  And there is a whole host of smaller companies with similar general product offerings.  Google it.

Like the HR and ATS examples above, the customer service management space is very large.  It can support more than one large player and long-tail of smaller providers who compete with the bigger guys through cheaper pricing, a specific vertical focus, or simply taking a tiny bit of market share in a very large market.  Often times it’s the latter and customers and some portion of customers just don’t know better that there’s a potentially better, more established product out there.

I could go through other examples with similar characteristics.  CRM, accounting software, social media management for marketers, email marketing, you name it.

An important point to make here is that these typically aren’t winner-take-all situations.  These usually aren’t marketplace businesses where there’s a network effect where increase scale creates a bigger and bigger moat around your business until the point where it makes no sense for either side of the marketplace to use any service but yours.  So how do you differentiate yourself?

A few ideas:

  1. Scale allows you to invest in a better product, and there’s not better business advantage than a better product.  I think the real benefit to scale is the ability to create a better product.  When you have more dollars to invest and you can attract better tech talent, you can build a better product.  More stability, more core features, more integrations, etc.  The more this happens, the harder it is for someone to simply copy what you’re doing.  It’s also hard to engineer for scale, so being able to create an awesome, reliable product that works at scale (think Evernote, Dropbox, etc.) is an advantage in and of itself.
  2. Try to create platforms, which in turn generate network effects.  Salesforce’s is a great example of this.  Salesforce essentially has thousands of developers doing R&D for free on their platform.  Salesforce can’t possibly think of every potential feature or customer need, and they don’t have to.  Others can experiment and do this for them.  This is very hard for competitors to replicate.
  3. Similarly, creating some type of network and then placing a SaaS service on top creates defensibility.  Linkedin is a cardinal example of this.  The core software tools Linkedin provides to recruiters aren’t anything special in and of themselves.  But they are incredibly powerful and proprietary given the network they’re built on top of.
  4. Having a unique angle and/or world class capability in Sales & Marketing is huge.  Selling to large, enterprise grade customers requires sophisticated sales teams and strategy.  Building this isn’t easy or quick, nor is it the realm of “copycats.”  Similarly, for people selling into consumers or SMBs, creating a great online marketing capability, perhaps supplemented with some inside sales, is tough.  It requires talent, full-time effort, the ability to experiment with multiple channels, etc.   If you can build this, you’ve created a big moat for yourself in terms of sales and distribution.

If you can nail 2 out of 4 of these, I think you’re on your way to building a SaaS business with a chance to occupy market share at the head of your market rather than the tail.  What other concepts would people add to this list?

The Third Wave Opportunity on Mobile

19 Aug

There’s really two sets of major players on mobile.  The first is historically desktop-focused companies where their pageviews started on the desktop and are now shifting rapidly to mobile as the share of time spent by users switches from the desktop to smartphones and tablets.  This includes services like Groupon, Google Maps, Yelp, Dropbox, Facebook, Twitter, eBay, Fab, Digg, Huffington Post, Gmail, Linkedin, Amazon, Skype, Salesforce, Kayak, TripAdvisor, and a whole host of others.  The second group is companies who started on mobile and don’t make sense without it.  Evernote, Uber, Prezi, WhatsApp, most mobile games, Roambi in the enterprise, and others are in this category.   

What’s interesting is that in terms of pure reach, the traditional desktop companies are really dominating.  The first wave of adoption of mobile apps has benefited strong desktop brands whose services make as much sense or are stronger even on mobile.   Check any smartphone n the US and you’re likely to see some mix of Facebook, Yelp, Google Maps, and Twitter apps to name a few.  Perhaps this shouldn’t be surprising since these are some of the most popular services globally.  And as mobile increases as a percentage of online time spent and as total hours spent online increases because of mobile, you’d expect these services to benefit.   

The next wave of adoption is of mobile-first services.  For some companies like Evernote and Whatsapp, the boat has already sailed in this regard.  For others, there’s huge headroom for adoption.  I’d also argue that there should be a whole slew of services built from the ground up for mobile that we haven’t seen yet.  This is the “third wave opportunity” for mobile apps.  

Gaming and Messaging have been the two killer apps on the smartphone, the former in terms of total time spent and the latter in terms of frequency.  After these, your traditional desktop services like Gmail and Facebook consume a ton of time.  And then you have your set of mobile-first services like Uber that aren’t in the Gaming or Messaging categories.  That last category is growing rapidly and should see many new players emerge.  

There are new ways of re-imagining everything we do on the Web, but for mobile.  For instance, Prezi is re-imagining how you create and view PowerPoint-like presentations on the iPad, and Roambi is reimagining Business Intelligence for mobile. 

In particular, I think there’s a whole host of enterprise applications that can be rebuilt from the ground up for smartphones and/or tablets.  CRM, corporate chat clients, time sheeting, meeting management, conference dial in, and Excel/spreadsheeting are a few examples of generalized apps that need to be rebuilt for smartphones and tablets.  

I also think there’s a whole slew of vertical-specific apps that are ripe for the taking.  Hospital management, big law firms, personal financial advising, hotel management, auto dealers, financial traders, and many other areas have a need for specialized mobile apps.  

In some cases, the incumbent, traditional desktop players will get their act together when it comes to mobile and continue to dominate.  In other areas, these players will either be too late to the opportunity or might lack the ability to, whether because of organization issues, a lack of talent, or something else.  

If I was investing in or looking to start  a company, I’d be looking for these third wave opportunities, especially in areas where the incumbents aren’t equipped to capitalize on the opportunity.  

Thoughts on Coursera After a Few Weeks In

8 Jul

I recently started taking two courses on Coursera, spending time on them late at night and on weekends.  One course is on Startup Engineering (i.e., basic web programming) and the other is on Competitive Strategy (i.e., game theory for business).  After a couple of weeks, I have to say that what the team at Coursera has built is pretty awesome.

If you’re unfamiliar with Coursera, the concept is pretty simple.  It’s an online platform that provides free classes from university instructors.  The structure of the classes is similar to a class in the real world.  There’s a course syllabus, weekly video lectures, weekly quizzes, supplemental reading material, etc.  There are also online forums where you can post questions and interact with other students and the instructors.

The quality of the instructors that Coursera has assembled is impressive and is the first aspect that stands out.  These are top academics from top universities in the US and abroad – Stanford, Duke, Columbia, Michigan, Berkeley, etc.  Each has invested significant time and effort in building the course material, recording videos, and all the other work that the product requires.


Every course is free as well, which is leading to massive adoption from people around the world.  The Startup Engineering course had over 100k signups at the time it started.  I expect Coursera to keep the service free as that really removes one of the main barriers to adoption.  There are all sorts of ways they can make money eventually – premium features, employers paying for student placement, etc.

I also like the fact that the course catalog spans the full breadth of disciplines – humanities, social sciences, engineering, law, business, the arts, etc. rather than focusing more narrowly on say more vocation or “hard skills” (e.g., computer science).  In that sense, Coursera’s offering really does mimic a world-class university.

A frequent debate I’ve seen is whether online education efforts like Coursera can replace the university.  One of the frequent criticisms of the online model is the high “virtual dropout” rate.  I think these types of criticism and the very question of “replacing the traditional college model” miss the point.

Coursera isn’t about necessarily about providing an alternative to traditional higher education.  For someone like me, the choice is between Coursera and nothing.  I wouldn’t be taking a class in game theory or startup engineering if there wasn’t the Coursera option.  Maybe I’d buy a book and try to self-teach, or more likely I probably wouldn’t do anything.  My guess is most people are in this category.

The beauty of Coursera is that it allows you to get as much or as little out of a given course as you want.  If you want to spend hours every week watching every lecture, taking every quizz, reading all of the supplemental material, etc. then that is your choice.  If you want to take a “light” approach and be more casual about the work, you can do that as well.  Coursera doesn’t need to replace anything to be an awesome education tool.

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.  

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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