Tech Road Trip

RedBeanPHP an amazing ORM

2012-11-21T15:08:00.001-08:00

I want to share a little bit about my experience with a library called RedBeanPHP, since it's been a completely transformational tool for me in the prototyping process (and in fact, was a big contributor to the app that my teammate and I built at AngelHack NY, which we ended up winning).

So, here's the general idea. In the prototyping process, no matter how much you plan ahead, it's fairly likely that you will want to add a DB column or change the values you were planning on storing. This generally means having to do a few things:

Add a script to alter the existing schema
Make changes to a central script that builds your DB from scratch (in case you need to recreate it on a new DB instance).
Deal with backwards compatibility/consistency issues

When you're prototyping, this is incredibly distracting and annoying (especially if you are like me and you just want to push a version out to start measuring usage). Enter RedBean. Redbean is an ORM just like any other with a little trick up its sleeve- it alters the schema to accommodate whatever values you want to assign to a given object type on the fly. So let's take the following examples:

Let's say I set foo.name = 1.

Redbean might set the schema for column 'name' to be a TINYINT

Let's say I then set foo.name = 1234

Redbean might set the schema for 'name' to be an INT

Let's say I then set foo.name = 'abcdefg'.

Redbean might set the schema for 'name' to be VARCHAR(250).

It gets better though. While it builds your schema, you're free to mess with your DB as much as you want behind the scenes (change schema, add indexes, etc) and redbean will still cooperate. And once you're happy with the DB, you push to production and you want to make sure RedBean doesn't alter your schema, you add one line of code to the top of your PHP script to ensure that doesn't happen ('R::freeze()'). After that, if the DB is unhappy with what you're sending it, Redbean will just work as an ORM solution and pass back the error if the DB is unhappy with a given query.

Beyond that, check out the site. The syntax is beautifully simple to understand and it's my ORM of choice at this point.

Jquery Mobile

2012-11-19T12:07:00.000-08:00

Jquery Mobile is simply amazing. If you haven't used it before, check out the demos/docs here. Here's why you want to use it:

It's HTML5. This means that it will not only work as a mobile application site but it is directly portable to native apps on iphone, android, blackberry, etc through the PhoneGap framework (I'll write more on that at a later time).
It comes with all of the basic widgets that you would expect any mobile app to have. Pretty much nothing required from you except to embed the html5 tags.
It is easier to build than a normal website. This is because the structure of the framework is that you create every view of the application on a single html document. This means that you have one document as the source of truth for pretty much everything, and if you get lazy (as I do, to my disappointment) and put all of your code in that document, there are no dependencies to worry about later.

Here are the key things to pay attention to, that took me a little while to get a hang of:

Since you have multiple views (each treated as it's own 'site'), using $.(document).ready doesn't work the same. The code loaded in that view gets loaded as soon as the entire html document is loaded to the page- NOT WHEN ANY SINGLE VIEW IS LOADED. To have some JS executed when a view loads, you bind to the following events:

$(document).delegate("#my_patients_view", "pageinit", function(){ //Your code here});

This will execute your JS code when the view is initialized for the first time (ie: first time the homepage view is shown

$(document).delegate("#my_patients_view", "pageshow", function(){ //Your code here});

This will execute every single time the view is shown
This is an important distinction because if you do event binding in this block of code, you will attach bind multiple event handlers to an item, which can give you trouble down the line

Ex: You bind a click event to a button in a given view. If the view is loaded twice, the second time you click the button it will issue 2 separate ajax call instead of one.

Seriously though, this is amazing. Love everything about it. Please use it.

Installing Localtunnel on Mac OSX

2012-06-13T06:20:00.000-07:00

Localtunnel is a nifty little application that allows you to share your local webserver with the outside world. The flow is pretty simple:

Run your local webserver
Localtunnel spits out a URL for you (ie: 'http://localtunnel.com/abcdefg')
Share the localtunnel URL with anyone and they should be able to access your 'localhost' remotely over the web, as long as localtunnel continues to run in the background.

This is ideal for sharing quick demos/prototypes. It is not a good temporary hosting solution because localtunnel shuts you out after ~20 mins if the service is not actively used.

Installing this *should* be pretty easy but about a million posts online show that there is a little hidden step that makes this 10 minute process take 2 hours to figure out:

You need ruby to install localtunnel according to their documentation:

Download XCode through the app store
Open XCode:

Navigate to XCode ->Preferences->Downloads
Install 'Command Line Tools'

Open up terminal and run 'sudo gem install localtunnel'
run 'localtunnel 80'. You should get a message saying 'Failed to authenticate.' To get around this, you need to upload a public key.

Make sure you have a public key

Run 'cd ~/.ssh'

If the directory doesn't exist, created it by running 'mkdir ~/.ssh' and navigate into it by running 'cd ~/.ssh'

If you do not have a private/public key pair (ie: id_rsa), create one by running 'ssh-keygen -t rsa -b 4096'

Run 'localtunnel -k ~/.ssh/id_rsa.pub 80' and enter your passphrase.
The service should now be running. Take the url displayed and type it in your browser; you should be taken directly to your localhost index page.

Installing MySQL on OSX Lion

2012-06-09T07:24:00.001-07:00

Setting up your dev environment can be a b*itch-and-a-half. There are dozens of StackExchange articles about installing each tool/framework, but people change their setup so frequently that it's hard to tell which dependencies they have that you don't. For my own benefit, I've decided to document how I set up my own system after a clean install of Mac OSX Lion, so all dependencies are accurately captured. Hope this is of use to someone else as well.

Quick tips to set up MySQL on your intel Mac OSX Lion machine

Download the MySQL .dmg file here
Within the .dmg file:

Run the large MySQL .pkg file
Run the MySQLStartupItem.pkg file
Run MySQL.pref_Pane

Active MySQL server
If you don't want to deal with this again, select the option to automatically start MySQL when your computer boots

Now, run the following commands in terminal

Add mysql to your PATH

Run 'sudo nano -S /etc/profile'
Add the line 'export PATH=$PATH:/usr/local/mysql/bin' and save changes
Open a new Terminal window for changes to take effect

Enable a root password for your DB

Run 'mysqladmin -u root password', where 'password' is your secure DB password.

Run 'mysql -u root -p'. You should now have command-line access to your local MySQL DB.

A Company's (First) Tipping Point

2010-04-30T05:07:00.000-07:00

I like to think of the first sale as being the first major tipping point for a startup. It is the hardest sale to make, since little is known about the product's efficacy or the company's stability in the marketplace. This is a classic lemon problem, where information asymmetry between the seller and the market result in a breakdown of trust and propensity to buy at fair price. Overcoming this inertia is extremely difficult but there are very clever ways to overcome this by creating strong positive signals in the marketplace. The following (true) story, shared by Dr. Macmillan at Wharton, is a great example of this:

A salesman came to pitch an industrial plant manager on an innovative new water filter. The filter was twice as expensive as the next best alternative but lasted 5 times longer with the same efficacy. The investment would have justified itself but he did not make the purchase, because he had to somehow justify why his expenses had risen in the quarter to the company before any ROI from the purchase was evident. Having gotten this response, the salesman went to one of Proctor and Gamble's factories and gave the filter away for free. In doing so, he created an invoice and had it signed on delivery by the company. He then went back to the manager and showed a signed delivery slip (not showing that it was actually given for free). The fact that a major multinational had implemented the technology was all the manager needed to justify the expense to his bosses so he purchased the new filter product.

This is just one great example of how one can leverage the trusted/positive image of a client and create a strong signal in the marketplace that inspires confidence in the company and product. The key here was that the manager thought that P&G had puts its trust in the product by purchasing it, signaling to him that it was indeed a good investment (whether this is withholding or clever positioning may be debatable, but the signaling effect is clear). Over the years, I have seen both good and bad signaling strategies.

Good ways to signal the market:

Get a customer with a strong reputation in the marketplace. If you work with a company that is known to have very high standards in their business relationships, you will benefit from this. This could also be the case with an adviser or investor who has a strong reputation.
Set up free trial periods. This will signal your confidence in your product by shifting the risk to you, while still not making the client's purchase totally 'free'.
Make use of great PR. There seems to be a positive signaling effect in peoples' minds from reading about a product in a reputable source (ie: "as seen in the NY Times").
Collect data. Lots and lots of data. Try to get the study conducted/verified by an independent source. Show where the product works best and where it is least effective (this will show you are transparent and not only showing the positive data).

Bad ways to signal the market:

Sign up early customers for free. While this can be great for collecting data, it does not say much about whether the counter party actually sees the value of your business. Anybody will try something if it's free. When you pitch the next company, it really does not send any valuable signal.
Working to get 'the wrong' early customers who do not help you 'signal' your product's value to your target customer base. For example, if your target is a Tier 1 company do not waste too much time going after Tier 3 companies. This may in fact create a negative signal (ie: Tier 3 companies use this product).

These are just a few examples that come to mind from my last startup. Obviously there are cases where these rules will not apply but in general I think this is a decent framework.

Under the Googview Hood

2010-04-25T19:02:00.001-07:00

I recently made an update to Googview, my first web project. The new functionality automatically updates the Googview background to current Bing search backgrounds from around the globe. This exposed me to a few new web technologies that I thought I would share here.

Search Functionality:

Made using Google Custom Search Engine. This tools has a wizard that makes it very simple to create custom Google search tools.

Bing Images:

Images are taken from Bing's global sites and put into an RSS feed by Long Zheng at istartedsomething.com
This feed goes into Yahoo Pipes and is modified to make the media asset URL the 'title' of each item.
A simple PHP script on the Googview page runs on load, takes in the Yahoo Pipes feed using MagpieRSS, parses the media asset url and writes it down to the page as HTML.

The Power of Instant Gratification

2010-04-14T19:52:00.000-07:00

Today I was thinking about what it was in the fundamental design of web apps like Twitter, Facebook and Zynga that made them so successful in acquiring and keeping users (causing enormous changes in online behavior).

I was reminded of an analysis that I did for a large social gaming company as part of their recruiting process. They asked me to play one of their Maffia games and determine what features were driving 'virality'. At first, I had absolutely no idea how the game had become so popular. The GUI was limited to having a user click a handful of buttons that would instantly give them points and 'virtual goods'. There was no story-line, no mental challenge, no advanced visualization; just an instant reward for performing a simple action (for example, to rob a store, one would just click 'Commit Robery', and instantly see an increase in wealth points without any chance of failure). It was the equivalent of flipping a series of light switches on and off and getting some psychological reward for it. "Strange" I thought...

After playing for an hour however, I was rather surprised. I had progressed quite far in the game and started to enjoy it. I'd built a mini 'empire' and had no idea how I'd gotten there. Each click had given me some slight enjoyment and they had magically added up to an hour of gameplay. Furthermore the game kept kicking me off every time I made progress so I never got to the point where I was bored of it.

Instant Gratification (aka the Bon Bon Theory)
My theory on what has made web apps is that they deliver instant gratification in limited doses. In the game described above, I felt instant utility through building my collection of virtual goods. The game design allowed me to instantly enjoy small doses of pleasure, while forcing me to come back later for more. In the case of twitter and Facebook, we are gratified by the emotional value of seeing a constant stream of information from those we value most. Once again, this utility is enjoyed over time as updates/tweets trickle in small doses throughout the day.

I call this the Bon Bon Theory because it reminds me of how quickly one goes through little wrapped sweets when they are lying around the house. They are just the right size to give you instant satisfaction but never sizable enough to satisfy a craving (and the solution is always simple-- you just go back).

This is an extremely powerful concept and should be considered key when looking at future web services as we become more and more connected (since being 'always on' makes it easier to administer each 'dose' of utility).

ESAF Part I: Testing the Business Model

2010-03-25T19:23:00.000-07:00

I will be writing a small series to provide further insight into the Early Stage Analysis Framework (ESAF). I recently posted to the blog. This will be somewhat out of order, as I will try to follow up based on discussions that I have with others in the blogosphere.

Today I wanted to address the question of how to test the business model. In ESAF, I suggest that there are 3 key steps to understanding whether a business model is sound:

Create a unit economic model of the business to understand the key revenue and cost drivers
Conduct break-even analysis on the unit level to see if the company can generate margins on each unit. If this isn't the case, expand the model to take into account multiple units and see what scale is required for the company to reach break-even.
Conduct Crystal Ball analysis to understand expected profit values based on a Monte Carlo simulation and de-risk the business model

I devised this approach after working for quite some time with both entrepreneurs and investors in early stage companies. I found that very often they spent a lot of time breaking down complex 3-5 year models and questioning key assumptions that the model makes. This is often a highly time consuming (and subjective!) process and often means very little since both sides stand firm behind their own assumptions. The challenge for me was to devise a way of testing business viability in an objective way without taking any position on what assumptions were 'reasonable'. This was key in getting buy-in from investors and entrepreneurs on the validity of my analysis. I outline my approach below.

First, creating a unit economic model is crucial because it strips the business down to its core revenue/cost drivers and eliminates the unnecessary complexity that most models have. This model is created by identifying an economic unit for the business (whether it is a cookie, a box of cookies, a delivery truck of cookies or the daily supply an average supermarket purchases) and allocating all revenues and costs (both variable and allocated overhead) to that unit.

Once we have this unit economic model, we simply ask the objective question of whether the business model is viable given the existing market size. If the unit has a positive margin in the model, immediately we know that the business model is validated. If the unit runs a loss, the model can be enhanced to account for multiple units to see if the company can break even as it scales up (and economies of scale lower overhead cost down across all economic 'units'). Once break-even volume is determined, this can then be compared to market size to judge whether or the business is viable. For example, if you found that it would take 9 billion customers to sign up for an annual subscription to your web service, you have objectively proven that the business is not viable since there are some 6 billion people in the entire world. When we conduct our break-even analysis , all we test is business viability. This does not take into account whether the business can actually achieve the market share necessary to break even (we examine this question later). It is an objective analysis that can be understood by everyone around the table.

If the business seems viable from a unit economic model perspective, the next thing to test is whether it can actually meet the ROI targets necessary to make the business worthwhile to the entrepreneur and investor. To do this, a Monte Carlo Simulation software such as Crystal Ball can be used. This software allows you to create a basic financial model and designate 'ranges' for inputs (ie: sales figures, resource costs, etc) instead of coming up with distinct best/worst/expected case scenarios. For example, if you think that salaries might be in the $40k-60k range with an average of $48k, it will allow you to input these ranges into the system. Once this is complete the software will iteratively simulate thousands of possible scenarios across all model inputs and generate two key outputs. The first output is a chart outlining results from the simulation with expected outcomes. Lets take this chart as an example:
This chart shows that across several thousand simulations performed on the input model , the business can indeed suffer a loss, although the expected value is a net income of $6K a year with an optimistic scenario of ~$12K. This data can be extremely useful when trying to compute ROI targets and value a company.

The second key output is a tornado chart that illustrates the key sensitivities of the business model. While running random simulations, the software isolates the most sensitive drivers of profitability and presents them in the form below:
This tornado chart shows the most sensitive variable in the model is Website Development costs (which will in the best case be ~$12K and in the worst case ~$18K.) Using this insight, entrepreneurs and investors can understand the key risks in the business and take steps to mitigate the key drivers of risk.

My experience has shown me that 'objective' analysis is crucial in the initial stages of discussing business models with early stage companies, as it ensures buy-in from both entrepreneurs and investors. Otherwise, there is simply too much room for subjectivity when looking at assumptions one by one and debating whether they are reasonable.

Early Stage Analysis Framework

2010-03-21T19:35:00.000-07:00

This is a little project I developed over a weekend. It is the culmination of 4 years of experience in working with bootstrapped and VC/PE backed early stage companies. I welcome any and all feedback!

Early Stage Analysis Framework v2

Why Are Entrepreneurs That Way?

2009-11-20T05:51:00.000-08:00

How does an entrepreneur think and what is that unscratchable itch that drives them? From time to time I ask myself these very questions and when I need a little perspective, I turn to the wisdom of Thoreau. These two paragraphs come from the final chapter of his book Walden:

I left the woods for as good a reason as I went there. Perhaps it seemed to me that I had several more lives to live, and could not spare any more time for that one. It is remarkable how easily and insensibly we fall into a particular route, and make a beaten track for ourselves. I had not lived there a week before my feet wore a path from my door to the pond-side; and though it is five or six years since I trod it, it is still quite distinct. It is true, I fear, that others may have fallen into it, and so helped to keep it open. The surface of the earth is soft and impressible by the feet of men; and so with the paths which the mind travels. How worn and dusty, then, must be the highways of the world, how deep the ruts of tradition and conformity! I did not wish to take a cabin passage, but rather to go before the mast and on the deck of the world, for there I could best see the moonlight amid the mountains. I do not wish to go below now.
I learned this, at least, by my experiment: that if one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours. He will put some things behind, will pass an invisible boundary; new, universal, and more liberal laws will begin to establish themselves around and within him; or the old laws be expanded, and interpreted in his favor in a more liberal sense, and he will live with the license of a higher order of beings. In proportion as he simplifies his life, the laws of the universe will appear less complex, and solitude will not be solitude, nor poverty poverty, nor weakness weakness. If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.

Why Start a Company When You Could...

2009-11-10T05:24:00.000-08:00

There's a lot of opportunity out there and I've been hearing some interesting insights from several entrepreneurs recently who've been very much against the idea of someone starting their own company. The argument is that there is so much risk in a pre-revenue venture (after all, creating something from nothing is the hardest part). So then, they ask, why wouldn't you:

Join a revenue generating start-up? A huge part of the risk has been taken away and the question isn't as much 'whether this will ever work ' but how we can now tweak the business to grow revenues. You won't get anywhere near the same amount of stock but a lot of people have made good money this way (and built their networks through venture backed companies).
Buy an existing business that's stagnant. Again, the hard part has been done. There are businesses out there that are profitable but stagnant making between $100k-5mm a year. So rather than trying to start a business why not raise some private money and flip the company around?

The moral is that there are a lot of undervalued assets out there that can use an individual's talents just as well as any bright new business idea.

Viral Marketing & Design on FaceBook

2009-11-03T12:04:00.001-08:00

A very interesting area I'm working on right now is Viral Marketing and Viral Design. As progress on Triip continues to move forward (predicting Launch in early December!) the team has been asking a lot of questions on how to launch our FaceBook app & how to add features that will optimize virality.

The presentation below is a stripped down (sorry!) version of a deck I created to show our engineering team how Marketing and Viral Design are essentially the same thing on a social media platform. The objective is to logically break down the question of 'how to do we get 100000 users?' into simpler parts and see what actionable steps we can take to reach success.

FB App Virality Drivers

A framework for success

2009-10-14T13:54:00.001-07:00

What is success? If you can't set the vision, you'll never reach it. that's why i came up with three criteria based against which the success of all current/future passion projects that I participate in will be based:

it should challenge an existing paradigm and make people think
it should empower people to do something they otherwise wouldn't be able to do
it should engage and inspire people to act

Release Early & Release Often

2009-10-13T10:08:00.000-07:00

"Release Early, Release Often" is a principle that is now adopted by some of the most successful companies in internet. I've known of it, incorporated it in the develop strategy of KnolSoft's internet product but I never actually knew how amazing it was until I started my little mashup experiment Googview.

GoogView Started off with a simple question: if people like Google search yet they keep going to Bing for the daily image, what would happen if we combined the two? The first iteration was simply the current Google Search with a background that I selected from Wikipedia picture of the day. People who I gave the simple pitch to loved it but other people didn't quite get it. After this I kept tweaking the site based on user suggestions daily. The rapid changes kept even the people who weren't that into it at first interested and I was able to keep the communication going. The result was a significantly better website design, users participation and a lot of fun. So, what were the lesson I got out of this?

Iterative development is an extremely powerful tool and it must be incorporated into your product strategy.
You have to iterate fast and work hard to keep dialogue going and maintain user interest.
If you don't have the infrastructure in place to go through this cycle rapidly, you're not ready to launch. If it means more manpower, get it.

Evolutionary Economics & How Small Business Can Survive Among Giants

2009-08-22T14:57:00.000-07:00

Building my company has made me think a lot on how a potential entrant to a market dominated by giants should position itself. After a couple weeks of pounding my head against the wall, I thought of a Discovery special that I saw on the rain forest, where the canopy created by 300 ft trees stifled the growth of life on the ground. This seemed to be a perfect analog to my conundrum, and two questions came to mind: 1) How did certain species evolve to position themselves for growth when no sunlight was available and 2) In such a stifling environment, how did the Amazon become one of the most diverse ecological systems in the world?

Here were some of my findings (I came across a U.Michigan website that summarized some fascinating studies on competition in the evolutionary biology context):

In answering the first question, it seems natural selection offers two answers. Some plants did not compete with the big guys, simply adapting to living on the forest's floor with less sunlight. Other plants actually used the gargantuan trees, and climbed up them towards the bright sun over the canopy. These very elegant solutions reminded me of small business either positioning in a niche market or partnering with larger firms to leverage their distribution channels.
The answer to the second question proved much more interesting, as it went to the heart of the studies summarized in the aforementioned website. Findings showed that whenever competition over limited resources existed within any system, all interactions were destructive (ie: no two species could co-exist). The dominant species always exterminated the subordinate one. The key to survival in competition was always adapting to position a species in a way that minimized overlap in resource consumption with the dominant ones. This suggests that adaptation is not a way of survival but the only way to survive, and that diversity is an inevitable state in any perfectly competitive environment.

The lesson from this analog, in my opinion, seems to be that going after Microsoft P&G or any competing giant is suicide (no kidding!). Yet evolution does seem to offer one glimmer of hope for small businesses that cannot afford an outright war with the big guys: the vine. Nature's solution to our problem was to adapt in a way that made partnership with the dominant player possible, and this should be a key option for any small business entering a multibillion dollar market should consider before taking the niche approach.

The Consulting Question or the Entrepreneurial Question?

2009-08-03T02:54:00.000-07:00

Over the past few weeks I'd been working on a business problem with someone who had decades of experience in the consulting industry. Our approaches towards solving the problem seemed to be notably different for the first part of the discussion, but at the end of the day the data uncovered by each ended up being the ying to each other's yang. From this experience came two conclusions: 1) That the consulting and entrepreneurial mindset were different and that 2) neither necessarily proved superior to the other. This made me wonder what it was that made our approaches so different, how our experiences played into it and whether a start-up or consulting practice could possibly survive without having both mindsets in the game. These were some observations:

Consultants are problem driven while entrepreneurs are opportunity driven. Consultants are ready to delve into mountains of data until they start finding some kind of pattern and go from there. It's guaranteed to work every time but risks missing out on the big picture. Think tuning an engine (figuring out the fuel to air mix, timing of each stroke, etc) instead of asking whether it's the right engine for the car, whether it's the right car for the user and what an alternate engine might be. The entrepreneur is much more opportunity and customer driven and is eager to go out and start talking to customers, understanding the potential of the product and then looking at the numbers to see if their findings make sense. Think of a multi-function product like compressed air; sales to existing clients may be stagnant due to a price point issue but what else can you do with it?! The downside: it can be hit or miss and might fail to consider small changes that can have big impacts (ie: changing the price would be so much easier/cheaper than chasing a new market.)
At the end of the day a winning solution is an innovative idea that is supported by evidence (or perhaps evidence that is supported by innovative ideas). It is unclear to me which way of thinking is more likely to succeed but I did learn something very useful last week: That the creative tension that results from having both on a team can not only be highly productive but essential.

A Decision Rule To Live By

2009-07-16T07:10:00.000-07:00

Over the past year I've found my decision-making to have become much more sharp and it's really really been based on one decision rule. It has been so powerful in my personal and professional life (ranging from R&D decisions, to managing employees and to maintaining relationships with my business partner.)

I always ask myself the following:

"What is the worst possible case that could happen if I make this decision? If it happened, would I be kicking myself or could I live with it?"

If the answer is the former, can I do anything to mitigate the risk and make the worst state more acceptable? If it's the latter, accept the decision because no matter what you're taking a calculated risk and the negative outcome will be out of your control.

A New Day, A New Blog

2009-07-16T06:56:00.000-07:00

I've been gone from the blogosphere for a very long time. Why? To be frank, nothing good to say. Over the past few months I've found that in the start-up world all people do is talk about the theoretical when the field is purely about execution and results. Therefore, I've decided to move the blog in a new direction and will now make the following pledge to my readers:

Anything read on this blog from here on will be original and a reflection of my personal experiences in the start-up world. I will not regurgitate anything that's well documented elsewhere and all discussion will be result-oriented instead of theoretical.

Sourcerer Makes it into Wharton VIP!

2008-12-11T17:42:00.001-08:00

The venture that I've been developing with my partner Atish was recently admitted into the Wharton Venture Initiation Program. We're extremely grateful for the opportunity and are looking forward to joining this entrepreneurial community.

Could Facebook Charge Money?

2008-09-27T12:32:00.000-07:00

I've been pondering our venture's pricing strategy lately, and it's sparked all kinds of thoughts about the free web 2.0 world. At a time when companies that serve free web apps, like Facebook, are having trouble monetizing (and having their valuations lowered as a result), one of the questions that they are surely asking themselves is whether they could move to some kind of subscription model to create new revenue streams and increased profitability. Before discounting this idea completely with arguments of Koppelman's 'penny-gap' theory and low switching costs between social networking services, let us consider the fundamental idea behind pricing and ask ourselves what price facebook could charge in exchange for their services, if anything.

Price is a direct reflection of value. The more something adds value to a customer's life, the more he is willing to pay for it. Therefore the first question is what value does Facebook add to my daily life?

The ComScore results in march suggested that on average people spend a total of 20 minutes EACH DAY on the service. It is a tool for organizing our social lives, networking, chatting, organizing photos and, increasingly, a platform for sharing information; a center for all things Web 2.0 that has driven internet use through the roof. Then we should have no doubt that Facebook adds considerable value to our lives. The question then is how does that translate to a price?

Though it may be a gross oversimplification, the price point would be the one we'd be willing to pay just before switching to a rival service. While some might argue that switching costs are negligible, Facebook has a number of competitive advantages that make these costs substantial. These include the network effect, unwillingness to manage multiple profiles, loyalty, inability to transfer all photos and profile, etc. So then let's imagine that Facebook were to implement a policy that either forced us to pay 1 cent per month or to watch an additional advertisement to receive 12 cents in revenue over the course of the year per customer. That means that with 100+ million users, they increase revenue by over a million dollars each month!

Now let's ask ourselves, is that 'charge' that facebook imposes on its customer in exchange for a very useful service likely to drive people away? Probably not. What the ideal price point would be will require a lot of research but it does leave us wondering why they wouldn't consider implementing a comparable policy to boost their revenues and valuation. What amazes me even more is the fact that they haven't created less invasive premium-service based revenue stream, such as bringing SmugMug type functionality to the photo app, which would certainly generate even more substantial revenues than charging subscription fees.

All signs are now pointing to targeted advertisements not being an optimal revenue source for web 2.0 tech. With companies like Facebook issuing equity valued at hundreds of millions of dollars, investors should really be pushing to develop the business in order to maximize shareholder value. Whether they would is another story, but from the logic described above I believe that they could make a strong case to do so.

Follow-Up to Yesterday's "Solve Your Own Problems..." Post

2008-07-24T08:59:00.000-07:00

I got an email this morning from a close friend of mine, Anthony Orlando, who made the following comment in relation to yesterday's post, where I argued the importance of solving problems that you've experienced in your own life when starting a business:

"...what if you're not an expert on anything, i.e. you don't have a problem of
your own to solve?"

The question goes to the the heart of the point I was trying to make, since this is what so many young entrepreneurs with limited professional experience ask themeselves. While it's true that you might not have the professional experience to cater to enterprises, you have plenty of experience as a consumer to cater towards consumers like yourself.

Everyone is a consumer, so there's no excuse to say that you don't have expertise in anything. For example, if you spend 3 nights a week going to restaurants and night clubs, you start to get some idea of what makes a good menu or entertainment venue. If you go to coffee shops a few times a week, you begin to develop some expertise in what people are looking for in terms of atmosphere, music, service quality and product offering. If you like to explore new bands, but have trouble locating these emerging groups in your local Virgin Megastore, you start to gain some idea of a need that exists for people looking to explore new music based on their current preferences. The list goes on and on. As a consumer there's a pretty big chance that you have some sort of consumption pattern that makes you knowledgable in some areas, and it's these areas you want to focus on (if you'll notice by the way, I'm positive you can think of someone who has made money off each of the ideas I've listed above in the last 12 months.)

Of course the difficulty of innovating towards consumers like yourself is that consumers are innovating all the time. Our lives in the new millenium are so comfortable thanks to technology and e-commerce that we don't even have to get off our lazy backsides to purchase bread and milk (it's all delivered to your house! and if you don't like it, free return shipping!) But that does not change the fact that there's always room for improvement, and that there's always a pain point somewhere (it's human nature to never be satisfied!)

I find it highly unlikely that anyone 'doesn't have any problems' anywhere in their lives (if this is the case, my recommendation is not to bother reading this blog and starting a business, but rather taking it easy on a beach somewhere.) The trick is being persistent and always keeping your eyes open for a potential need. This means that you don't get much time to just shut down and lie down in the sun without analyzing the hell out of everything, but hey, that's the life you choose as an entrepreneur.

And if you really are living a life where you can't find a single need as a consumer... start changing your lifestyle to open you up to some new experiences; you're bound to find something somewhere out there. Just make sure you live it before you act on it.

Solve Your Own Problems, Not Someone Else's

2008-07-22T12:32:00.000-07:00

Creating value is all about solving a problem. Solving a problem means understanding the problem itself in every dimension (missing even one dimension can render the product/service that you develop utterly useless). The only true way to understand a problem fully is to experience it. That pretty much explains why some of the most successful businesses in the world stem from the entrepreneurs solving a pain point that they experienced and knew inside out. Bankers identified opportunities in banking services/software, people having trouble working remotely developed collaboration software and college kids having trouble organizing their social lives built social networking.

One of the biggest issues I've faced over the past 6-7 months has been coming up with a great idea. Ordinary people find this difficult enough but it's infinitely harder for a young person who has such limited work and life experience and whose problems really are between the three realms of social life, student life and and consumer life. The result is often that young entrepreneurs try to learn about others' problems in the hope of solving them for a premium. Yet my recent experiences have shown that this is extremely difficult, since you keep learning some new information down the road which forces you to reevaluate everything. Uncertainty is always higher than you'd like and there's a part of the story that you know you're always missing.

So what's my takeaway here? Stick to solving your own problems. Don't try to build a business catering to outdoor sports enthusiasts if you've never been camping once, just because you see some untapped niche. If you think the opportunity is that huge, get a partner who IS an outdoor enthusiast so that you at least have some way of understanding what clients are telling you. In other words, stick to what you (or someone on your team) know. It'll take longer to find a great idea but pay off in the long run.

Angry Employees (Updated)

2008-07-03T13:08:00.000-07:00

“A happy worker is a productive worker”; every company with a half decent HR department knows that’s true. An unhappy employee can be dangerous, not only because his productivity stalls but also because he can diffuse his dissatisfaction into the work environment and turn others against the company as well. Yet there is another area of your business in which an unhappy employee is even more dangerous; word of mouth marketing. People tend to put twice as much trust in the word-of-mouth of an employee that trashes the business than a peer who recounts a bad experience. This is because of two reasons; firstly, we always consider the possibility that our peers’ bad experience is a one in a hundred occurrence, whereas the employee gives us a survey of the history of the company’s service quality. Secondly, we assume that a company has to be pretty bad if its employees are putting their livelihood at risk by scaring away potential clients.

I was reminded of this fact last week when I was on a boat trip on the Aegean. The anchor broke and our captain, unable to get the proper guy to fix it since the owner of the business told him to go cheap, made us stay in the same spot for an entire day. The cook took the opportunity to trash the captain and the owner of the business, telling us about ‘the great boat’s he’s worked on before’. Suffice it to say, this really gave us a strong bias throughout the rest of our trip to everything that went wrong, and we were already talking about using one of the boats the cook was talking about next year. If this happens to every tour group that gets on board, I can’t imagine the business prospering. So what’s the bottom line: keep your employees happy, there’s more at stake than productivity!

UPDATE: A friend of mine who was on the boat with me shared some interesting information ysterday; apparently the cook did not stop at trashing the tour company but went so far as to give the contact numbers to other tour companies later that evening (I, of course, was asleep when this happened). FYI

3 Grievances on the VC Industry

2008-06-13T15:19:00.000-07:00

The VC conference that I attended earlier this week gave me a very different view of venture capital. I was expecting to hear a lot more from the fund managers regarding their investing strategies. There were a few things that really got to me, and made me wonder whether some of the people in the room actually knew what they were talking about. Here is a list of grievance that I have regarding the VC industry:

No Real Investment Strategy. Quite a few VCs in the room were asked the question "What kind of companies do you normally fund?" The answer that a lot of them gave was that they were looking for 'anything and everything', as long as they were 'disruptive technologies.' Now, there are A LOT of VC-backed companies out there that do not even mildly look disruptive. Flash video technology was disruptive- it affected the movie and music industries and created a revolution in personal expression in the internet sphere. The IPhone is being disruptive- Apple single-handedly changed the idea of what a phone should be and is on the way to beating RIM and other competitors into the ground. A social network twist that allows you to share musical ideas is NOT going to disrupt anything! Yet VCs keep putting money into these start-ups, which in turn fuels more non-disruptive start-ups to emerge (no wonder there is too much money chasing too few good deals!) This shows that either a) they don't have an investment strategy or b) they are not following their investment strategy. This conclusion got me thinking and I arrived at my second grievance.
They are essentially gambling. If you set out at the start to get a success rate of 10-20% something is seriously wrong. If your investment strategy is to make picks and get that low a rate I equate it to gambling (even a random toss of the die gives you a 16% chance of success.) Now, I understand that the model has been proven to work, people have made money, etc. etc. Yet I can't help but wonder how anyone could possibly think that this current model is the right one to use going forward. Just because this has been the typical result historically doesn't justify it being a future goal. This thought led me to yet another realization and, indeed, another grievance.
Misalignment of interests. The objective of the fund is to make money in x years (typically 6). This time constraint and the large funds that are raised forces VCs to make investments no matter what to make sure they get a large return for their investors (even if they haven't come across the next disruptive wonder) I believe that this is a misalignment of interests, as VCs are pushed to use their money unwisely, resulting in the ridiculous 1/10 success rate. Again, this system just doesn't seem right.

Now let's get back to the infamous complaint of there being 'too much money chasing too few good deals'. The first reaction that I had to this statement was that not enough innovation must be happening- after all, given the billions of dollars out thee one would expect innovation to increase. Yet in retrospect I wonder whether this excess money is playing some role in stifling innovation by encouraging people to create moderate innovations in an effort to make a quick buck. If this is true, it suggests that VCs are actually doing damage to themselves because of the aforementioned grievances. Then what are some possible solutions to these problems?

Give VCs less money. If they have less cash they will have to make every dollar count. No more of this 1/10 success rate business. Investment strategies will have to be clearly defined and followed to the letter. With this much scrutiny, entrepreneurs will be pushed to create true breakthroughs
Make VCs set higher targets... if VCs attain higher success rates because they are no longer swimming in cash then losses should go down and expected returns should go up. This means that LPs should demand higher returns on their capital and push the VC partners to invest their money better.

No VC at the conference really addressed these questions completely (admittedly, I only confronted 2 people on the topic) so I'd be interested in hearing peoples' thoughts on this.

My Two Favorite Web Generators

2008-06-11T05:46:00.000-07:00

Over the past couple weeks of looking around the blogosphere, watching videos and talking to entrepreneurs I came across two great website that I wanted to share:

The Dot-o-mator: I published a post a while back about the importance of naming your company early on. After not having followed my own advice for the past two weeks (and after suffering one of the pitfalls I'd predicted at a VC conference) I decided to get it over with. Enter the Dot-o-mator. This is a fantastic web-app that helps you generate a list of names and then automatically check for domain name availability. The programmer let's you specify the prefix/suffix and then lets you merge this with prefixes/suffixes from selected categories. So for example, if you are creating a sports website an want a 'Tech' name, you get results like soccercast, soccerfeed, soccerwire, etc. etc. etc. The author did a great job in thinking up all of the popular suffixes that are out there and then categorizing them. A lot of fun, very easy, give it a shot.
Dilbert Mission Statement Generator: I get the feeling that I'm one of the few people in the world who hadn't seen this before, but in case there are more of me out there this is a must-see web app. Guy Kawasaki referred to this as a way to 'save $25,000', making fun of how inane corporate mission statements are. I think it's really clever and amusing. Enjoy.