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From hardware maker to content platform

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It is the received wisdom that hardware suffers from low margins but platforms, where everything from apps to content are sold in an online marketplace has much higher margins. That is why so many startups I see are trying to become platforms. But it isn’t easy, as platforms by their nature are two-sided marketplaces, where the middleman has to satisfy both buyers and sellers while also maintaining the platform software and paying hosting and bandwidth cost.

By what’s at least one order of difficulty greater is transitioning from a hardware maker to platform provider, a feat recently achieved by streaming TV set-top box maker Roku. The article on The Motley Fool by Rick Duprey, Roku’s Transition Is Paying Off in a Big Way lays it out. The sub-title tells the story:

Moving away from being simply a hardware maker could have been risky, but instead it is becoming hugely profitable.

Other tech companies — like GoPro and Snap — that have attempted the same maneuver and stumbled hard can only look on in envy. TiVo said it would stop selling hardware altogether last year.

Roku has now become a content aggregator. Its advertising supported Roku Channel has quickly become one of top channels on Roku devices, based on hours streamed. Much like iTunes, Roku aggregates video and sells the set top box.  Roku ended 2019 with over 27 million active accounts, having added 8 million last year alone, which led to the number of streaming hours rising 9.2 billion year over year to 24 billion.

Roku has adopted the Gillette razor business model of practically giving away the device to sell the ad-supported content. Fourth-quarter gross margins on players were just 2.4%, a 75% decline from the year-ago period. Margins for its platform business, on the other hand, stand at around 75%.

There are two lessons for founders in the Roku story: one, yes the margins on contents and software are far greater than those on hardware, and two, while it’s best to build a platform from day one, Roku has demonstrated that hardware makers can transition into platform providers given the will and the means.

 

 

What founders can learn from Facebook’s Cambridge Analytica scandal

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The Wired article 15 MONTHS OF FRESH HELL INSIDE FACEBOOK by  and   has some interesting lessons for founders in how to make, or not make, decisions.

The key decision Facebook was faced with in the aftermath of articles in The Guardian and The Times was how to respond to articles exposing how Facebook had enabled first Ted Cruz, then Donald Trump, to use the private data of Facebook users by Cambridge Analytica to attempt to influence voters.

To the amazement of those inside and outside of Facebook there was no response from Mark Zuckerberg, Cheryl Sandberg or anyone else at Facebook for five days! Dead silence. Here’s how Sandberg explained their lack of response to the article’s authors:

“Those five days were very, very long,” says Sandberg, who now acknowledges the delay was a mistake. The company became paralyzed, she says, because it didn’t know all the facts; it thought Cambridge Analytica had deleted the data. And it didn’t have a specific problem to fix. The loose privacy policies that allowed Kogan to collect so much data had been tightened years before. “We didn’t know how to respond in a system of imperfect information,” she says.

There are two very important aspects to this explanation. While Sandberg is no doubt one of the most able and experienced executives in the worldwide tech industry, to the best of my knowledge she has absolutely no startup experience. And that becomes clear in two ways. First, I was taught that no decision is a decision. That things move fast in a startup, you will be faced with many decisions. You will get some wrong. That’s ok. What isn’t ok is to fail to make a decision, as was the case with Sandberg. Secondly one of the two big differences between a startup and a large established company like Facebook is that big companies can survive a failure, startups may not. But more importantly, leaders of startups must get used to learning how to respond in a system of imperfect information. I’m amazed that somehow either Zuckerberg never learned this in his meteoric rise or was overridden by Sandberg – but both of them should have had that founder skill of decision making with less than perfect information.

You may never run a social media company, and you may never have to deal with the type of self-inflicted crisis Facebook was err… faced with. But there’s no doubt you will be faced with making big decisions for your company, even the the mot du jour, existential decisions. And certainly you will be faced with making these decisions with imperfect information. Better get used to it … now.

 

 

 

 

Users may discover unforeseen uses for your application

 

Screen Shot 2019-04-20 at 6.27.40 AM.pngThere are a lot of articles about Pinterest now given that they have just gone public. Like many ideas, I’d seen it before. In fact I advised a company that created a digital pinboard many years before Pinterest, but they confined it to use by teachers for use in the classrooms to post images related to what they were teaching! And of course there had been other predecessors to Pinterest, if you just looked at their main benefit as being the ability to save web sites of interest.

But Ben Silberman’s insight was four-fold: one, value for users was not simply saving web sites of interest; two, with the rise of smartphone photography people were becoming more and more interested in images, not text; three, people are driven by aspirations and the web is full aspirational images: fashion, art, consumer electronics, cars, etc;. and finally very large numbers of people like to collect things, but cost is a limiting factor for most people. But with Pinterest there was no cost, images are free! Pinterest, like Houzz, became a site for collecting one’s aspirational objects.

These benefits drove the first wave of growth in Pinterest, but what I believe happened is that users discovered higher order uses for Pinterest. Erin Griffin in her New York Times article I.P.O. Day for Pinterest and Zoom Ends With Shares Sharply Higher does a great job of elucidating the primary current use cases:

Pinterest is not a social media app for interacting with celebrities or broadcasting one’s life, the company said in its I.P.O. prospectus. It is meant to be personal instead. Its 250 million monthly active users, or pinners, use the site to plan important aspects of their lives, including home projects, weddings and meals.

The focus on personal growth and planning, rather than on comments and interactions with others, has helped Pinterest sidestep much of the bullying, toxic behavior and disinformation that have plagued other social platforms in recent years.

Thus Pinterest went from a nice to have (pinning stuff you pined for) to need to have (a great tool for personal growth and planning); from vitamin to pain pill.

So what is the takeaway for founders? If you can succeed in building an application for enough users the users themselves may well discover new uses for your app or platform you may never have envisioned, uses that add tremendous value to your business.

 

 

 

How to take advantage of the serial-position effect

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I came across the what are called the primacy and recency effects in an article on fake reviews.

Consumer psychologist Cathrine Jansson says some sellers might be aware of what is known as the primacy and recency effects. These theories state that people tend to remember the first and last items in a series better than those in the middle.

A little web searching turns up the article Serial-position effect on Wikipedia. “Serial-position effect is the tendency of a person to recall the first and last items in a series best, and the middle items worst.”

Clearly from the serial-position effect your first and last slides are by far the most important in your entire pitch deck.

What if you only had two slides to convey your entire message to investors? What would be the message on each slide? The graphic? Should these two slides be the first and last slides in your deck? What I’ve noticed is that most entrepreneurs do not pay enough attention to the very first slide in their deck, which typically just lists the name of the company and often the contact information for the founder (which belongs on the last slide, not the first!)

Clearly you need to spend a lot of time on that first slide. That should include coming up with a tagline that summarizes your product in a short and punchy line of text. Secondly you need an impactful graphic that supports your tagline. Try several variations on this slide until your mentors or advisors feel you have nailed it.

Your last slide needs to neatly summarize your pitch supported by a graphic. You may want to repeat your tagline as well.

When presenting give both your first and last slides more time on screen. Speak to those slides! Work on exactly how to open your presentation, perhaps with a venture origin story and how to close it, with why your product will be hugely successful. Keep in mind when doing a pitch at a contest or demo day when you may be one of many presenters that your last slide may stay up on screen until the next presenter gets to the stage. Take advantage of those few seconds with a killer closing slide.

One final point. As I tell my mentees, most people can only remember three things from a presentation. Due to the serial-position effect; the primacy effect will bias them to remember the message from the first slide, the recency effect will bias them to remember the message from the last slide. What other message will all those intervening slides convey that will be memorable?

 

Questions to help you become investor ready

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I’m a strong proponent of the Socratic method and as such I’m always on the lookout for good questions to ask, especially for the founders I mentor. The Forbes article 15 Key Questions Venture Capitalists Will Ask Before Investing In Your Startup by

I’m going to simply refer you to that article along with a couple of posts of mine. If you can successfully run the gauntlet of all these questions you’ll be ready to sit down with an investor, with confidence!

Here’s another set of questions, Investors questions to address and the post Are you investor ready?

But rather than simply view answering these questions as a one-time exercise I recommend you convert them into a to do list, as it will be highly unusual for a zero-stage founder to have good answers for every question. For example, if you haven’t launched your product you should make sure to arrange for customer testimonials and if you haven’t built a set of KPIs (Key Performance Indicators) there’s a major milestone for your venture. For that one I’ll refer you to my post 12 KPIs you must know before pitching your startup.

 

 

Every company’s dream – to become a platform!

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I admit I haven’t kept track of all the startups I’ve mentored over the past nine or ten years, but a sizable percentage of them aspired to become platforms. And when you look at the success of Amazon, eBay, Netflix et al, why not?

But it surprised me to read the ZDNet article by  entitled Most companies aspire to be platform providers, and APIs will get them there. And the sub-title summarizes the article neatly: A majority of IT managers see their companies evolving into platform providers, and see APIs as critical to making the connections. The basis of the article is a survey of 350 IT managers released by Cloud Elements which finds 62% of organizations aspire to become platform providers to integrate with partners, maintain stickiness with customers, or find new revenue opportunities.  Platforms are two-sided marketplaces where buyers meet sellers. Even Apple plays the game with its App Store where independent iOS app developers sell their wares to everyone with an iPhone or iPad and pays 30% of their sale for the privilege. And Google does the exact same thing with Google Play. In fact you can’t turn around in the crowded Internet ecommerce space without bumping into a platform or two.

But as I counsel my mentees, two-sided marketplaces are subject to the dreaded “chicken and egg” problem: buyers won’t come to a platform without [consumer goods] [apps] [movies] [tv shows] [games] [etc.] and developers of all this stuff have no interest in a platform that can’t boast serious traction with buyers of their goods. So how do you prime the pump and supply either chickens or eggs or even both to jumpstart your platform?

The answer I always get from founders is “social media” – the marketing marvel that will drive both sides to meet at the platform. Unfortunately the days when upstarts like Amazon and eBay could go from startup to rocket ship in a two-sided market are probably long past unless you can find a small enough niche, as many founders have done by putting together specialized professionals, like graphic artists, with customers, such as companies too small to have a graphic arts department. Another way of looking at two-sided market is to consider the platform providers as simply brokers, a business model that probably goes back centuries. One that many are familiar with are real estate brokers, who put together landlords with tenants or owners with buyers, taking a commission on their sales.

The problem with this model, as Amazon will attest, is that margins are razor thin. In fact, without the totally counter-intuitive genius move by Jeff Bezos to act as a platform for other sellers of goods who compete directly with Amazon, it’s unlikely he would be the richest man in the world today. He wrote in his recent annual letter to shareholders that Third party sellers are kicking out first party butt. Badly. How?

Why did independent sellers do so much better selling on Amazon than they did on eBay? And why were independent sellers able to grow so much faster than Amazon’s own highly organized first-party sales organization? There isn’t one answer, but we do know one extremely important part of the answer:

We helped independent sellers compete against our first-party business by investing in and offering them the very best selling tools we could imagine and build.

So Jeff has given you founders the secret sauce to running a platform: you must add value beyond simply handling the financial transaction. Though as eBay found, even handling the financial transaction wasn’t easy, which is why they ended up buying PayPal.

In fact, I would highly recommend that founders to aim to create a platform study Mr. Bezos’ annual shareholder letters (and anything else they can find about the success of Amazon).

As quoted so neatly from Alex Moazet of Applico: Platform businesses don’t, to use a common phrase, own the means of production- instead, they create the means of connection. In fact if you look at Facebook they too can be considered a platform business as they are the broker between consumers who swap their personal data for free access to friends and family in exchange for being subjected to a barrage of advertising based on that personal data. Google and Facebook both make money by pairing user-generated content and personal information with advertising.

Going back to the title article this post is based upon, APIs can act as the means of connection. Those IT managers who were surveyed saw APIs as critical to making the connections needed to attain this new business model, opening up online assets to partners, and vice-versa.

The key success factor for platform providers is adding value to both sides of the business connection: demand and supply.  Once you start thinking about platforms you realize you probably are a customer of many of them, such as Uber, which connects drivers with riders by supplying both with state of the art location-based apps and a frictionless means of payment.

So if you want to grow up to become a platform provider my best advice to you is to find a crusty old marketplace with lots of friction, where you can successfully enter by providing value to both sides of the economic transaction. While I won’t go so far as to say bootstrapping a platform is impossible, gobs of VC money can help you spin up the two-sided marketplace. But what investors will be looking for will be what is your sustainable competitive advantage? What tools or APIs or whatever will you be providing to attract, engage, and retain not just one set of customers – the buyers, but two sets, buyers and sellers? A lot of VC-backed marketplaces attempting to be the “eBay of lab equipment” or ‘eBay or X” are buried in the startup graveyard because simply facilitating a sale isn’t enough, which is why you see Uber re-engineering itself as a logistics company and its competitor Lyft attempting to go deep as a consumer transportation company by getting into bikes, motor scooters, and probably soon, skateboards.

 

 

Are business plans back?

 

Screen Shot 2019-04-12 at 10.24.13 AM.pngI was very pleased to see business plans die out, replaced by pitch decks. IMHO no one reads, and even fewer people actually read business plans! By the time these plans were completed they were obsolete. They tended to be more fact than fiction and were usually accompanied by voluminous Excel spreadsheets showing the classical hockey curve of revenue growth.  A giant waste of time for all involved!

But the Business Insider article by This serial founder thinks pitch decks are passé. Here’s what his startup used instead to raise $45 million in new funding argues that pitch decks are so over, replaced by a “pitch memo.” The pitch memo sounds exactly the wordy business plan of yore. But Parker Conrad, who founded three venture-backed startups — SigFigZenefits, and, most recently, Rippling, argues that a pitch memo is far more effective than the typical pitch deck. He clearly understands that pitch decks are meant to be presented, not read and thus must leave out a lot of detail that is provided on the fly by the presenter. So yes, pitch decks rarely standalone, in fact they shouldn’t. As I’ve written previously, founders need two versions of their decks: one to enhance their standup presentation, they other meant for sit down reading by an investor. I encourage founders to start with the highly detailed version, then edit it down for presentation usage.

There are two advantages to the written narrative, one is obvious, it can contain a lot more detail; the second is much less obvious and relies on a deep understanding of how VC firms work, which obviously Parker Conrad possesses. Investment decisions are made at weekly partners meetings – usually on Mondays – where the partners who are seeking an investment by the firm need to convince their colleagues it’s a good investment for the fund. By providing a “pitch memo” the founder can make it very easy for the partner championing their cause to write the memo to their partners for the firm’s investment decision meeting.

Riplings’ pitch memo is included in the article. It’s only 11 pages long and basically covers the same topics as a pitch deck, just in much more depth. In other words it looks just like the “business plans” that were de rigeur in the VC game back when I was raising money in the last century.

But while Parker Conrad has had great success raising money with his pitch memos, I’m not convinced pitch memos will replace pitch decks for two reasons: one, it’s so much easier to get feedback from friends and mentors on a pitch deck than on an 11 page memo, and two, people don’t read! The safer play is just to send a more detailed pitch deck that can be read by your target investor instead of taking the risk that 11 pages of dense text will not only get read, but not get passed around the firm either.

So I’m not convinced by the Business Insider article that founders should take the time to do both a pitch deck and pitch memo. These things change often and trying to keep both of them in sync is not easy – simpler to keep two different version of a deck in sync.

But that doesn’t means founders can skimp on detail – they need to foresee all the questions an investor may ask in the detailed version of the deck they email to them.

To recap my recommendations made previously here’s what you need in your search for capital:

  • A short executive summary of your business plan – one page or less with one eye popping graphic
  • A great subject line for the email you send to prospective investors
  • A body of text for the email that is so compelling that the recipient will open the attached file – which is your one page business plan
  • A pitch deck designed to be used as part of a presentation
  • A very detailed version of the deck to be emailed to prospective investors

With these documents in hand you can contact are large number of investors. But keep in mind the goal is not to give a presentation but to engage an investor in a conversation. Pitch decks and pitch memos are a means to an end, not an end in of themselves.