The Big 4 Internet Companies

Someone asked me the other day if I could only invest in one of the Big 4 internet companies (Google, Facebook, Amazon and Apple), who would it be?  I didn't even hesitate: my answer was Amazon.

Without doing a true valuation analysis (I plan to do one in the coming days), here's my simple reasoning:

Facebook: overvalued due to the hype and enormous amount of un-monetized users; my sense is that with the lack of a coherent, long term revenue strategy the public markets will bring their valuation down to earth a bit when they IPO.

Google: using Warren Buffet's investment thesis of "only invest in what you know", I'm afraid of Google.  They're in too many businesses where they haven't been successful, and in too many businesses in general for me to wrap my head around.  I don't like to invest in what I don't know.  Google now has such a wide array of products that they have a website titled "what do you love?" where you can search any word -- any word -- and they'll come up with a listing of products that serve that word.  Try it and you'll see it what I mean.  They're in a lot more businesses than many conglomerates (GE is down to thirteen).  I'm not saying there isn't upside for Google, but their business is much too difficult for a casual investor to grasp.

Apple: I haven't read the Steve Jobs biography yet but I've read enough excerpts and heard enough interviews about him and it to know that he was the heart and soul of that company.  The company succeeded when he started it, crashed when he left and came back like wildfire when he returned.  See a post I wrote about his success a while back.  Surely his unfortunate passing is built into their share price at this point, but there are certainly enough reasons to believe that Apple's outrageously impressive growth curve may have peaked.  And without Jobs at the helm, they're tough to bet on.

Amazon: a fantastic management team with a long, long track record of success competing in a variety of synergistic verticals.  Amazon is steadily entering businesses that they are setup perfectly to dominate -- self-publishing being one of the most promising.  They've finally smartened up and have reduced the price of the Kindle massively, setting them up nicely to dominate digital media alongside Apple.  Amazon is so well run and at the early stages of so many fast growing businesses that I think it's a no-brainier to put my money behind that team.

So there's my very amateur, 100,000 foot view of the Big 4.  I'm planning to write a post on valuations (including those of the Big 4) in the coming days so more on this topic soon.

A Viral Marketing Framework

Uzi Shmilovici had a good post on Techcrunch yesterday on the 8 different ways one can do viral marketing.  I’ve written in the past how I don’t believe you can “do” viral marketing. But I do believe you can do a few things:

1. Build a product or service with ‘network effects’ so people are intrinsically inclined to tell their friends: (e.g. the telephone has a network effect because it’s a worthless product if your friends don’t use it -- it's naturally viral)
2. Build a product or service that’s so awesome that people are inclined to spread the word
3. Make it really easy for people to spread the word about your product or service
4. Use gimmicks to get people to tell their friends.  I don't mean 'gimmick' in a bad way but there are tactics you can use that give you a temporary bump in new customers.  Though they're not truly viral marketing activities as the increase in customers doesn't continue to spread past a few degrees as a real virus would

That said, Uzi's 8 ways of doing viral marketing are interesting.  I'd encourage you to read his post before reading on.

To help me think through his approach, I've applied his 8 methods to my framework above and included an example of each:

1. Network Effects

(1) Inherent Virality – your friends must use the product for it to work (example: the telephone)

(2) Collaboration Virality – the product is more valuable if your friends use it (example: Amazon’s ratings & recommendations system)

2. Make an Awesome Product or Service

(8) Pure Word of Mouth Virality – people tell other people because the product is awesome (example: most of Apple’s products)

3. Make it Easy to Tell People

(3) Communication Virality – include your tagline with the product (example: tagline in Hotmail’s email message stating, “sign up for a free Hotmail account”)

(5) Embeddable Virality – include a link back to your product in your content (example: link to Youtube in embeddable Youtube videos)

(6) Signature Virality – include a “powered by” link even in white labeled products (example: Intel logo on laptops)

(7) Social Virality – allow users to broadcast that they’re using your product through social networks (example: Turntable.fm forcing users to attach their account to their Facebook account)

4. Gimmicks

(4) Incentivized Virality: give users a benefit for telling people about your product (example: Living Social’s me+3 = free promotion)

As I've said before, viral marketing should be a mostly passive activity -- it's an output of building an amazing product or service.  So while all of the above are worthy activities, most of your energy should be spent building that amazing product or service that people can't wait to tell their friends about (see #8 above).

So True

Saw this comment under Chris Dixon's post, The enterprise: buyers versus users.  His comment was in response to a commenter's theory that SAP is a mess internally. So true.

A Couple More Thoughts on Enterprise Tech Versus Consumer Tech

Two other quick thoughts on this topic... Why is enterprise tech behind consumer tech?

1. Slower development cycles: B2C companies can innovate and release much faster than B2B (often B2B product changes need multiple approvals), "MVP" as a development strategy doesn't go over well with big companies

2. Many large companies (especially banks) are still on old operating systems and web browsers -- many top banks still use IE6.  This requires enterprise providers to dumb down their products and allows for less innovation.  I don't think Facebook or Youtube are even operational in IE6

The "I'm Here" Rationale

In the offline world, once you get a customer into your store there’s generally a good chance that you’re going to get them to buy. 

They took the time to drive to the store, park, get out of the car and walk inside.  There’s a negative feeling of wasted time if they don’t buy something.  So if your store doesn't have the best price or best selection the consumer is still likely to buy: “well, this shirt isn't perfect, but I’m here, I might as well buy it".  I’ve felt this way many times as a consumer.

This feeling doesn’t exist online; if it does, it exists to a far smaller degree.

The cost of leaving an online store is less than a second (just close the browser window).  The "I'm here" rationale doesn't work.

This is an important insight as it disrupts many traditional conversion methods used by marketers.  For example:

1. Loss leaders don’t work online: if you get someone to your site with a great deal and they miss it, they won't buy something else, they'll go somewhere else
2. Impulse buying -- a huge offline revenue driver -- is almost impossible to replicate on the internet; you’re not stuck in a checkout line, the line moves as fast as your internet connection 

Of course there are multiple other examples.  Like so many other things, the internet is disrupting old fashioned conversion tactics and putting the consumer back in the driver's seat.  A good thing, in my view.

Usage Metrics

Most web services closely track their site usage and site conversion.  A "user" that "converts" equals $.

In e-commerce, you could describe it like this: get people into the box (drive usage) and do well for them when they're in the box (drive conversion).  

I thought I'd take a moment to clarify a few of the key terms associated with usage metrics in e-commerce as there's often some confusion around how these metrics are defined.  In a subsequent post I'll talk about some of the key conversion metrics. 

Usage Metrics:

• Registered User: a new user, or a user that came to the site for the first time in a given period and accepted terms of use and (generally) provided the site with their email address
• Total Registered Users: sum of all new users
• Unique Users or Unique Visitors: the number of individual people that came to the site in a given period (only count 1 visit per person)
• Sessions: the number of total site visits during a given period (count all visits for all people)
• User Activity: the % of total registered users that visited the site in a given time period

To keep it simple, when evaluating a web service's usage I really only want to know two things: 1.) how many total registered users do they have and 2.) what % of those users visit them each month?

Generally, I find that usage is pretty healthy if around 25% of registered users are coming back to the site each month, though this can vary widely depending on the vertical.

"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.

Consumer Tech is Better Than Enterprise Tech

Chris Dixon asked this question in a blog post yesterday: why does most enterprise technology feel like it is a decade behind consumer technology? 

It's a great question and one I've thought about quite a bit.  I see so many sub-par enterprise products that are able to succeed simply because they have a strong sales force.   The enterprise sales model is such that one good salesperson can sell thousands of "users" just by selling one person on the product.  And because of high switching costs within a firm, these products are often very difficult to displace.

I posted my answer to the question in a comment on the post and Chris was kind enough to write a blog post about my comment this afternoon (the shout out is much appreciated).

It's nice to see that more and more companies are taking a "user first" approach to client/user acquisition.  If this approach becomes the norm, it should weed out the weaker technologies and allow enterprise tech to catch up with the slicker consumer tech we use today.  

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.

Healthcare & The Web

One of the things I'm a bit obsessed with is how we can better use the web to drive down the cost of healthcare.  With that in mind, I saw a post from Fred Wilson (the VC/Blogger) last week talking about healthcare and healthcare investment.  His simple point was that his VC firm hasn't found a large number of companies to fund in the healthcare space that fit their investment thesis.  In his words:

"But we haven't seen many large networks of engaged users emerging in healthcare. "

As usual, his post started a wave of comments -- 394 last time I checked.

Because I'm very passionate about this topic, I weighed in with my two cents and I thought I'd post my comment here (see below).

Over the next few years I expect that we'll see more and more companies using the power of the web (social, gaming, mobile, engagement, incentives, etc.) to address the healthcare problem.  And as a a result we'll see more and more capital (early stage and late stage) flowing into this space.

Evil Plans

I've always believed that most business books never should have been written.  Instead, the ideas in the book could have been summed up in a couple of blog posts or a long-form article.  I prefer to digest business content in the form of a blog rather than a book.  Too often business books are stuffed with superfluous examples and repetitive fluff in an effort to turn a somewhat simple concept into a 300 page, $14.99 book.  Like most people that are apt to read a business book, I don't have the time or the desire to read a lot of fluff.

Hugh Macleod, the blogger, artist, and writer must share this opinion.  He's an excellent business writer.  He writes a bit like he's paranoid that the reader is going to get bored.  He knows how to write books for people that are busy.  He makes short and simple points (often with a real life example) and moves onto the next thing.  He almost forces you to read faster than you normally would.  He did this extremely well in his first book, Ignore Everybody: and 39 Other Keys to Creativity.  Ignore Everybody was one of the best business books I've ever read.  It's full of insightful ideas that are communicated concisely, without the fluff.  I wrote a post on Ignore Everybody a while back where I called out some of the best tidbits.  I highly recommend reading Ignore Everybody.

Over the weekend, I finished reading Hugh's latest book, Evil Plans: Having Fun on the way to World Domination.  While not as insightful as his first, it's just as inspiring.  In short, Hugh asks his readers to develop and act on an Evil Plan.  What's an Evil Plan?  Hugh sums it up well in this line from the book:

"It has never been easier to make a great living doing what you love. But to make it happen, first you need an EVIL PLAN. Everybody needs to get away from lousy bosses, from boring, dead-end jobs that they hate, and ACTUALLY start doing something they love, something that matters. Life is short."

The book is written with a sense of urgency that suggests that the writer has some personal interest in getting you to move on your plan.  Now.

The book is a great reminder that with nothing but a laptop and an internet connection, we all have the power to shape our lives and careers and link up what we do each day with what we love and are passionate about.

If you're looking for a bit of inspiration to get off your butt and start moving on what you love, I'd recommend picking up a copy of Evil Plans.  It won't be a waste of time and I guarantee that it'll at least make you challenge whether or not you should be working on what you're working on.

eBay's Mobile Growth

This week TechCrunch reported that eBay is projecting $4 billion in Gross Sales Merchandise (GSM) for 2011 -- that is total sales volume through their marketplace, not revenue.  That's 100% YoY growth in that metric.

I'd estimate that they'll do about $80 billion in total GSM this year, which means that ~5% of shopping on eBay will be done through their mobile applications.  Mobile commerce is becoming real.

The article also notes that they sell 2,600 vehicles through their mobile application each week.  Mind boggling.