Posts from November 2012

I've thought this for a long time but never really articulated it publicly until the Q&A session at ad:tech last week.

There are a ton of social services that sit on top of the world of e-commerce and allow users to curate items they like and may want to buy in the future. These experiences can be highly social. And there are services that allow for transacting and payment inside of large social platforms like Facebook, Twitter, Instagram, and Pinterest. They bring commerce to social platforms. This entire category of services is called Social Commerce.

I have not been particularly bullish on these services because I think social commerce is most naturally e-commerce with a well implemented social layer built natively into the commerce platform. When you look at conversion rates in e-commerce broadly what you see again and again is that the more friction and overhead there is between discovery and transaction, the lower the conversion rate. Something as simple as logging into a commerce platform to complete a transaction can lower converstion rates by an order of magnitude.

Conversion rates are critical. They tell you what systems perform best for the end user. When a system converts north of 5% of users visits to a transaction, it is working extremely well for the end user. When a system converts 0.1% of user visits to a transaction, it doesn't work as well for the end user.

When a retailer or e-commerce service implements a highly social layer into their service with hooks into the major social platforms, the conversion rates can be significant. I have seen this first hand. This is an indication that users enjoy and benefit from social commerce when it is built into a native e-commerce service.

When users start in a social system that is divorced from the e-commerce platform, I believe the conversion rates are significantly lower, often by an order of magnitude or more. This, to me, suggests that the overhead of multiple systems reduces the effectiveness of the experience for users and is suboptimal.

So this is the thinking that led me to say what I said on stage at ad:tech this past week. I've felt this way for a long time and I am glad that I got the question and had an opportunity to address this issue publicly. I am eager to hear the discussion of this issue in the comments.

I'm going to fly to LA today. I would normally fly United because of miles/upgrades but the Gotham Gal booked this flight and we are going Virgin. I find flying on Virgin like going to a nightclub because of the lighting and I avoid it as a result.

It got me thinking about airlines in general. You hear people complain all the time about airlines but you don't hear that many folks talk about airlines they love. As I have some long flights to asia and other far flung parts of the world in my future, I figured it would be fun to talk about the best airlines in the world, instead of the worst.

The best airlines I've flown on regularly are British Airways and Lufthansa. If it were up to me, I would fly the international airlines over the US airlines every day of the week.

How about you?

Dave Morgan is one of my favorite entrepreneurs. We've backed him twice at USV and he is also a very good friend to me and my partners. Dave has been building businesses at the intersection of madison avenue and the internet since the mid 90s. So when he asked me to do a fireside chat at ad:tech with him, I said yes in a nanosecond.

We did that chat yesterday and I thought it was a great wide ranging conversation that started with the mid 90s and ended with where we are headed in the coming years. It's long, but if you have an hour to watch/listen, I highly recommend it, particularly the Q&A at the end.

Please note that this embed only goes for 10mins. But once the pre-roll is finished, there is a spot on the lower right of the player that says "watch full program" that you can click to go to the full 58 minute video.

Fred Wilson and Dave Morgan: Tomorrow's Digital Landscape from ad:tech on FORA.tv

Kasi asked me this last night in the comments:

Fred. Now that… it is all over and done.

How do you take the result? Will that be the post for tom'row?

So I will take a shot at answering that question.

I take the result of yesterday's election as a sign that the demographics of the United States are changing and changing fast. The Latino vote in Florida, Colorado, New Mexico, and Nevada has changed those states from red to blue and maybe permanently.

I also agree with Nate Silver that the President's bailout of the auto industry in 2009 was a huge bet that paid off bigtime yesterday. The blue that ran from Pennsylvania to Wisconsin in the electoral map last night was a sign that the industrial midwest is more comfortable with the President than the private equity guy.

And finally, I think that the war on women that the GOP has been waging for years must stop if they want to be relevant again. It is not OK to include legitimate and rape in the same phrase and it never will be.

But where do we go from here?

The House is in full control of the Republicans and the Tea Party. They will continue the obstructionist politics that have been the dominant theme in Washington for the past four years. But Mitch McConnell's goal of using those obstructionist politics to deny the President another term did not work and probably cost his party a lot of goodwill in the end. He was the big loser last night as his chance at majority leader was slapped back hard. That was nice to see.

I am hopeful we will get the grand bargain on deficit reduction that repeals the Bush tax cuts along with $4.5 trillion in spending cuts. We have to have that deal. Our deficits are killing us and our economy. I know this community is full of folks who think you can't tax your way out of ecoonomic problems. But our country enjoyed a great economic run in the Clinton years and repealing the Bush tax cuts will simply take us back to the tax regime that was in place in those years. I hope and pray we can get that grand bargain done now that the President has been given four more years.

The other thing that yesterday's election makes perfectly clear is the rising power of the Hispanic community in our country. Their signature issue is immigration reform. So hopefully we will get relief on that issue now. The idea that we can and should close our borders to those who want to work hard and make a better life for their families is abhorrent to me. It is downright unamerican. We need to open our borders to those who want to be hard working citizens of our country and we need to legalize those who have been working hard and acting like good citizens in this country for years.

The economy is on the mend. The recovery is the slowest we have had after a recession in many many years. My partner Albert is doing a series of posts on why that is. I highly recommend them. Our economy will continue to expand in the coming years if we take control of the deficit and stop piling debt on top of our economy. We can bring manufacturing jobs back to the US. We can bring service jobs back to the US. We can build on the entrepreneurial spirit of our country and we can compete on a global scale if we just put our heads down and work at it. And it would be best to do that together.

My favorite image of the entire campaign is the one of Gov Chris Christie and the President touring the ravaged Jersey shore together. That was dropping our differences and coming together in a time of need. We must have more of that in America. And after last night, I hope and pray that we will.

We've witnessed the most expensive presidential election contest in history. If you don't live in one of the eight to ten "swing states", it didn't feel like much of an election. I did not see one commercial for either side. But friends who have been in Ohio tell me they have been bombarded for months. Well that's the electoral college for you.

But regardless of whether you live in a swing state of not, I urge everyone to go out and vote. I plan to do that bright and early this morning on my way to work. I have no idea how crowded the polls will be so I am going to leave extra time.

Like much of America, I find it hard to be enthusiastic about either choice this morning. My vote will be a vote against Romney and the GOP more than anything else. I don't subscribe to the GOP's social views and I don't subscribe to the idea that you can fix the fiscal mess without asking those like me who have to the means to do more. I am hoping that once their legislative strategy of "keeping Obama to four years" fails, the GOP will meet the Democrats in the middle and find common ground to deal with the messes that all of our elected officials have been entrusted to solve.

I have thought a lot about the Kid's advice to pull the lever for Gary Johnson, but that doesn't work for me. It's a two horse race and placing the lever for anyone else is a waste of a vote. And I take the job of electing a President too seriously to waste a vote like that.

But regardless of how you feel about Romney, Obama, or Gary Johnson, I hope that all of you take the time today to go out and vote. Our system sucks in so many ways, but it is our system and as citizens we have a responsibility to engage in it. Today, that means voting.

I'd like to tie together two posts and make a final point on Sustainability.

In my first post for the Sustainability class, I wrote:

Clay Christensen talks about this kind of thing all the time. Big company executives are asked to calculate an return on investment (ROI) on the investments they want to make. If the ROI isn't greater than some minimum hurdle, the company doesn't make the investment. And so along comes a smaller competitor who makes the investment and they eat the big company's lunch.

ROI is not the right framework for companies to evaluate investments. ROI is for the wall street folks. They will use it to decide if they want to invest in your company. But when you make investment decisions in your company, don't use the tools that wall street uses. Use the tools that animals use. Survival instincts. What will it take to ensure that your company is around in ten years, fifty years, 100 years? That's how to think if you want to stay in business.

And then the man himself, Clay Christensen, went and wrote a post for the NY Times yesterday which I highlighted in yesterday's What I Am Reading post. Clay wrote:

So we taught our students how to magnify every dollar put into a company, to get the most revenue and profit per dollar of capital deployed. To measure the efficiency of doing this, we redefined profit not as dollars, yen or renminbi, but as ratios like RONA (return on net assets), ROCE (return on capital employed) and I.R.R. (internal rate of return).

Since this is called MBA Mondays and we are supposedly teaching a MBA style curriculum, I want to emphasize this point. Do not use Wall Street tools to evaluate investment decisions in your companies. Use the tools that animals use. Survival instincts. What will it take to ensure that your company is around in ten years, fifty years, 100 years? That's how to think if you want to stay in business forever.

But Clay's post for the NY Times yesterday makes a broader point. If the folks who allocate capital in our society – venture capitalists, hedge fund managers, mutual fund managers, etc – are using IRR, ROCE, RONA, then they are going to allocate capital to companies that are making efficiency oriented investments, not empowering investments. And our society will continue to be awash in capital with no game changing  empowering investments that create new industries.

Clay suggests that we measure our returns in "dollars in dollars out" and forget about time, " profit as dollars, yen or renminbi". That's they way I was taught the venture capital business back in the 80s. Cash on cash, dollars in dollars out. That's what matters. If it takes a decade or more, who cares? The slow capital approach.

So if MBA Mondays is a school of business, then I hereby outlaw IRR, RONA, ROCE, from our lips. We aren't going to teach those tools and we aren't going to talk about them either. We are going to talk about making money the old fashioned way. In gobs and gobs, but slowly over time, with our survival instincts fully engaged. Let's hope others do the same.

A Capitalist's Dilemma by Clayton Christensen

The Money Quote:

The answer is that efficiency innovations are liberating capital, and in the United States this capital is being reinvested into still more efficiency innovations. In contrast, America is generating many fewer empowering innovations than in the past. We need to reset the balance between empowering and efficiency innovations.

The Doctrine of New Finance helped create this situation. The Republican intellectualGeorge F. Gilder taught us that we should husband resources that are scarce and costly, but can waste resources that are abundant and cheap. When the doctrine emerged in stages between the 1930s and the ‘50s, capital was relatively scarce in our economy. So we taught our students how to magnify every dollar put into a company, to get the most revenue and profit per dollar of capital deployed. To measure the efficiency of doing this, we redefined profit not as dollars, yen or renminbi, but as ratios like RONA (return on net assets), ROCE (return on capital employed) and I.R.R. (internal rate of return).

 

The Return Of The Capital Intensive Startup by Albert Wenger

The Money Quote:

Historically startups were capital intensive because they had to spend a lot of money to build the product and bring it to market before they were able to generate revenues.  Now it seems that everyone believes in network effects and the capital intensity comes from trying to build the biggest network faster than the competition.  The use of capital has thus shifted to customer and/or supplier acquisition or maybe more generally towards network growth.

 

The Network Effect Isn't Good Enough by Nir Eyal and Sangeet Paul Choudary

The Money Quote:

Creating a network effect is not what it used to be. Today, stored value created by the users reinforces the power of the network effect to retain users and grow market share. This dynamic makes creating user habits all the more important as investments of stored value only occur through successive passes through the user experience (see Nir’s previous article and video).

With the portability of the social graph and the fall of upfront costs to join a network, companies must leverage new ways of acquiring and retaining users. Business models that leverage a network effect plus stored value, hold the keys to the kingdom.

 

Show Me Your Badge by Kevin Carey

The Money Quote:

One of the most important functions of college degrees is signaling knowledge and skill to potential employers. Yet degrees and certificates often do a poor job of communicating detailed information about graduates. Grade inflation has steadily obscured the meaning of G.P.A.’s, and there’s no easy way to know what someone who got, for example, an A-minus in Econ 206 actually learned. A badge, on the other hand, is supposed to indicate specific knowledge and skills.

Stack Overflow, an Internet forum with 1.4 million registered users, awards members “reputation” points and a variety of badges based on answers to questions posed by fellow computer programmers. Some members devote hundreds of hours to writing and editing posts that are judged by the Stack Overflow community to display high levels of expertise. Tomasz Nurkiewicz, an Oslo software engineer and one of only 88 users to earn a “Legendary” Stack Overflow badge, writes, “I received numerous job offers from people who either saw my profile with reputation and all the badges, or were particularly impressed by one of my answers.”

About a dozen years ago, the Gotham Gal and I purchased a townhouse in Greenwich Village and did a gut renovation on it. Down in the basement, we built a large data room. There were racks and racks of equipment in this room. There was a home audio system with mp3 servers. There were network attached storage devices for family photos and videos. There was even an exchange server that I had taken from the offices of Flatiron Partners which ran our mail and related systems. It was an impressive room that would raise oohs and aahs from geeks who like that sort of thing. When we sold that house in 2007, we decided to decommission all of that equipment and put everything into the cloud.

The home audio system became Sonos units connected to Rhapsody, last.fm, and a number of other cloud based music systems that were available at the time. The family photos and videos went into cloud based file storage systems. The exchange server was scrapped and we all got onto Google Apps.

I thought of that room when we went back to visit our building on Tuesday in the aftermath of the storm. Our basement was filled with the Hudson River and I shivered to think about that townhouse data room filled with water to the ceiling. Of course that never happened. But what if it did?

We do have a data room in the basement of our building which was filled to the ceiling with water this week. But that data room mostly has network switches, routers, cable and DSL modems, and patch panels in it. We have redundant data networks in our home. When we get our basement cleaned up and dry, we will pull all of these switches, routers, amd modems out and replace them with new ones. And we will be back up and running. Because all of our systems are now up in the cloud. And I know they are operating fine. Because all week while we have been displaced from our home, I have been accessing all of them from our friend's home.

But it goes even deeper than that. For the next couple months, the Gotham Gal and I and our son will be living somewhere else. I have a home office that for over twenty years has had a windows desktop machine running Quicken on it. I am a bit obsessive about keeping good financial records and files. I thought briefly this week, "how am I going to manage all this stuff while we are displaced?" But then I remembered that we moved everything to Quickbooks Online a while back and I can make any place my home office because my data is in the cloud now.

And this applies to our portfolio companies as well. One of the companies I work with went down this week because their primary data center was flooded and has not come back online yet. Their engineering team worked pretty much around the clock to move their primary application to Amazon's cloud so they could get back up and running. As the CEO and I were emailing about this disaster, I mentioned that one good outcome of all of this is that our application is now redundant. We can run it in a data center and/or the cloud. Which of course is a good thing.

Whether it is a company or a family, moving your applications and your data to the cloud is a great disaster preparation effort. Most companies deal with disaster planning and redundancy when they "grow up". But many families do not. This week was an eye opening experience for me about the value of putting your applications and data in the cloud. We did that a while back and it has made being flooded and displaced a lot easier. I cringe to think about what would happen if we had replicated that big data room in the basement of our building. Thankfully we did not.

Lost in the crazy week that we are having in NYC is that fact that Kickstarter went international this past week. On Wednesday, Kickstarter announced that projects in the UK were now live on the site.

Folks from around the world have always been able to back Kickstarter projects, but until this week project creators had to be US residents. This is largely a payments issue, but there were a few other factors at work.

The good news is now that Kickstarter has gotten a payment system of its own live in the UK, it can more quickly roll out project creation status to other parts of the world. Payments is not something that you can do globally all at once. It is something you have to roll out country by country.

Here are a bunch of open projects from London. Maybe you'll find one to back. I backed this one because I'm a fan of time travel fiction.

Related articles

Kickstarter Now Live in the UK

Kickstarter Finally Goes Live for UK-Based Projects

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Kickstarter goes live in the UK