Questions to Ask When Joining a Venture Fund

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Before I joined Launch Capital, I spent some time with my future manager on how we would work together. Joining a fund in many ways is like joining a typical company, but in many ways it is definitely not. I asked him a battery of questions which are unique to working for a fund versus any other company. Since many people are looking at venture capital as a career, I thought I’d post some of the questions I posed to Launch Capital before joining. Here they are:
Fund Strategy and Philosophy
1. What is the fund term? When does the fund go raising more money? How will I be involved in that process?
2. How is the return to me calculated? Is it a carry on the profits? How are returns distributed to the LPs, and eventually to me?
3. What kind of deal terms do you present when leading? How is it different at early stage and your later stage investments?
4. What is your message to entrepreneurs? The deal terms will reflect part of that.
5. How much money would I be responsible for deploying as a goal and in how much time?
6. Are you ok with deploying money into exploratory startups or would you rather not? Or do you only want to look for big opportunities (or as big as they seem at the time)?
7. What kinds of startups do like investing in and why? What kinds do you want to stay away from and why? Are there any investment theses I should be aware of? Can I invest with my own investment theses?
8. What is your typical due diligence process? Can you send me a list of docs you ask for? Do you have a documented process i can take a look at? Am i personally responsible for due diligence for all my sourced deals? Do you send all of this to your lawyer for review?
9. What research resources are there? Do I have to do all research myself?
10. Would I be signing docs on behalf of the fund or would someone else?
11. How much autonomy do I have? How fast can i really pull the trigger? Is there any approval process necessary at all, however small? Is there a partnership and partnership approval process to work with?
12. Once we determine “yes we will invest”, what is the typical process from that point forward and how fast can it be? Who has control of wire transfers of money? Is there a control system there (ie. someone still must approve all wires)? I also assume that early stage is going to be faster than later stage?
13. Are there any co-investment rights and if so, how would that work?
14. What are the expectations on failure rate? Early stage failure rate can be higher than the typical VC failure rate. If we’re going to go full bore starting with early stage and with larger checks, I don’t want to have some sort of $$ shock if expectations are not set right.
15. On the other end of the spectrum, are expectations set correctly regarding return of capital timeframe? If we are playing more long term and with bigger checks, the timeframe could be 10 years or more. Or do you have a timeframe as to when you’d like funds to return?
16. Do you have a detailed strategy statement and mode of operation for the fund?
17. What is the current theses that the fund invests in? What are the philosophies that are used to determine investments? Are there any areas that you focus on or stay away from?
18. Is your intention for me to go for board seats at early stage whenever the opportunity comes up or should I be less aggressive? For later stage, will this be different/same?
19. Do you have any restrictions on me taking on advisorships? If I take one on, in whose name do I put in under? Can I put it in my personal name? Is it ok to take on advisorships of companies we do not invest in?
20. Does the fund want my pro-rata investments?
21. Is there any notion of vesting of the carry at all, based on my time of service with the fund?
22. Are there any kind of common VC-like fund terms i would be operating under, like clawback provisions and the like?
23. What are the terms if I leave the fund?
24. What kind of accounting type reporting do you do to your investor? Early stage reporting can be challenging to get specific and accurate info. What is the resource we can use to do that or would I be responsible for that myself?
25. How often do you present to your LPs? Quarterly? Other? How involved will I be in this presentation?
Management and Operations
1. Can i get an intro to your other team members? I’d love to chat with them about their experience working for the fund, if they are willing. it would also seem good that they get to know me also and make sure they are ok with me joining the team…?
2. I am pretty much self managed these days. but who would i officially be reporting to? If so, will there be any kind of performance metrics I would have?
3. Are we indemnified when we work for you?
4. I see you have a blog up. Can i cross post some entries from my blog to yours?
5. Can I get an office somewhere? What is the price range?
6. How often do you get the team together to strategize and update? Do you have any regular update calls/mtgs now and if so, how often?
7. What is expensable and what is not? Is there an expenses budget I work within?
8. How does the group work together? What is the interaction style? How does collaboration work?
Benefits
I included questions on Benefits as benefits in a small company are often much different than joining a large firm with a lot of resources to pay for employee benefits. I think a detailed look into what kind of health insurance and other benefits is important here.
1. What are the benefits?
2. What are the details of the health insurance?
3. Is there a 401K?

I’ve Joined Launch Capital

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To some of you, the news has been trickling out but now it’s time to do a real announcement: Yes, I’ve left the ranks of angel investing and joined Launch Capital, a seed stage fund based out on the East Coast.
I met Launch Capital about 3 years ago when we both were invested in two Bay area startups. I got to know the managing director, Elon Boms, very well through the years. We found we had mutual agreement on investing philosophy and approach, and about a month ago, he offered me a job as West Coast Director of Operations, doing seed stage investing on the West coast where I am mostly based, but also covering internet-tech and mobile in NYC where I am often.
I am excited to see my career go in this direction. As an angel investor, I discovered that I loved working with startups and helping them and their products grow. Now, at Launch Capital, I could do more of the same but with more resources and under a prominent brand. While I enjoyed being an angel investor, I think that it is much more preferable investing in startups with the ability to bring more money, resources, and help to bear than just what I can bring individually.
If there is anything I’ve learned from angel investing, it’s that angel investing is hard – easy to have fun, but hard to make money. As individuals, we can only bring so much to help except for those individuals with exceptional resources and backgrounds; the majority of us may have enough capital to invest but have limited capability to help beyond that capital. But now I can work with startups with the ability to bring more capital to bear than just my own quickly dwindling resources.
To be totally open and frank, I hit that tough place being an angel investor: I’ve been actively investing for about 5 years now but the economic crash and lack of exits has made deployable cash harder to come by. I had contemplated potentially stopping angel investing for the time being until the opportunity at Launch Capital came along, for which I am eternally grateful so that I could continue to work with startups.
Likewise, I found angel investing to be sometimes a lonely place. I have worked with others in the past, but each of us, either angel or fund, had very individual reasons for investing (see my post Why I Hate Social Proof). However, now, I am glad to be working with an experienced team of investors with a singular mission, all to invest smartly for Launch Capital. Over the last 4 weeks I have come to value their feedback and help on my deals, which has sharpened up my decision process greatly.
To all you entrepreneurs: I look forward to working with you in my new capacity at Launch Capital.

What’s the Real Problem with Your Startup?

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After I wrote my post Talk About the Problem, Not Just the Solution, I’ve had a series of pitches all characterized by the same thing: a singular focus on how wonderful the product is.
Unfortunately, I’ve got news for you all you MIT/Stanford/super-genius engineers and hot shot designers:
Product development is a commodity.
In today’s day and age, you can build just about anything. There are very few things out there being worked on that really require rocket scientists. But most of them don’t. Most products and services have plenty of models to copy from. Or if you don’t have something to copy, we have all these well defined processes to find solutions such as customer development by Steve Blank, as documented in his classes and in his book The Four Steps to the Epiphany, or Eric Ries’s Lean Startup principles.
So if that’s true, building product is not the problem. In fact, anything that is under your direct control is not a problem for your startup. And that’s why I’m not interested in seeing your product just yet; I want to hear about how you’re going to solve all those problems that you have no control over.
Every startup has approximately 1-3 things that will make or break their business at early stage and very, very rarely is one of them the ability to build the product (by the way, if it is and if it’s something that doesn’t require rocket scientists, you’ve got bigger problems than you can imagine, if you can’t even get your product built).
For example, I’ve recently met some local startups. They all showed nice product design but the real problem lay in how the heck where they going to scale customer acquisition, if there customer was every local merchant down the block, in every city, in every state in the US?
Now that’s worth talking about! Because if you can give me a convincing scenario where you may have a novel solution to this problem where so many have failed, your startup actually has a chance. But if you don’t have a great answer to that problem, your beautiful product is not going to magically leap into the hands of local merchants, and certainly not fast enough to get you enough revenue to survive as a company.
Usually it’s pretty straightforward to figure out what those 1-3 key problems are. If we can get past those, then we should take a look at what you’re building. Assuming you’re doing all the right things, I’m guessing that whatever you build is probably going to be good enough to start, or to get there after you launch.
But until we get past those 1-3 key problems, I’m probably going to keep interrupting you, derailing your pitch, until we do. Or if we can’t get past those key problems, I think you need to go back and figure those out or else it is unlikely that I will invest.

What I Really Mean By “Souring on Internet-Only Startups”

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People who know me have heard me say in the last several months that I’ve “soured on internet deals.” Unfortunately, this has been misinterpreted as “Dave has stopped doing internet deals completely.” But this is untrue.
Internet is in my blood. I’ve been working on internet businesses since 1995 – that’s nearly 16 years of thinking, designing, launching, breathing, living internet. I can’t escape it and don’t want to.
I *will* do internet-only startup deals. But the problem is that the current environment makes it difficult for me to justify investing in internet-only startups. This is because:

  1. Competition for internet-only startups is created too easily. Too often I meet an entrepreneur who already has competitors; how do I know that he will be the one who wins?
  2. Competition stifles growth potential which can be deadly to an early stage startup who is watching their bank account grow less by the day while revenue and customer growth is slowed by the other similar startups attempting to sign up the same customers.
  3. Competition creates confusion in the customer base as much of the company’s differentiation is very incremental or small. To a customer who is inundated with so many similar services, how do they tell who to buy services from? This limits the growth of startups which again can be deadly at early stage.
  4. Extending on 3, not enough startups are working hard enough to differentiate exponentially versus incrementally. In today’s crowded marketplace, it is not enough to be just a little better; you have to be exponentially better.
  5. New angel investors entering the market are inexperienced but also they have no choice but to invest in what is out there today. This fuels the existence and survival of competition in the marketplace when these startups should have been pushed harder to develop exponential differentiation instead of simply incremental.
  6. Valuations are inching upward, while the quality of the startups is dropping relative to the conditions of the marketplace. When valuations rise above what I think the risk potential of a startup’s idea, it’s time I know that I should not play in the internet-only space. Now we are seeing notes without caps, which is the beginning of the end for why angels should be putting up early risk capital and getting little in return later when the note converts into a large up round with a venture capitalist.
  7. Hiring is a nightmare across the board. Lack of resources limits a startup’s ability to scale. I have seen many startups who want to do more but simply cannot hire fast enough to do more.
  8. SEO and viral don’t work any more. I’ve seen too high a dependence on trying to drive traffic in these ways, but too many people are SEO-ing in the same way, and consumers have way too much stuff to be viral about.

However, that does not mean I won’t invest in internet-only startups. It just means that they have to pass harder conditions. These are conditions like:

  1. Little or no competition.
  2. Understand what it takes to compete in today’s world and have some sort of advantage. Arguably, in 2011 now, people are competing now with competitive advantages in design/user experience and customer acquisition. This may also mean that you must raise a ton of money to: a) outlast your competitors, who will die because they couldn’t; b) out-market everyone else by spending money to buy customers since free methods aren’t as effective (ie. SEO) or too difficult (ie. viral). The world moves fast; potentially in a few short months, these factors could change.
  3. The idea must be *totally* unique. That means if I search around Google or iTunes app store, I won’t even find near competitors of yours. If it is improvement over a previous product, the improvement must be exponential, not incremental.
  4. Disruption of an old world industry is always attractive.
  5. Some kind of technical advantage is also always attractive.
  6. I must have an affinity, interest, and/or expertise in the area. If I’m going to spend time on your startup for a long time, it might as well be something that I think is cool.
  7. They must have a world dominating vision and show unwavering determination to take over the world. We must both agree that their vision is a world domination vision. I want the entrepreneur to aim for a lofty goal that is game changing, and not just some tiny goal.
  8. Another lofty goal: I want to them to figure out how to make $100MM revenue per year…or more.
  9. Ideally, I see valuation at exit for the company in excess of $100MM. Otherwise, it will be hard to make money for my overall portfolio and not just on this one deal, given that many others in my portfolio will fail.
  10. The entrepreneur must exhibit great entrepreneurial qualities, be tenacious, adaptable and not quit, because yes it is freakin’ hard to win in today’s internet-only startup world and I don’t want them to give up but instead it energizes them and ramps their creativity further.

I may, therefore, say no to investing in internet-only startups a lot more, maybe even 99.99% of the time now as I adjust my bar so high for an internet-only startup to pass. But I am simply reacting and strategizing to the realities and demands of today’s marketplace, AND the fact that I invest to make money, versus other non-money making reasons.

Who knows where the world will be in another year or two? Perhaps my bar will shift again. But if you have an internet-only startup which satisfies my new super-hard critieria, I would love to meet you.

The Dangers and Opportunities of Platforms [UPDATED]

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UPDATED: Added another possible suggestion to What Can You Do?
Recently, we saw a flurry of discussion surrounding Apple and their new subscription bounty. So many cries of “foul!” and “unfair!” – it was evident that many people had never taken a deep look at platforms, the people behind them, and why they come into being in the first place.
The First Platform
The first platform I can remember was when Google launched their maps API in June 2005. How cool was that! Before Google, maps data was nearly impossible to get hold of, and certainly not in a form that made it easy to access. Maps data was huge; it took a lot of resources to host and to maintain. It was expensive to get hold of – who could cut a deal with a maps provider at early stage? Even big organizations couldn’t justify the cost of getting that data versus the uncertain return it would bring. Maps data took a lot of computation power to fully access; you had to know how to write programs to access maps data efficiently and quickly.
In an ingenious move, Google took their maps data, which powered their own maps product, worked it out with the maps providers contractually, and then released it to the world through an API. This spawned an amazing flurry of innovation, more than they could have achieved internally. They created a maps platform on which others could build and innovate without the added difficulties of getting the maps data at all, and maintaining it.
Not only did this spawn innovation on their own platform, it created a flurry of platforms launched by every company who had data to share, on the hopes that they could get developers to do something interesting with the data they had.
Why Platform?
Now that Google (assuming there wasn’t another company that did it before Google) paved the way, people had proof that this was a great thing to do and could justify positive effects worthy of their time and cost.
Google showed that companies can open up their data to the outside for the following reasons:
1. They have some valuable proprietary data that nobody else has.
2. They want to extend the value of their data by leveraging outside resources.
3. They want to innovate on that data and want to utilize the creativity of the external developers to do that.
4. They want innovation but can’t do it internally for any one or more of reasons we all could come up with, with respect to big organizations and even small.
5. They want to create another monetization stream, now that Google and others have shown that this is possible.
6. If someone innovates in a way that is hugely profitable and brings an enormous amount of customers and value to the company, that opens up the possibility of bringing that capability into the company either through acquisition or blatant copying.
7. By the way, all this has positive effects on the customers and users of the original platform as they can enhance their experience with the activity via the new innovation that arises.
This is, of course, dependent on the company actually having resources to:
1. Do the development and make the platform available for outside consumption.
2. Create a backend to support the platform and be able to support enough access to it to support a large ecosystem of developers.
3. Create a monetization scheme around the platform.
4. Set up on-going support and maintenance of the platform. Continuing support is necessary to make sure that platform access is not interrupted or corrupted.
5. Setup educational resources to teach people how to develop for the platform.
Opportunity Beckons!
The announcement of a platform comes usually with lots of excitement and interest.
Wow! Data that was previously hard to get hold of, now easy!
Developers can innovate and make money! They put together pitch decks and get funded by investors!
Even the company benefits from the press, who covers this explosion of developer studliness and the emergence of a new ecosystem and rampant innovation.
Eventually, as developers get on the platform, the company makes money by charging for access to the platform. If the company is smart, it would have planned for many avenues of monetization. In many instances, many cannot be planned for. Herein, lies the dangers of developing for platforms…
Dangers of Platforms
While opportunity knocks for both developers and the company, people start forgetting about a crucial concept, which is the most often misunderstood or forgotten concept about platforms:
A company creates a platform solely for its own benefit first, before all else.
I cannot think of any company that just puts a platform out there for the good of the world, and is willing to just pay the bills for providing this service without monetizing anyone using it. Wikipedia seems to be getting an API together so I suppose they are the closest to an independent organization that claims to be non-profit. NYC opened its data to the world and held a competition to see who could create the best applications using that data.
But other than non-profits like Wikipedia and government organizations, for-profit companies create platforms to increase usage, to open up new opportunities, to draw customers, to make more money. Otherwise, how can they justify to their shareholders, budgets, and balance sheets to keep personnel dedicated to developing and supporting the platform?
While a platform may be launched with its services being used for free, at some point this must change. A platform’s owner will eventually, if not at the outset, begin to charge for being on that platform. It will start exerting control through techniques like throttling of data (pay to get full speed and volume access), taking a cut of all money made by anyone on the system, and up to kicking developers who have growing influence and power off the system using a variety of techniques.
All of these facts make it extremely dangerous for any developer to depend solely on a single platform for its livelihood. It’s because you never know when the platform will turn on you. So if you’re going to create a business on someone else’s platform:
Never bank your business on a single platform.
Why is that? It’s because the world has shown that as long as you are small and not a threat to a platform, the platform will let you live on it. The moment you get big, powerful, hugely profitable, and/or influential, the platform will begin to actively work to stifle you up and to the point of shutting you down.
Let’s take a look at what was once one of the most opportunistic platforms: Facebook. Here is a snapshot of a series of events through the history of its apps platform. As you flow through this peek at its history, remember also this essential fact about Facebook which is their relentless focus on the user and keeping users happy:
May 24, 2007
Facebook Launches Facebook Platform; They are the Anti-MySpace
“Facebook’s strategy is almost the polar opposite from MySpace. While MySpace frets over third party widgets, alternatively shutting them down or acquiring them, Facebook is now opening up its core functions to all outside developers.”
After Facebook launches its platform, developers quickly figure out that continuous posting throughout friend’s walls, both legitimate and not, could grow their services enormously by exposing new potential customers to their services. Many grew to tremendous size on these marketing techniques.
Aug 16, 2007
Facebook Takes Action Against “Black Hat” Apps
“The changes that Facebook have made today, while they may inconvenience some application developers, have clearly been done to protect users from spammy tactics that some applications have employed.”
Jul 7, 2008
Facebook Continues War On App Developers. This Week: Super Wall
“Facebook is continuing its war on Facebook apps that push the limits on acceptable user interaction. Last week it was Slide’s Top Friends App, which it briefly suspended. Later Facebook also suspended another popular app, Social Me.
This time they’re targeting Slide’s rival RockYou and their Super Wall application, which tends to have a lot of spammy user content. But instead of shutting down the application wholesale, they’ve simply turned off the viral components of the app – invitations, notifications, etc.
The consequences have been just as dramatic. A month ago Super Wall had 2.4 million average daily users. Today it’s 600,000 and falling fast.”
Those whose services were dependent on a continuous firehose of users and not on their own merits to grow users saw their traffic shut off and many were forced to shut down. But some did figure out how to keep growing within the system, generate huge profits, and then use those profits to further market to users on Facebook via their advertising platform. Enter Zynga.
Oct 31, 2009
Scamville: The Social Gaming Ecosystem Of Hell
“Zynga may be spending $50 million a year on Facebook advertising alone, fueled partially by lead gen scams. Wonder how Facebook got to profitability way ahead of schedule? It was a surge in this kind of advertising. The money looks clean – it’s from Zynga, Playfish, Playdom and others. But a large portion of it is coming from users who’ve been tricked into one scam or another.”
This time also saw the entrance of a clever promotional method pioneered by a company named Trialpay and others like Offerpal, which enticed users to sign up for an advertiser’s service and traded that user signup for credits which could be used in the games. It drove a ton of revenue into the social games running on Facebook and encouraged users to keep signing up for these services in order to get essentially free credits in the games to gain levels and buy virtual goods.
Sep 17, 2010
Social Gaming Market Reaches Its Final Stage…and It’s Not Looking Pretty
“This same cycle is now taking place in social media. When Facebook changed the rules, the early leaders in the space faced two extremely unpleasant realities: 1) Unlike casual gaming, their popular franchises were ineffective at acquiring Facebook audience directly and 2) Paying market rates for audience made their books look a whole lot less pretty. Faced with this challenging circumstance, social game development studios have started taking aggressive steps to remedy their situations, including:

  • Finding buyers as fast as possible before people realize that their growth and maybe even their businesses are not sustainable
  • Leveraging the abundant capital available to try to buy their way out of dependence on Facebook by either acquiring their own standing audiences or by acquiring non-Facebook dependant game companies
  • Overspending on marketing to try to buy audiences to preserve their apparent growth even as their books leak money and their earned audiences decline”

By now, Facebook’s changes and restrictions were growing to point that many companies simply could not survive and were forced to shut down or take other options. If they have enough capital, they attempt a pivot off the platform. If not, they were dead.
Jan 24, 2011
Facebook To Make ‘Facebook Credits’ Mandatory For Game Developers (Confirmed)
“Facebook has confirmed that it is indeed making Facebook Credits mandatory for Games, with the rule going into effect on July 1 2011. Facebook says that Credits will be the exclusive way for users to get their ‘real money’ into a game, but developers are still allowed to keep their own in-game currencies (FarmBucks, FishPoints, whatever). For example, Zynga can charge you 90 Facebook Credits for 75 CityCash in CityVille.”
“Of course, Facebook gets something out of it: they take an industry-standard 30% cut whenever users purchase anything with Facebook Credits. That can add up to a lot of money — we’ve heard elsewhere that Zynga is paying Facebook around $30 million a month for its Credits tax.”
Facebook launched their own virtual currency which they are requiring any developer on their apps platform to use. Direct charging of customers is prohibited, and Facebook receives a 30% cut of all monetary transactions on their system.
What’s a Facebook dependent company to do? Zynga was a lucky one. They were grew so huge that they *could* take their users and leave.
May 7, 2010
Zynga Gunning Up (And Lawyering Up) For War Against Facebook With Zynga Live
In fact, after Facebook began to force Zynga to use their credits, they threatened to leave. They formed Farmville.com and started making motions that it was going to leave and take its audience with them. But, it was also to Facebook’s advantage to keep Zynga on their platform as they were generating an enormous amount of revenue for Facebook. So after a lengthy negotiation, Zynga still remains on the platform, to the delight of users who love to play Zynga games on Facebook, but also paying a significant amount of capital to Facebook, although we do not know the details of how much.
May 18, 2010
Facebook And Zynga Enter Into Five Year Partnership, Expand Use Of Facebook Credits
So far, only Zynga has had enough market power to initiate that kind of negotiation. Every other company has been forced to change their strategy or die.
Will it Happen Again?
There are a lot of platforms and their APIs: older ones like Google, newer ones like Twitter and Foursquare.
You could say that Google search is a platform. Over the years, people have used SEO to drive traffic to their sites. It’s a never ending game to figure out how to get yourself on the top of search results for important terms. Google adjusts the algorithm for best user relevance; companies game the system to get higher up, sometimes being relevant and sometimes to fool users into clicking over in order to monetize them. Even now, companies are in danger of being dependent on Google.
Demand Is Strong For Demand Media IPO
“It’s important to note that Google is changing how it ranks certain websites, including Demand’s network of content. Demand is highly dependent on Google search traffic and no doubt a change in ranking could negatively effect the content farm’s business.”
If Demand Media is to be a true contender in the public markets, it cannot be beholden to another company for its success. It needs to be independent or else it risks being shut down. The markets know this and the short sellers are loading up on Demand Media stock. As of Feb 28, there are 3.21M shorts on DMD, up from 2.68M from the previous month.
Twitter’s Platform
Look at a small piece of history of Twitter’s platform:
September 20, 2006
Twitter Blog: Introducing the Twitter API
Dec 9, 2009
Twitter Spawned 50,000 Apps To Date, Will Open Up Firehose For More
Apr 9, 2010
Twitter Acquires Tweetie
“Unsurprising, because Twitter investor Fred Wilson recently wrote that Twitter developers needed to stop “filling holes” in Twitter’s product and instead build entirely separate businesses.”
When Twitter acquired a mobile app, it put all other mobile Twitter apps in danger. But let’s look at someone who is trying build a business on real-time Twitter data and attempt to monetize it in a way that other Twitter apps have not, to this date: UberMedia.
Why Is Twitter So Afraid Of This Man?
The world suspects that Bill Gross is attempting to aggregate Twitter clients and find a way to monetize the users, which has, to date, eluded Twitter itself.
As a result:
Feb 18, 2011
Twitter Suspends UberMedia Clients For Privacy And Monetization Violations, Trademark Infringement
While I am only hypothesizing here, and the news say that Twitter shut down UberMedia due to policy violations, I am sure that somewhere in Twitter, somebody has noted the growing power of UberMedia and has drawn battle lines in the sand. To me, it was only a matter of time.
And at SXSW:
March 11, 2011
Twitter Drops The Ecosystem Hammer: Don’t Try To Compete With Us On Clients, Focus On Data And Verticals
It becomes official; Twitter clients are Twitter’s responsibility.
And Apple’s iOS…?
So why would Apple’s strategy around iOS be any different, when it comes to exerting control over its developers over time?
The Harsh Realities
1. The launch of a platform can present large opportunities, especially if the platform owner has chosen not to innovate for whatever reason.
2. Small to medium businesses can be built on this platform and the platform allow them to thrive.
3. Over time and as the platform gains users and power, the platform will continue to press its advantage in monetization.
4. If there are any businesses that gain significant influence or power, the platform will seek to limit their influence and power through any number of techniques. This can be any kind of limits in access to the data, to driving more monetization from them, to blatant shut down.
5. As a business owner who is trying to build a business in this kind of environment, it can really suck. You will feel like the world is crashing down around you and are powerless to do anything about it. Feeling powerless and watching all your hard work go down the tubes really sucks. I can sympathize. In my portfolio, the machinations of platforms has already tanked two of my businesses. I’ve learned to not invest in startups who are overly dependent on a single platform.
What Can You Do?
1. Don’t plan on building a business that is dependent on a single platform. Plan early for a business strategy that can be ported to other platforms (ie. a mobile app business that is built on iOS, Android, and Blackberry; ad serving that is on webpages, mobile apps, etc.).
2. You can start by developing for a single platform to gain traction. But move as fast as possible to be not dependent on that single platform.
3. If you’re skilled and/or lucky, you should attempt to build your business as fast and as large possible on the platform. If you can grow your influence and power to the platform, you may be able to have negotiating leverage against the platform in case they attempt to shut you down. Do this before the platform figures out that they should do something about you.
4. If you can, you should build something that is essential to the platform’s customers. This puts the customers on your side in case the platform tries to shut you down.
5. Plan for independence. Can your customers/users be taken with you if you are forced to leave the platform? If so, this makes you less dependent on the platform. Build towards this independence as fast as possible.
6. Build something that continues to add tremendous value to the platform, and hopefully that value is measured in dollars. This has proven to be a way to be exempt from getting shutdown by the platform. An example of a business built on a platform that have been left alone are SEM management companies who are helping Google generate tons of revenue, but their own revenue is independent of gets passed to Google. As long as they do not interfere with Google’s monetization, they really don’t care about how they monetize over and above the rates that Google sets.
7. Leverage PR to your advantage. Write blog posts, talk to journalists about how a platform has destroyed your livelihood. Bad press can be a lever used against a platform’s owner who cares about their reputation in the world.
8. Analyze the terms of service before you start. Make sure you aren’t violating or are close to violating their TOS. Even entering grey areas can put you at risk for shutting down.
9. Don’t develop an improved version of a core service. Just because the original platform owner doesn’t do something basic well, doesn’t mean that they won’t do it better later and supplant you, or shut you down. It may mean that you get acquired (ie. Tweetie), but if there are a lot of competitors, then this can be a single-winner-everyone-else-loses-it-all game.
10. [NEW] Be super-creative and develop a service that is a huge opportunity but also something that the platform owner would never want to do themselves. Then the platform will be most likely to leave you alone (assuming you don’t do something like violate their policies). An example of this is Zynga on the Facebook platform. Facebook will never want to be a games developer, so they will probably never try to do this themselves. However, if you’re great at games development, you can create a big business as Zynga has done. If the platform owner ever wants to enter the space that you’re in, then you’re most likely going to die.
The struggle between the platform’s constituents (users/customers, businesses on the platform, and the platform itself) is a classic fight for market balance. You provide something of value, you find out what people are willing to pay for it, you constantly test how much you can charge for something and adjust to what you think the market will bear. If there is anything you don’t like, then just leave, assuming there is somewhere to go. If there is nowhere to go to, then the platform has all the advantage. But usually there are competitors and a platform has to also work hard to keep customers and businesses on its ecosystem or else they will leave.

Apple Charges Subscription Bounty, Dependency on Single Platforms, Part 2

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The indefatigable @webwright posted some comments to my previous post Apple Charging Subscription Bounty, Evolution of Platforms, Free vs. Paid, Right vs. Wrong. @webwright brought up Pandora, who has tight margins and can’t give Apple 30% of its normal subscription fee without taking a loss on every subscription it gains through the app, via this new restriction.
I guess that I could naively say that Pandora should just raise its subscription fee to incorporate the 30% over and above its normal margin and just tell its user base that it had to do it because of Apple. But pricing is rarely so cut and dry.
I could also just say that Pandora should just give up the iOS platform and go Android, which is still a pretty big market and theoretically should make the company plenty of money. But giving up any market is a tough decision to make, especially when there are entrenched users.
And especially that Pandora is in the IPO line up for this year. In looking at their S-1, it unfortunately didn’t mention what the breakdown was in terms of iOS users versus other platforms. So I don’t know if punting on iOS would be a big deal for Pandora or a loss they could absorb with the growth of other listening platforms.
Still, all my supposed solutions are just the musings of a guy sitting outside of Pandora and not a guy who is in the trenches at a company trying to do its best to make money and ultimately go IPO.
I think my point, though, is this. Let’s say a company was singly dependent on iOS as a platform. I am sure we can point a number of companies like that. To me, this is a problem. That’s because when you build a business solely on one platform, you incur the risk of having that platform ultimately be able to jerk you around or even sink you.
Let’s go back to my example of the electric company in my preceding post. The platform on which that electric company depends is fuel. How much it charges for electricity is highly dependent on fuel costs. If oil prices go up, so does our electricity bill. But yet we all roll with the fact that this is true and we may grumble but we don’t go on Twitter and rage about how my heating bill is up a few bucks because those damn oil cartels in the Middle East raised prices again.
Still, at some point, oil prices might rise so much that we might do something. We might even refuse to use electricity from that company and get it elsewhere: home solar cells, energy from one of those other green utilities, etc. That company could go out of business because it was dependent on oil prices with which it has zero control.
Take a look at Facebook apps and the ecosystem it first created, which allowed a myriad of businesses to flourish. Then, they went and started closing down the viral mechanisms that allowed so many games and apps to gain users. Yes, it did do so to clamp down on bad practices, but it also affected legitimate companies and stifled their ability to grow. Many startups either left the app ecosystem or just outright died.
Nowhere else did dozens of companies feel the pain and death as a result of their dependence on a single platform.
Last year, Zynga almost left Facebook but had built enough value and power against the platform to leverage a 5 year deal. It also realized that its future could not depend on this platform, so it started to break away in a variety of ways, forging a partnership with Yahoo!, MSN Games, and also working on Zynga Live.
Zynga was fortunate enough to have grown so large and so quickly before the platform could entirely sink the company. They had gotten enough users who loved their games that they could now just take those users somewhere else. So Zynga shows that you can use a single platform as an early growth mechanism, but it also shows that you better hedge your bets against the day when the platform turns against you.
Apple’s iOS is a platform which has spawned a ton of new businesses. Many of these are thriving in the iOS platform. However, Apple did not create the platform so that other businesses could just flourish out of the goodness of their hearts; they created it so they could make a ton of money and benefit its users who would in turn buy more Apple products and services. It is easy to forget that and just feel entitled that the platform should just exist for the benefit of those working in it.
Therefore, businesses whose livelihood are dependent on one platform as at extreme risk of that livelihood being screwed with by the platform owner and as history has shown, they could even die by the machinations of the platform owner. Companies should be acutely aware of this and work to make their businesses immune to the manipulations of any one platform. If they can, they should strive to create their own platform and jerk other people around instead being jerked around themselves.
So if you were developing on iOS and dependent on subscription revenue, and then Apple comes in and says you gotta pay up 30% or we’ll drop you, you better have a back up plan and execute it fast if you can’t absorb the 30% cost somehow.
On the other hand, if the 30% bounty either kills off enough businesses or makes them leave, such that their users become dissatisfied enough to revolt and leave, then Apple will have to make changes because it needs those users. Facebook doesn’t have this problem – pretty much every user in the world is on Facebook. Users can leave, but where would they go? If they leave, their social graph is still back on Facebook…

Apple Charging Subscription Bounty, Evolution of Platforms, Free vs. Paid, Right vs. Wrong

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My buddy, @LDrogen, tweeted recently:
@LDrogen: There’s nothing unfair about this arangement, it’s like complaining that a store owner on 5th ave has to pay rent, complete bull $AAPL
in reference to recent news about Apple formally announcing they were going to take a 30% cut of any content subscribed to through one of their iOS apps. I retweeted it, because I agreed with him.
But then, my buddy @bmull replied back:
@bmull: @LDrogen do you feel like apple should take 30% of anything (pandora, netflix) subscribed to on a MacBook? How is that different? @dshen
to which, @LDrogen replied:
@LDrogen: @bmull no, only content that is exclusively delivered through their platform and paid for in the store $AAPL
and @bmull then replied:
@bmull: @LDrogen so apps in the Mac app store? If pandora had an app in the Mac app store, they should be required to pay apple 30%? / cc @dshen
Apple’s announcement of the subscription bounty recently sparked some strong emotions and opinions on the net. Many were opposed to Apple charging 30% and felt it was unfair that Apple should force this on everyone. But yet, I was OK with it. I promised @LDrogen and @bmull a blog post on this topic and here it is!
Why I think this is OK crosses many dimensions. I’ll do my best to cover them here:
Evolution of Platforms
If you look throughout history at any kind of platform, there is a starting point from which things evolve. Picking that starting point is critical as it sets the evolution from that point onward.
When people got electricity delivered to their homes, a company was formed to create a big generator and maintain it, wire up the neighborhood and maintain that, and then bring that wire to the home. Somebody had to pay for that so that people could create all this and then continue this service to everyone. Since the dawning of electricity service to our homes, this hasn’t changed. They began charging and so we’re used to that and OK with it.
Had the service been provided by the government, then we might have perceived this service as “free” and then developed a sense of entitlement that the government should provide us with these services along with other services. I quote the word “free” because we really don’t get governmental services for free; we still pay taxes and that pays for these services which are seemingly for free (ie. police, fire, elected officials). But changing from that to making the people pay at some point would probably result in some uproar as all of a sudden, people were paying for these services out of some other part of their bank account at a different time, when they were paying for it all along (whether the government would lower taxes in response to this change would be a whole other discussion).
When Microsoft developed DOS and then Windows, they didn’t charge for the presence of software products and services which used their operating system. Not charging here set the tone for software on operating systems for decades to come. Because they did not charge in the beginning, I argue no other operating system could either or else they could not compete against the proliferation of Windows. However, their only two real competitors were Mac OS and versions of UNIX, and of those two, only Mac OS *could* have had the mission of charging as UNIX was a community driven product who probably never would have considered charging anyone to put software on it in the first place.
It’s pretty obvious, I think, that if Apple had charged a bounty to place products and services on their operating system, their ability to gain any kind of share relative to Microsoft over the years would have been hampered severely. Hence, their decision competitively was to not charge or else they would have died years ago.
But platforms evolve over time from their beginning points based on competitive forces and what people are willing to pay for.
Free vs. Paid
This is where free versus paid comes in, as an element for competition and a general desire of the people to not want to pay for anything.
The internet is infamous for taking something we paid for and giving it away for free, disrupting and pissing off older established businesses and creating a ton of new ones. For years, we paid for news in newspapers and magazines on newsstands and then all of a sudden we could get the same stuff for free (to the consumer)!! Wow!
Free then became a competitive tool for new startups and businesses to enter the market, forcing those before them who charged for products and services to go free or die…or at least find a new way to monetize. After all, who could survive by just giving everything away for free in perpetuity? Born was the word ‘freemium’ and strategies of using free to get customers, destroy your competitors (and potentially themselves in a nuclear fury of mutual free destruction), and maybe…just maybe monetizing your customers later., assuming you survived that long. This is the inherent problem of free, which is people who provide the product/service must eventually get paid to support themselves; very rare is the group of people who can provide time/effort into providing a product/service for free indefinitely.
Despite that, free is pretty effective at getting customers. This is because I believe that people in general are pretty darn cheap. Nobody wants to pay for anything. In a choice between getting something for free or paying for it, I would bet that free would be chosen near unanimously no matter what the consequences. We are indeed a selfish bunch; welcome to capitalism!
Coming back now to the exchange between @LDrogen and @bmull and Apple charging for subscription fees on its iOS platform:
Can Apple charge?
Yes, of course, they can. They have full control over the platform since they built it and have built controls into software/services which enter into the platform.
Am I OK with them charging?
Yes, I am. I am in the minority on this issue, but I believe that people should get paid for the products/services they provide, whether its software, news, music, or videos or whatever. If I enjoy these services, then I want them to get compensated for it to the level that they can survive and feel motivated and incentivized to produce the best of whatever it is that they are working on. I am totally OK with watching TV shows which I purchase through iTunes. I pay for music all the time. I still subscribe to physical magazines and also read news online that I do not pay out of my own pocket for.
But, I also want Apple to be motivated and incentivized to provide the best platform they can provide. To date, iOS and the hardware it runs on are clearly superior to that of any other platforms out there. Granted, if someone never encountered an iOS device, they would be totally OK with Android or some other similar touch based, app economy platform. They still get the majority of the benefits that was pioneered by iOS. But if you have the ability to experience both platforms side by side, you’ll notice that iOS is just better, sometimes so subtly superior that you may not be able to articulate why. That is the magic of Apple’s user experience and the care and attention they put into making their products not just good enough, but insanely great. And I want the people who create these insanely great products to keep doing it, and so I want to them to be paid and happy.
As long as Apple keeps putting out superior products, I’m OK with them charging.
If they falter, then I believe that people will vote with their feet and their wallets. Faltering can simply mean, “I don’t think you should charge so I’m going to Android, et al.” which is a choice and an opinion. Or someday, Apple will start to build mediocre or crappy products and then we’ll all bolt to someone else who is better. Or if the world evens up on its superiority until everyone is at some new baseline of mediocrity, then we’ll all choose on price since when all else is held equal, the only differentiator is price.
So if you disagree with Apple on this issue, it’s easy; vote with your feet and your wallet and go somewhere else. If enough people vote to go elsewhere, Apple will be forced to change. This also goes for businesses who want users to subscribe. If they don’t want to pay the bounty, then don’t be on the platform. Go somewhere else. You may add to the pressure put on Apple to charge or not charge.
What will the future bring on the charging on a platform issue?
If Apple decided never to charge a subscription bounty, I believe they will never be able to in the future. People get used to whatever cost environment they operate in and hate change, especially ones that impact their wallet negatively. That is why going from free to paid can be painful when you’ve trained a whole bunch of users to enjoy your products and services for free.
If the world votes with their feet and wallets to go somewhere else, whether through better products elsewhere or simply by their opinion, then Apple will be forced to change their strategy. It’s that simple.
To reverse the decision on apps through the Mac App Store will be a difficult one, given that Windows still dominates. While Mac OS is gaining on Windows and everyone universally hates Windows, I think the competitive landscape is still very unsure and Apple won’t be able to do that for a long time if they want to continue gaining share on Windows.
Perhaps at some point in the future, if they dominate, they may be able to impose a bounty on subscriptions. But that is far in the future. Or they may never be able to. Or they just might not. We’ll have to wait and see.
Right versus Wrong
So much in the commentary on the net is regarding right versus wrong. To me, being religious on this issue sparks of the entitlement that people feel, but also their bias on the issue relative to their own position in the ecosystem.
As I said before, people are basically cheap. They don’t want to pay more for anything. If Apple charges a bounty, this could raise prices.
A lot of people who oppose this issue are also are those trying to build businesses on top of Apple’s iOS. They want to make as money as possible and don’t want to pay bounties at all.
Everyone complains, but again the answer is easy. You don’t like this, then go somewhere else. There are other platforms to build for like Android. By some metrics, Android even leads iOS in sold devices.
There is no right or wrong; the shades of grey in business (and in life) permeate everywhere. Our own self interest and biases may be hidden but we have only our self gain to blame on whether we are OK with Apple charging or not.
Still the reality is that workers need to get paid and support themselves and I, for one, want to keep motivating them to do great work. I want to buy music so artists will continue to make awesome music. I want to buy TV shows to download so that I can enjoy the next great show. I am OK with paying for content because I want content creators to keep doing it. And I want Apple’s employees to stay motivated on making the best platform out there, even if prices are higher on Apple platforms than on others.
And by the way, today’s press release on Apple’s subscription bounty says:
“…when Apple brings a new subscriber to the app, Apple earns a 30 percent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing.” – “Apple Launches Subscriptions on the App Store” – Business Wire
This little nuance is important – they do not take 30% on ALL subscriptions, only those they create. If the publisher does a better job than Apple at gaining subscribers, then they pay no bounty.
How do we feel about the subscription bounty now?

News Innovation: Still Haven’t Quite Gotten There Yet

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Over the last few months, I have been actively giving feedback to my buddies at the news.me team (see NYTimes: Betaworks and The Times Plan a Social News Service and Techcrunch: Exclusive: An Early Look At News.me, The New York Times’ Answer To The Daily.
News is one of those things I worked on since the beginning of the internet when Yahoo released its first linked page of news back in 1995. I watched it grow, basically taking offline news and putting it online, into a huge powerhouse of traffic. Likewise, traditional outlets put all their news online launching both opportunity and destruction as users flocked to reading news online and heralding the slow death of physical newspaper business models.
But in the last few years, I’ve been thinking a lot about news, how I read it, consume it, and want to do things with news that I still can’t do. If you look out there on the web, news is still basically just pages of content. Only just in the last year have people started looking beyond just RSS readers and using the social/real time web to help with recommendations. But I still want more; Twitter is a big source of news for me, but it still doesn’t do everything.
I wrote this and sent this to the news.me team, but I want the world to come up with something exponentially better, not just incrementally better. Here are my current issues with news and what I would love to see:
1. News front pages haven’t innovated in ages. They mostly look like their offline analogues. Seems like it’s time for an improvement.
2. Trust is a problem. Too many sources and no way to verify, or verification takes way too much time. You can always find someone who supports your viewpoint on the internet so it can be very difficult to tell who is lying and who is not. At one time we trusted journalists because they had ethical standards to uphold. That’s been destroyed. Everyone has biases and it’s starting to show more and more.
3. Every news source reports on the same news, with few exceptions (ie. local or vertical). If everyone is just re-reporting what comes off the wires, then what is the differentiator for news outlets? Brand? Voice? Opinion? Bias?
4. How to balance what I am interested in and what I want to read serendipitiously?
5. I want to pick sources I want to follow all the time but want to be introduced to new sources on occasion. There are too many sources to deal with.
6. I often drop into a topic later in time. I want to be able to easily navigate back in time to a topic’s start. I also want to see how the topic developed so i want to read all stories up to the present. I also want to navigate across sources for any given topic to see other opinions.
7. When I am interested in a topic, I want to somehow designate it to be tracked. I want to be able to undesignate it also, when I do not want to follow it any more.
8. News rolls with time. but there are often stories I don’t have time to read now. This is the problem with using Twitter as a newsfeed. It does great from a social recommendation standpoint, but the news rolls past so fast that I have to favorite or else it is gone forever.
This also applies to news front pages. The saving grace is the NYTimes email which snapshots the news for me and it is saved in my email.
9. Breaking news often comes from many places, and maybe from Twitter before anywhere else. How do we insert that into our news reading? Do I have to stare at my Twitter stream all day long just to catch the rare, elusive news event before anyone else does?
10. I want something to remember everything I read because I often want to find something that i read in the past. I want to be able to search everything I read and only that.
11. Ideally I want to pull up old stories I’ve read, or tagged, or saved. Hopefully I can easily tag/save into categories and pull them up by those groupings.
12. News must be both curated and algorithmically recommended. Either can’t do it all.
I really hope someone innovates news more than just putting a “news” layer on top of Twitter, or a prettier face on top of RSS feeds. Everyone seems to be working on a singular part of news but not the whole experience. I would love to see a startup take on the whole project of news rather than just little pieces of it. Might even be worth investing in…

Body Hacking Tim Ferriss Style

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I’ve never met Tim Ferriss in person, but I think it’s pretty outstanding that he chose to hack his body, as described in his thick tome, The 4-Hour Body. In an unprecedented, data driven way, Tim experiments on himself with all sorts of supplements, exercise programs, and diets to see what works and what doesn’t. But he just doesn’t subject his body to the stress and ingredients; he also measures, using sophisticated but readily available devices, their effects on his body before and after trying them.
Being a triathlete and one that wanted to improve AND being a gadget lover, I felt that this was right up my alley. While my experiments with his methods on myself aren’t finished and I hope to publish some results on my training blog, I felt that some of the measurement methods are worth publishing here and highly relevant in my investing.
Prior to Tim’s book, I was already using technology in my training. I regularly run with a Garmin Forerunner 305 GPS watch and upload the results to my Mac. My old coach, Michael McCormack, had set me on using the Computrainer, a computerized bike trainer which allowed me to workout using repeatable and measurable power settings. On my bike, I use a Powertap power meter that is installed in the hub of my rear wheel. This allows me to record and examine my power profiles during training rides and competition. It also gives me a picture into exactly how much power I expended during a ride and, over time, whether I have improved or not.
Simply recording all this in an Excel spreadsheet meant that I could go back and examine my training, and figure out if I have truly improved season over season.
Recently, I have begun to use other tools to supplement my training. For example, I started swim training in Total Immersion which advocates frequent use of underwater video footage to give feedback on swimming technique. I use a GoPro video camera with suction cup to record my workouts for re-examination later. I also bought a Pulse Oximeter to check my resting heart rate every morning, which is important to track and see when you *aren’t* recovered from previous days of workouts and to know when it’s time to back off and rest. I do also record my heart rate during my bikes and runs, although I’m not a big fan of using heart rate as a training metric.
I also now run with the Runkeeper app on my iPhone 4, which finally has enough battery power to last through an entire marathon while broadcasting/recording my run. Runkeeper does things similar to my Garmin, but I feel that it’s displays are better than the Garmin software, although Garmin’s website implementation isn’t bad.
After diving into Tim’s book, I got a Omron Full Body Sensor Body Fat and Body Composition Monitor to start tracking my progress using Tim’s methods. To see not only my weight but my visceral fat decrease before my eyes has been enlightening! I had considered getting a Withings scale, but for now I needed the full body composition monitoring versus just weight measurement.
With the exception of the Computrainer and the Powertap, all of these are well within the budget of normal consumers. (NOTE: Even now, other manufacturers have come out with computerized bike trainers and power meters that cost significantly less than the Computrainer ($1650) and Powertap ($2000)). The pace of innovation and the movement of price to within the reach of normal consumers (versus prosumers/early adopters) has been accelerating year over year. Also, the availability of devices which can monitor our human condition day to day, minute by minute, and allow us to track our progress minutely is growing exponentially. Devices that were only found in doctors’ offices or hospitals, or big medical research centers are now available to the average person for a fraction of the cost.
When the average person can know the effects of eating a McDonalds hamburger or a healthy chicken salad in the short term, we can really do some wonders in our ability to know how are body is reacting to stimuli and what we should do about it.
What did we do before? We went to the doctor once a year, if that, and he would (maybe) run a battery of tests on you and tell you how you were doing. In between that time, all we had for feedback was a mirror, maybe a scale, and how we felt day to day. We would go back to our old habits of eating poorly, exercising without metrics or goals, and wonder why we kept gaining weight day over day, month over month. Or perhaps we drive ourselves into the high risk group for heart disease or worse. This sucks and is changing rapidly.
Exposing data about ourselves in real time (not doctor visit time) is the first step, giving insight on them is the next, and then lastly providing actionable advice on what to do next is the third step.
We are now in the next revolution of human analytics and I, for one, and diving full bore into it not only from a usage standpoint, but also from an investing standpoint.