Joel Andren posted a couple of weeks ago on Why Zynga couldn’t go public soon enough – in which he notes that everything is great at Zynga right now (revenues on a tear, Farmville is hot, Cafe World is getting there) but postulates that ‘their current efforts have probably reached their apogee without making significant changes to their ecosystem’.  Hence they should get out while the going is good and IPO.

I’ve got no inside track on Zynga buy Joel’s analysis is interesting and can (and probably should) be applied to most internet businesses.  He has a ‘customer ecosystem’ model into which he has plugged Zynga:

And by way of explanation:

If a company is strong, it will have three of four squares rated green. Anytime a company has a red square it essentially means that their customer ecosystem is unhealthy.

I like this model a lot.  It is applicable to a wide range of internet businesses and has the merit of forcing you to look at every aspect of the customer lifecycle and I’m using it to help analyse an ecommerce company as we speak.

To comment on Zynga’s red squares:

• We have seen the danger of Facebook dependence before when iLike was only able to sell itself for $20m.  This point is not lost on Zynga who are pushing their own site Farmville.com quite hard and would, I’m sure, love to be working in more social networks, and to be fair to them when the business was started it looked like Bebo and Myspace would have application platforms to rival Facebook’s.
• Customer retention is a challenge for all games developers as it is difficult to get gamers to care about anything other than individual titles – which is why franchises are so important for the industry.  I thought Social were a little different as developers have the option to cross promote between their different games.  Indeed, Zynga even had a sort of in-game cross promotional ad network story for a while as a way to attract third party games into their orbit.  Not sure what happened to that.

I’m a big believer in the importance of sustainability, which is why I like this model, but since Joel wrote his piece Zynga has raised a further $15m from existing investors, including Kleiner Perkins and Union Square Ventures.  I’m guessing the picture isn’t all bad .

Reading this morning on Techcrunch that Google’s rumoured ‘phone’ may be a data only device and that AT&T has confirmed they  will sell data only plans to customers who bring in Blackberry and Windows mobile devices has me thinking that the day when operators recognise their destiny and accept their future as simple ISPs is getting close.

There is nothing wrong with being a simple ISP (also known as a dumb pipe) of course, except maybe the name.  Traditional telecoms businesses like BT started out with content and portal ambitions in the late 1990s and backed out of that to be ISPs in recent years and I’ve thought for a long time that mobile operators will go the same way.  This is not a bad thing, running a lean and mean network can be a profitable exercise and one that adds a lot of value to society.  Electricity and water utilities have been doing this for years.  Further, embracing the future as a pipe doesn’t rule out selling content oriented services – they just need to be viable on a stand alone basis

Being a pipe is, however, a low margin business and with low margins come low ratings on stock markets which is why mobile operators have been fighting their destiny so hard.

I’m writing this morning because the news that AT&T is selling data only plans to Windows Mobile and Blackberry users means they have embraced their future as a simple ISP for those customers.  If Google starts selling a data only phone we will have operators around the world following suit.

As a brief finale the increasing ubiquity of free and cheap wifi networks is also bringing the day of reckoning forward.

Scoble has a list up of 12 common mistakes that startups make.  I’m going to bring out three of them:

2. You can’t tell me what you do in a single Tweet. See that super complicated Toyota Prius in my driveway? It gets better mileage than your car. If you can’t explain why your product is better, the way I just did with the Toyota Prius, in a short space or time on the phone you won’t make it.

I love that the elevator pitch just got reduced to 140 characters.  The importance of having a crisp pitch is not a new idea, but it is one that can’t be repeated too often.

6. (This should be #1) They don’t fire fast enough. I’ll be honest, at Podtech me and another guy were pulling the company in different directions. John should have fired one of us. He didn’t. The story got muddled. The rest is history. (In those situations it doesn’t really matter who is right, either, you gotta pick one direction and go with it, startups don’t have enough resources to try out two directions). I’ve seen lots of other startups be slow to fire people who weren’t pulling their weight. Always bad because the best people get pissed and/or leave. Again, you need to have everyone pulling with all their weight in one direction. If that isn’t happening the startup probably isn’t firing people fast enough.

One of the more unpleasant sides of my ten years as a VC across two recessions has been seeing lots of people fired – and I’m struggling to think of a single redundancy that with hindsight was made too soon, so I think this point is spot on particularly as success is tough to achieve even with a perfect team, let alone with an imperfect one.  Avoiding this mistake is made more difficult by our desire to be humane and by ‘confirmation bias’ – our natural inclination to seek out evidence that supports our existing beliefs.  In the case of people that means justifying someone’s importance based on a couple of things they do well rather than the overall picture.  Don’t make that mistake.

8. You let VCs control your management team and strategy too early. There’s lots of advice out on the Internet about this one, so I’ll leave it for you to figure out. But your early decisions will have big leverage on your company later. Hire the wrong management team and your company won’t make it to the B-round. I’m not experienced enough to give good advice here, but I’ve seen what happens up front. I remember meeting one CEO of one company that was just, well, let’s say clueless. How did he get hired? The VCs put him in.

I include this because I want to comment on it rather than because I believe in it.  I guess I have two reactions – firstly that (generally speaking) handing over control to VCs is something that happens to companies that have missed their numbers too often and had to raise too much money at low valuations – in that scenario there is probably little the entrepreneur can do about it (beyond avoiding burning too much cash in the first place).  My second thought is that not all VCs are created equal.  In an ideal world you will have a highly capable VC who you like, trust, and respect and you would work together with her to choose a new CEO, should you need one.  In a less than ideal world you might decide to risk taking money from a lesser character in which case you have done your deal with the devil and will have to cross your fingers and live with the consequences.  You can, of course, help yourself by negotiating hard to limit the VCs powers.

Chris Messina and Fred Wilson have posts up today which both talk about the pros and cons of simplifying the user experience at the expense of limiting the options available, although they come at it via very different routes – Fred discussing the power of instant approval versus moderation and Chris focused on the trend away from using URLs.

The interesting thing here is the dichotomy created between power and flexibility on the one hand and ease of use on the other.  There is also the related question of balancing the needs of early adopters/power users with those of the consumers with simpler usage patterns who will really take an app/service mainstream.

Reading this back I’m struck that there is nothing new here, although APIs may be the joker in the pack here as they allow users to self select which interface they want to use.  Additionally I think the web has changed the game by enabling crowd filtering, at least for content oriented services (iPhone apps, YouTube videos etc.).

The other interesting thread is that simple interfaces limit options thereby making it harder for new sites/services/apps to get traction.  Chris’s main point is that because of this the trend in browsers towards pictures and lists of sites and away from using the address bar is a simplification that threatens everything that has made the web vibrant.

I can see the logic, but I think the trend to open is too strong.  People are used to being able to get at exactly what they want to when they want to, even if most of the time they are happy going with the suggestions of others.  Simplified interfaces which don’t offer this ability will have their place in the market, but I can’t see them dominating.  Open has won out over closed every time so far and will again.  Chris talks about the trend amongst television manufacturers towards walled garden internet experiences – they will have their time at the beginning of the internet television market, but will lose out to more open solutions eventually, mirroring what we have seen on mobile.

Brad Feld wrote a post about the Defrag Conference over the weekend where he notes that the amount of information in the world is exploding and that there will be a wave of software innovation to help us make sense of all the data (a prediction he originally made in 2006).

Taking the underlying trend first – the volume of information growth is staggering.  I can’t find any easily digestible stats on the web right now, but numbers I’ve seen before shows that the amount of data produced in the last few years exceeds that created in the entire rest of history.

For the doubters, Brad offers these explanations:

For the foreseeable future, there will be a continuous and rapid increase of information as more of the world gets digitized, more individuals become content creators, more systems open up and provide access to their data, and more infrastructure for creating, storing, and transmitting information (and data) gets built.

Implicit within Brad’s explanation but worth bringing out are increases in the amount of sensor data, that media consumption is becoming trackable for the first time, and the huge volumes of government data that are starting to be published/exposed (in the UK context I hear that Sir Tim Berners-Lee has secured a commitment from Gordon Brown which should see the UK as a leading nation in this regard).

Some months ago I tweeted something about the problems of information overload and my friend Jof Arnold replied that he didn’t see any of his non-techie buddies thinking or worrying about this problem and questioning if there is much of an opportunity here (excluding web search as ‘already done’).

I have returned to that thought a number of times, driven by the conviction that a trend this big has to be creating some kind of opening for startups, and my current view is that there are two types of opportunity, and that they might form the basis for investment themes.

Firstly there is the obvious tools and filters to help us manage all the data. Now that information is abundant time is the new scarcity and these tools and filters are really productivity aids. There is nothing new here, the spreadsheet is a good example of an innovation in this area and Google is another.  Going forward I think the startups will come in vertical markets, e.g. news, something about which I have written a lot on this blog and where we are seeing a lot of innovation at the moment.  Medical is another area where we will all soon need help interpreting the vast volumes of data that are becoming available (I have recently heard of two businesses that are taking the cost of sequencing individual human genomes down to mass market levels).

To Jof’s point – these tools will need to be *very* user friendly to get mass adoption, a hurdle at which many will fall, but which some will clear.  For example, an application which shows you the news stories most read by your friends could well get traction without the users ever thinking they were solving their information overload problem.

The following quote from the Foundry Group blog in 2008 gives further insight into how these tools and filters will work.  The eighteen months since it was written it have maybe rendered the insights more obvious, but they are no less relevant, and nor has the opportunity passed.

We think of the technologies that fall under the implicit web [which I have called ‘tools and filters] theme as a next-generation set of applications, tools and infrastructure that stitch together a long list of interrelated and overlapping ideas: the academic and theoretical ideas behind the Semantic Web, the utility of social networks and social media, crowd sourcing/wisdom-of-crowds, folksonomy, user attention data, advanced search and content analysis tools, lifestream analysis and numerous others.

When combined, these technologies offer the promise of a more unified computing environment that spans the applications where a user consumes and creates information (email clients, web browsers, RSS readers, etc) and is aware of the user’s preferences, interests and interpersonal relationships without requiring a ton of heavy lifting on the user’s part to get useful work done.

The second area perhaps has more promise, and that is the idea of building on the newly available information to create services to create products and services which simply weren’t possible before.  GPS/SatNav devices are a good example here – building on digital maps and GPS data to offer real time driving instructions.  Similarly LastFM built a music service based on data that only became available after people started using digital music players.  Looking forward the concept of VRM is built on the notion of using data generated by online purchase and surfing behaviour to turn the advertising model on its head.  Businesses like this are hard to describe in the abstract because they are solving problems we didn’t necessarily know we had, and in there early stages can expect to encounter lots of naysayers arguing that it will never take off/people don’t need it/they will never pay etc. etc.

Simply writing this post has clarified my thinking, but ideas like these really come to life when they are discussed, so I look forward to your comments.

• Published a new post: Twitter Weekly Updates for 2009-11-08 http://cli.gs/R7A4y #
• Published a new post: Twitter Weekly Updates for 2009-11-08 http://cli.gs/utZ1h #
• Published a new post: Why most VCs don’t sign NDAs http://cli.gs/RPS5Y #
• What a day for m&a – EA buys playfish for $300m + $100mn and Goog buys Admob for $750m #
• LinkedIn integrates Twitter status updates – http://bit.ly/3VEHmz – your web presence is an increasingly important part of your CV #
• We will see more and more freemium business models, but it is no panacea RT @TCEurope http://bit.ly/14hht6 Babbel dumps freemium for subs #
• Published a new post: I can’t see many newspapers blocking Google http://cli.gs/G8gg5 #
• Anyone else getting tired of the continual java updates? #
• Published a new post: Socially responsible responsible startups are increasingly important http://cli.gs/pTUeR #
• @wdavc they could batch the updates and do it less often though in reply to wdavc #
• Bing integrates some Wolfram Alpha results – RT @rww http://bit.ly/jaXIS #
• MS blocks modified XBoxes from XBox Live to counter privacy http://bit.ly/1iIgkq – owners of those XBoxes just moved to the unhappy camp! #
• Video advertising continues to do well – http://bit.ly/3H8onj #
• Bing makes more market share gains in Oct, up to 9.6%, long way to go though RTjohnpaczkowski – http://bit.ly/44zmwM #
• Published a new post: Getting the competitor analysis right when pitching http://cli.gs/DLP45 #
• I've had major tech troubles this week. IPhone, BBerry + 2 laptops all playing up. How much redundancy does a man need?!? #
• Published a new post: Apple on the ropes? a bit of Friday fun http://cli.gs/EbD5Q #
• US visitors to Twitter.com down 8% in October – http://bit.ly/p6mOb – I hope this isn't the start of a trend #
• Published a new post: News corp still talking about blocking Google http://cli.gs/EdWQs #
• Modern art meets the fun fair. I'm in a hall of mirrors at the RSA #

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The Telegraph reports today on a Jonathon Miller telling the Monaco Media Forum that he would block Google’s access to News Corporation’s content within months.  Then he went on to say that they wouldn’t do it unless other news businesses joined them.  I can’t see the industry wanting to co-operate to this extent, and even if they did I suspect someone new would step into the void and suck up all that Google juice for free, thereby undermining the whole operation.

The other interesting thing he said is that News Corp’s properties can get by fine without the Google traffic:

He also said that News Corporation, which owns The Times and The Sun newspapers in Britain, could survive both economically and audience-wise without the search giant driving traffic to its sites.

“The traffic which comes in from Google brings a consumer who more often than not read one article and then leaves the site. That is the least valuable of traffic to us… the economic impact [of not having content indexed by Google] is not as great as you might think. You can survive without it.”

Hmm, maybe for a while…..

Finally Miller threatened that unless they can start charging for content they will not be able to pay for things like ‘news bureaus in Kabul’.  Really?  Is that what this is about?  If the price of free content is not having a news bureau in places like Kabul I wonder what all the fuss is about.  There must be other ways to get word of what is going on there.

Check out this cartoon from xkcd titled iPhone or Droid:

As I can never help but to get a little serious note that a) this is perceived as a (somewhat) even choice, and b) the subtle positioning of the iPhone as a leisure device.

Jason Cohen has a good post on Venturebeat where he talks about four common ways that people turn him off in an instant.  The whole post is worth a read if you are going to be raising money, but there is one point that he makes which I’m going to bring out here, and that is how to make a good competitor analysis.

In Jason’s words:

Let me guess what your feature-comparison chart looks like. Probably pretty close to the illustration to the right [above actually], huh?

You have all the checkmarks, they have few. Even when your competitor has a checkmark too, your implementation is still better. There’s nothing they have that you don’t. Oh, and they’re more expensive too.

When I see this chart, all I know is: It’s a lie.

The point of “competitive analysis” isn’t to say: “I’m better than everyone else.” Rather, it’s to define your niche in the market and explain how you own that niche better than everyone else.

Jason then goes on to point out that your competitors may well be larger, stronger and more established than you, so it is a mistake to say that you are better than everyone else.  Better is to define a niche of the market that you will own and say why you are better than everyone else there. 

This takes us to another area that a lot of people could do better, and that is defining their target market.  I’m not talking about putting a size on it here (although that would help), but rather describing which parts of the market you are going for and which you are not.  It is usually more credible to tightly define a market and plan to take a big share than to aim for a small share in a larger market, so it doesn’t matter if the market subset you are targeting isn’t huge.

As an example my dad’s company was a computer rental’s business.  That is a very broad market and one of the things he did after he took over was to focus the company on renting PCs to training companies.  This was a definable niche in terms of customer which had some distinct requirements that he was well set up to service (large numbers of computers delivered simultaneously on short term rentals with pre-loaded software and high prices ).  Critically this meant there were whole areas he decided not to service at all – e.g. minicomputers, and others where he responded to inbound queries but didn’t proactively target – e.g. longer term loans to large businesses.

My old friend Rod Schwatz of ClearlySo has a piece in the Guardian this week about the increasing importance of small social businesses and enterprises (SBEs) to the economy.  It is fashionable to talk about this right now in the aftermath of the credit crunch but SBEs have been of growing importance for a long time now.  As Rod points out the first two large and successful social businesses were The Body Shop here in the UK and Ben & Jerry’s in the US, founded in 1984 and 1978 respectively.

Quoting Rod, SBEs are:

organisations seeking to generate social, ethical and environmental (often described collectively as "social") returns. The social businesses also seek profit, while the social enterprises target social impact – but use entrepreneurial methods to achieve them. What makes SBEs interesting is that they have several factors in their favour that mainstream businesses lack – and they are highly present in the "hot" sectors: green technology, new media and the internet.

For me the big picture here is the underlying shift in consumer thinking in favour of SBEs, both to work for and to buy from, which is in turn a result of the economics of abundance.  Simply put, now that (by and large) we don’t have to worry about things like getting enough to eat, having a roof over our heads and being warm at night our focus shifts towards higher order concerns like fitness, preventative medicine and feeling good about the places where we work and shop.

I’ve written a couple of posts recently about how I see the world looking in 5-10 years and I see this as another in that series.  This one is subtly different though in that it talks about types of companies that will be successful rather than how individual markets will evolve.

The interesting question from my point of view as a VC is the extent to which these businesses will be profit oriented and open to taking money from funds like ours with the objective of generating VC scale returns.

There are two things I want to say in this regard:

1. Some social entrepreneurs are happy making shareholder returns a key objective alongside their social goals (Body Shop eventually exited to L’Oreal and Ben & Jerry’s to Uniliver) while some want to make to keep singularly focused on the good they are bringing to society.  Both approaches are fine but only the former will work for venture capitalists.  In some ways this is re-stating Rod’s distinction between social businesses and social enterprises.
2. Rod describes SBEs as having three advantages – consumers prefer to buy from them, people want to work for them (and will often do so for much less), and finally that ‘social’ investors will seek lower returns from their investments in this category.  It is this final point I’m not sure about at scale.  I have no doubt that socially responsible angels will be happy to operate like this, and that they may be joined by some government funds and maybe even some small VC funds.  Going further, as a citizen I’d like to believe that larger scale VC funds could operate in this manner (hell, I’d love to be a partner in one), but I can’t see that happening in the near future.  The facts of the investment world as I see them are that everyone is short on returns (pension funds very publicly so) and that overall returns are the way funds are assessed. For these reasons I can’t see large volumes of capital going into funds that are not designed to maximise returns, whatever their sector.  Moreover, I suspect the consumer love affair with responsible business won’t stretch far enough that people will want to sacrifice the size of their retirement pots to help SBEs succeed.  I am also a little concerned that a VC fund which was deliberately investing to generate lower returns might find it difficult to generate any returns at all – it is hard enough to invest profitably without this additional constraint.

In summary, many things are abundant now, but money isn’t (yet) one of them.  I therefore expect to see many more SBEs flourish and hope to see venture money from our fund and others flow into them, with the caveat that those that take venture money will be run along traditional lines from a shareholder value perspective.