"User-First" Client Acquisition

I built the simple framework below to help me think through the enterprise product conversation happening yesterday.

A B2B company could find itself in one of four situations.  The goal is to be in the top right quadrant (good sales talent, good product quality) so that you can simply accelerate what you’re doing.   But the most interesting to me – and the one that I think will be the fastest growing – is the top left quadrant: when you have a good enterprise product but little or no sales talent.  I’ve seen more and more startups come along that have super cool products but no enterprise sales experience or talent.

The old fashioned solution to this problem would be to hire, partner or find an experienced distributor that could move product for you.  But largely because of what I think is an increasing hesitancy among early stage companies to over-invest in sales & marketing, there’s a ‘user first’ strategy that seems to be gaining traction.  Companies like Yammer are providing value at no cost to individual users but charging the company for “premium upgrades”: system integration, security, admin rights, etc.

At its core, “User-First” seems like a no-brainer: get employees to use your product and love it so much that they demand their companies purchase the upgrade.  But like most things, the challenge may lie in the details of the sales process; i.e. how does this approach align with a potential client’s buying process?  Good B2B salespeople have adapted their process to match their prospects’ buying cycles.  And in my experience the buyers like the process, control, security (and bureaucracy) that these cycles allow.

Products that decide to go “User-First” will have to learn these details and adapt their upsell process to fit in neatly with institutionalized buying cycles.  If they can’t do that well, “User-First” will simply be a fancy lead generator and sales talent will continue to be a requirement for B2B success.

Never Underestimate the Network

Chris Dixon likes to say that the next big thing will start out looking like a toy.

Some good examples are companies that are building networks on the web.  In the beginning, many web services can look like they’re serving relatively frivolous needs.  Sharing photos or music, booking reservations, writing reviews, playing games, shopping, etc.  It seems that most of the popular web services currently aren’t filling critical human needs and solving critical human problems.

But what all of these companies are doing is this: they’re building huge networks of individuals connected by common interests.  And the services that capture the critical mass of users in any given space are in the best position to begin to start to solve the more important problems of that space.  Many problems can’t be solved on the web until a strong network is built on the web

Facebook is a good example.  Today, it seems that they’re filling a somewhat unimportant need: connecting friends and providing entertainment (allowing people to essentially kill time).  But by building a platform that does these few things better than anyone else, they’ve built a network that is almost impossible to match or displace.  And it is this network that provides the foundation that allows web services to solve far more important problems.  I would bet a lot of money that ten years from now Facebook will be solving problems that we (and the founder) haven't yet imagined.

In short, the point of this post is to say be very careful of dismissing any web service that is building a network as just a toy.  It’s likely that they’re simply undershooting, or haven't fully realized, the full breadth of their users' needs and the problems their network can solve.

Talk to Everyone

Over the last several weeks I've been lucky enough to talk with at least a dozen founders of web startups.  It's fun to hear their passion, ask them challenging questions and talk about where they see their products and companies going.  The thing that they all have in common is that they love to talk to about their businesses.  This is a key component of success in business.  Talk to everyone.  It reminds me of an experience I had earlier in my career. Several years ago when I was working with a biotechnology startup we we were looking for a commercial application for a diagnostic device that we were developing.  One of the promising applications was to measure levels of e. coli in meat.  We believed that we held a market advantage in two areas:

1. We could measure these organisms more accurately; specifically, we could reduce the number of false negatives (i.e. if the meat was tainted with e. coli, we were more likely to catch it)
2. Our tests were significantly quicker; they didn't require incubation, we could do a test in four hours versus the standard 10 hours

We flew out to Kansas to meet with a potential customer, a large meat processor.  We took a tour of their plant, talked to them about our product and everything seemed to be going great.  They were interested in the device, it seemed we had identified a pain point that we could address.

But that night, after a few drinks and a lot of steak, we began to hear a much different story.  It turned out that the beef companies were actually not interested in reducing the number of false negatives -- because it would increase the number of positive tests.  And when there are positive tests, they have to shut down the plant, send people home and clean the entire line.  This is extremely costly to them and they didn't want any more line stoppages than they already had.  This seemed counter-intuitive to us.  If the company let meat with e. coli out their doors and someone got sick, they'd be in big trouble.  Surely they were interested in more accurate testing, right?

Not exactly.  It came down to the law of small numbers.  From our contact's perspective, the odds that the e. coli in the meat would survive the ride to the distribution plant and then the ride to the supermarket and then the ride to a customer's home and then the 5 or 10 minutes on the customer's 500 degree grill was extremely unlikely.  Frankly, it wasn't a problem worth really worrying about.

Further, the time advantage we were excited about wasn't all that valuable either.  We learned that the plant works in 8 hour shifts, and as long as the meat was tested and ready for the next shift, 10 hours was fine with them.  Our time advantage was a 'nice to have' not a 'must have'.  And in order to truly win in this business, our product needed to be a 'must have'.  In short, by talking to the right guy, we found that we didn't have a market for our product.

The insight we gained from our trip to Kansas wasn't easy to get.  We had to fly out there and talk to a real insider, off the record, to determine that we didn't have an advantage.  And that's really the moral of this story...when you're working on a startup, talk to everyone that you possibly can.  Insiders, outsiders, friends, family, users, anyone that will listen.

You'll be amazed at how much you learn from bouncing ideas off of other people.  So often, businesspeople get burnt because they just don't know what they don't know.  Talking to everyone prevents you from getting burnt.

A Daily Deal Bubble?

I was watching Michael Lewis on Charlie Rose the other night talking about his new book and the European debt crisis. I was most interested when he was talking about Iceland and their recent currency bubble that led to the collapse of all three of the country’s commercial banks.  He was explaining that, at one point, it got so bad that 30 year old fishermen that had never had another job outside of fishing were literally walking off of boats and into banks to take jobs trading currencies.  

When do you know you have a bubble?  When you have fishermen trading currencies for your country’s largest banks.

This leads me to the question of local daily deals.  Is this industry experiencing a bubble?  Is there too much investment?  Is it setup to fail? 

It’s hard to tell.  But take a look at this short list of companies that have built daily deal programs for their customers in the last several months. 

• BlueCross BlueShield Association
• NBC
• Time Warner Cable
• 95.5 KLOS (a radio station in Southern California)
• The Boston Globe
• Car & Driver Magazine
• Intuit
• Target 

For many companies this isn’t a huge investment and there are some synergies between their core business and daily deals; as an example, radio stations can use their existing sales force to sell a local deal as an add-on product for their advertisers.

But when health insurance providers and cable television companies are entering the space, it begins to feel a bit like a fisherman working the currency desk.  

My bet is that a correction is coming to the deals space.  The only question is -- when should we head back to the boats?

Going Mobile

I had some interesting discussions last week around mobile application development.  One thing that’s interesting about new and fast growing channels like mobile is that they cause entrepreneurs to develop products to serve the channel, rather than to build value and serve the user.  That is, businesses build apps to build apps, rather than build “products” that truly address critical unmet needs. 

For mobile to work, you must have a core proposition that works (very often, that proposition has very little to do with mobile). 

I built the following framework outlining when I believe web services should go mobile: 

1. More Exposure and Engagement: you have a product that works now on the desktop, you want people to engage ‘on the go’.  Action: build a mobile friendly website.
2. Better as an app: your desktop product doesn’t work well in a mobile browser due to site layout, widgets, flash issues, etc.  Action: build an app that gives users all of the functionality of your desktop site on their phones.
3. Must be an app: your product value proposition doesn’t work on the desktop (e.g. it requires geo-location, phone ‘bumping’ etc.).  Action: build an app and a desktop site to support user engagement.

Insulting Steve Jobs

I'm on a Steve Jobs kick lately; last week I wrote about how someday there may be statues of him all over the country. I came across this great video of him responding to an insult from someone in the audience at the 1997 Apple Developer Conference, just after he was renamed CEO.  If you listen closely, you'll notice that in his response he does far more than respond to the heckler.  He  lays out Apple's philosophy on product development that would fundamentally drive their outrageous success for the next 15 years.

Start with the consumer.  The consumer must drive the technology.  It's five minutes long but definitely worth watching.

[youtube http://www.youtube.com/watch?v=FF-tKLISfPE]

Disruption, Illustrated

I came across a two very neat examples of disruption over the past few weeks. The first is from Digital Music News and graphically depicts music distribution by medium since 1981, it's fascinating to watch cassettes and CDs grow exponentially and then disappear just as quickly.  Depending on your browser you may need to slide your mouse over the image to turn it on.

The second is from Chris Dixon's blog and illustrates recent disruption in the video game market.  Below are images of the instructions to play Angry Birds versus the most recent version of John Madden Football, arguably the most successful video game for the last ten years.

Over time the incumbent often builds complexity into its product to satisfy customers, to give them more.  But at the same time that complexity can leave new customers behind.  This creates the opportunity for a new entrant like Angry Birds to swoop in and provide a far more easy to use product for the majority of consumers.  At last check Angry Birds had sold more than 200 million downloads.

Angry Birds

Madden NFL 12

Leading Metrics

A couple weeks ago Techcrunch had a post titled, Don't Be Fooled By Vanity Metrics. In it, Eric Schonfeld calls out the difference between what he calls "vanity metrics" and "actionable metrics".

Vanity metrics are things like registered users, downloads and raw page views. These metrics, he says, are easily manipulated and don't necessarily tie to the metrics that really matter. Actionable metrics are the ones that matter. These are things like active users, engagement, revenue, profits, etc. He argues that startups should publish the actionable metrics from the start, instead of trying to fool the press and others with impressive, less meaningful numbers.

I'm always very, very careful about trusting any metrics that come from a startup and are published on a technology blog, vanity or otherwise. Entrepreneurs are very good at stretching or morphing the truth to tell the right story (they're probably not being written about in Techcrunch if they're not good at this). And in an interview with a tech blogger there's little fear of consequences from not telling the truth and big upside from stretching it. That said, if the metrics are accurate and honest, I think both vanity and actionable metrics are critical for any startup to track and manage to.

Instead of vanity and actionable, I've always referred to these metrics as leading and lagging. Leading metrics are indicators that have a strong correlation to more important lagging metrics. The simplest example of this is to apply leading and lagging metrics to a salesperson. For a telemarketer, number of dials is a leading metric for the lagging metric sales. If it takes 50 dials to get a sale, you can track the number of dials a salesperson is making to have a good sense of what sales will look like in a given period. If your salespeople aren't making enough dials or some of them aren't converting at 50:1, then you can make changes quickly. In web startups, leading metrics can be things like: registered users, unique users, emails sent, email response rates. Lagging metrics are closer to $$$ -- things like transactions, revenue driving clicks, number of revenue driving users, and ultimately, revenue.

Determining the right leading metrics to track is critical for any company. It helps management get a sense of how individuals, groups and the company as a whole is performing in real time, allowing for far more intelligent strategic decision making and tactical management.

Songkick

I like to say that there are two things that motivate customers: fear and greed. 

Songkick, a web service founded in 2007, addresses a very simple and common fear: not knowing when one of your favorite bands comes to town.

I signed up for the service a few weeks ago and I love it.  It has a very slick and simple UI/UX.  You simply “track” your favorite bands and the site builds your own personal calendar of events.  It then makes recommendations for similar acts that you should track.  You can also import your favorite artists from Pandora, Last.fm and iTunes.  One thing I’d like to see them add soon is a second calendar that’s full of recommendations that you haven’t yet chosen to track.  That would be great for nights when you just want to see some live music but one of your favorites isn’t performing. 

Once you’ve setup your profile and created your own calendar, the system will send you an email when a show from one of your favorite bands gets scheduled in your area (I've already received a few of these emails and it's pretty exciting when you see one in your inbox).

In short, Songkick has executed very well on an awesome idea.  If you like live music, you should definitely take a few minutes to sign up.

Twitter Business Model

The other day Sarah Silverman tweeted a somewhat vulgar complaint about American Airlines.  I'd post it here but it looks like she deleted it from her Twitter account. Her complaint regarded a connecting flight that was cancelled after a 7 hour layover.

Following her tweet, a short discussion ensued between Sarah and her followers about the poor service they've experienced from American Airlines.

As of today, Sarah has 1,692,580 followers.  To give you a sense of her reach, that's approximately the same number of people that will see this 17,000 square foot Walgreen's billboard that rises 340 feet above Times Square in a 24 hour period.

Imagine someone posting a complaint about your company on this billboard?  The damage that can come to American Airlines and other consumer businesses from Twitter is significant.

I know several companies (particularly airlines) are already using Twitter to communicate with frustrated customers.  I believe there’s a huge B2B revenue opportunity here for Twitter.

If I was American Airlines, I'd pay a lot for a Twitter application that would integrate into my CRM or customer service software where I could view all of my @mentions sorted by the number of people that follow the Tweeter.  If American Airlines is able to turn Sarah into a happy customer and can get a positive Tweet from her, they’ll get 17,000 square feet of Times Square advertising for $0.  A pretty good investment to make in one customer.

I have no idea if Twitter is already doing this or if they're considering B2B CRM as a future revenue stream.  But it seems to me that there'd  be a significant revenue opportunity if Twitter was able to effectively integrate their reach, data and users into a company's CRM systems and process.

Milo

I wish I had known about Milo when I wrote this post back in April of last year.  Milo's mission from their site:

Milo's mission is to track every product on every shelf of every store in real-time. We see ourselves as building a bridge between online and in-store commerce that empowers the consumer to access the best of both shopping worlds—all in one place.

Basically, with Milo, you can check in-store inventories and find the best in-store prices online.

Bridging the gap between offline shopping (a trillion dollar industry) and the internet is an enormous opportunity that Milo was able to take advantage of.

They started just a few months before I wrote this post, completed their Series A round in November of 2009 and were acquired this month by eBay for $75 million.  Nicely done.

Groupon at $6 billion?

Rumor has it that Google is going to buy Groupon, the premier localized “deal-of-the-day” website, for an astronomical $6 billion.

If a $6 billion valuation for a company that started less than two years ago that competes in an industry with almost zero barriers to entry seems crazy, it’s not.

Groupon has 30 million subscribers.  Assuming that Google is paying a 10x revenue multiple for this business, they’re estimating revenue of around $600 million per year or $20 per user per year.

Using some reasonably conservative numbers, the revenue model they're using to justify such a valuation could look something like this:

• 30 million emails sent per day
• 5% click-through rate
• 10% buy rate
• $10 revenue per buyer
• 365 days per year

That gives Groupon revenue of $547 million per year, just short of the 10x Google valuation.

My math includes a lot of assumptions and has a lot of moving parts so I’ll be the first to admit that there’s plenty of room for error.  But it does show that this valuation isn’t as crazy as some are suggesting. 

With all of that said, there’s quite a bit of risk to Groupon, specifically in the form of competition and acquisition and retention of merchants.

One report said that in Boston alone there are already more than 50 Groupon clones.  The business is extremely easy to setup; just hit the streets with a media kit, write some catchy copy and some simple code.

And the reports of unsatisfied merchants keep coming.  With all of their competition, their rumored 50% revenue share is not sustainable.   I’m also told that their first significant national deal with the Gap -- 50% off with no restrictions -- will never happen again.

Regardless of whether Google is paying too much or too little for this deal, this should be a fun one to watch.