Rational Exuberance | Digital Media and Online Advertising | Brian Goffman

RedBeacon: Congrats and What's New Again!

Congratulations to RedBeacon on their win at TC50!

Back in 1999...ok it's been more than 10 years...I was at Austin Ventures and we invested in ServiceLane. Lee Blaylock, Ven Kumar and the team had the great idea at ServiceLane to build a network of local service providers that could be accessed by consumers through the web. I still believe it was a great idea, but if so clearly it was just too early. We didn't enable scheduling, since most of the local guys at that time didn't even have a website, but we did send out leads by phone and email and had scheduling on the roadmap.

As the VC adage goes: "Being early is the same as being wrong."

Good luck to RedBeacon. The timing seems right by now. I hope they follow in the footsteps of Mint, who set the bar for innovating in a mature market.

Lee Blaylock is at it again with WhoDoYouKnowAt and launching at DEMOfall 09. Another learning: stay at the table!

Why Twitter is a Disruptive Innovation

It's hard to escape the Twitter publicity storm.  Celebrities are now coming in droves to what was a geek-driven network. One question worth asking is...why now?  What's different? Aren't email, IM, chat, Skype, blogging, social networking (now with email) and other the other forms of rapid fire communication enough?

In short, no. I had a chance to look again at the Innovators Dilemma by Clayton Christensen.  He describes a Disruptive Innovation as a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves ‘up market', eventually displacing established competitors.

An innovation that is disruptive allows a whole new population of consumers access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill. Characteristics of disruptive businesses, at least in their initial stages, can include: lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics.

Why didn't blogging companies (like SixApart) develop Twitter?  Because they were busy serving ever growing needs of bloggers who right long form entries.

How about IM vendors? Chat? Facebook? Facebook was building its app platform at the same time Twitter was building a seemingly bare bones system for sharing a stream of short messages. Now Facebook has to respond to Twitter's incredible success with developers.

Because companies tend to innovate faster than their customers' lives change, most organizations eventually end up producing products or services that are too good, too expensive, and too inconvenient for many customers. By only pursuing “sustaining innovations” that perpetuate what has historically helped them succeed, companies unwittingly open the door to “disruptive innovations”.

It may be that incumbents...themselves in many cases only a few years old...will respond with innovation of their own and catch up to Twitter's momentum.  I'm not betting on it.

Warren Buffett and the Three I's

I heard a great quote from Warren Buffett today via Theodore Forstmann of Forstmann Little & Company:

"Buffett once told me there are three 'I's in every cycle. The 'innovator,' that's the first 'I.' After the innovator comes the 'imitator.' And after the imitator in the cycle comes the idiot."

If you're building a new product or investing in one, which "I" are you?

The Beaconization of the Web

A lot of ink and pixels have been spent on Facebook's Beacon feature.  Most of the concern has been about Facebook's clumsy implementation of privacy controls and backlash among users that don't want to share what they're doing on the web with others.  I've heard the story about how Facebook was ruining holiday gift giving probably 10 times in the past 2 weeks.

I'm going to come out and say that I'm a big fan of Beacon and what it represents.  With the right privacy controls and affilates, I think Beacon represents a paradigm shift in the way people share information about themselves online.  A recent article by Sandy Pentland at MIT describes the concept of using "reality mining" to monitor actions on a cell phone to develop a representation of a person and their web of connections online.  With all due credit to Erving Goffman and his assessment of behavior in a specific context, our online identity is a new framing of representation of the self. 

The key concept for me from this and other research is that aggregating actions on a cell phone, on the web, or in the real world can speak volumes about who you are.  Just knowing that I spend a night on Mercer Island and a day in downtown Seattle speaks volumes.

I believe that Beacon will work through the kinks and privacy issues to enable users to share what they want from the web on their profiles.  Services like Six Apart (the platform that runs this blog) have introduced features to enable comments to post through Beacon on Facebook.   The difference at Six Apart is that their solution is completely opt-in.  Though details are murky, Pluck recently announced features to allow users to share activity on Pluck-enabled services with Facebook and OpenSocial.

There are lots of potential ways that Beacon-like services can extend, connecting actions on any service to any other service, and potentially any device, as long as users are in control.  In a Beaconized world, applications will create lots of value for users if they can require very little if any work to extend identity on the web.

More Seattle Companies

Marcelo Calbucci from Sampa updated his list of Seattle startups for November.  The list comes in at 210 members.  Thought I'm not sure what criteria is used to filter minimum criteria, it's clear that aggregate traffic (and hopefully revenue) is growing, along with the depth and range of services.   

I'm looking for a way to keep the list up to date, ideally automatically, and make it available for editing by companies who want to update their profiles.  User feedback would also be great.  One candidate to add this kind of service could be AboutUs or the TechCrunch company index.  A database service like DabbleDB or Blist could also work.

Kudos to Marcelo for pulling this list together.  Hoovers.com, now owned by Thompson, is a good source for this kind of data on public companies, but all companies should be in control of their own profiles.  There's definitely a business opportunity here.

Innovating in a "Mature" Market

Many investors and entrepreneurs have commented on the importance of targeting the right market opportunity for your company.  Most investors view market opportunity and economics as having a greater impact on success than team or building a great product.  To quote Warren Buffett:  "When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."  In a startup context, Marc Andreesen’s post about what matters most is a great reference on this topic.

In my experience, most experienced tech entrepreneurs, and many inexperienced ones, know intuitively how to identify a large market.  In consumer services, this is often based on personal experience.  “If I would use it, so would lots of people!” YouTube, Facebook, and other very large services fall into this category.  In enterprise software, seeing a large number of companies building similar services in-house might identify a general need. 

But what makes a great market?  I’d propose using the following framework to think about venture backed markets and the related likelihood of having a big outcome for you and your company.  Credit goes to Ross Cockrell at Escalate Capital for helping me think this through.

   

The first area to consider in evaluating your market opportunity is the potential size of your market.  The really, really simple formula here is P * Q:  price times quantity.  If your market is too small – and you may not know this starting out – by definition, there will be no big winners.  The size of market is a time-bound definition, since in startups, being early is the same as being wrong. Even if the market gets there eventually, if you don’t time it right, you will run out of money before the market catches up.  If you are selling ads, you either need a lot of inventory, or high eCPMs, or (preferably) both.

Examples of small markets with many venture-backed companies and no winners abound.  WAP software application developers and B2B marketplaces in 2000 are examples.  Online jewelry turned out to be a large market, but Blue Nile and others had to hunker down in 2001 to survive until the market arrived.

The second, and, in my view just as important, area to evaluate in considering your market opportunity is to look at how recognized the opportunity is among venture capitalists.  This is another way of predicting the intensity of competition.  In a “consensus” market, even if large, there will be winners, but lots of losers as well.  You can do extremely well in these markets, but you will be looking over your shoulder every day to see what's coming.  Think YouTube and its host of video sharing competitors in 2005.

What excites me the most are large markets that are viewed as uninteresting by a majority of venture capitalists.  There are a number of categories viewed by technology entrepreneurs and VCs are “mature,” but where innovation can really change the landscape.  This is where you often stand alone and have the highest probability of building an independent company.

To give a few examples of non-consensus leaders, think about Google in 1999, when search was considered a mature market and relegated to a feature of established portals.  Zillow, another innovator, recognized the broad consumer desire to know the value of their house.  They also understood the size of the real estate marketing industry and took on HouseValues with a self-service, consumer-friendly application.

Picnik, an online photo editor, is a rapidly growth service operating in what many people viewed as a well-established market.  Did the world need another photo editor in a world of Photoshop, Picassa, and a host of other offerings?  Apparently yes, when brilliantly executed in a web service.

In thinking about the attractiveness of your market, ask yourself some basic questions:

• Are you fulfilling an already recognized need (i.e., large market) in a dramatically lower cost, more convenient, and / or radically innovative way? 
  
• Are you taking a differentiated approach to delivering to your customers vs. competing on features and functions?
  
• Do venture capitalists view your market as mature?

If you can answer yes to those questions, and are targeting a large market, the odds of success are greatly improved.