Tag Archives: Kosmix Corporation

About 1329 days ago E-Commerce

The Real-Time Web and You

One of the biggest technology trends in 2009 has been the emergence of the “Real-Time Web.” The real-time Web is a made up of technologies and practices that can inform users as soon as information is published, instead of requiring users to check for updates. The real-time Web discards the traditional notion of the more static “webpages,” and instead adopts the notion of dynamic “streams” of information. The real-time Web is also very conversational because it makes it possible to get instant responses across very large networks of people. Action in the real-time Web started with companies like Twitter and Friendfeed, which built their own infrastructure for large scale delivery of real-time messages. By providing Web service application programming interfaces (APIs), these companies enabled many other developers to create applications based on the real-time Web. However, Anil Dash, a prominent blogger, points out that real time services need not be built on the back of Twitter and Facebook anymore. Due to emerging technologies, the pieces are falling together for creating a free, open and decentralized “pushbutton platform,” which makes it easy for websites to add real-time messaging services. With these developments, we can expect many more websites to jump onto the real-time bandwagon. Growing importance to business The real-time Web is becoming increasingly important to businesses in multiple ways. Firstly, as many webmasters and Web analytics companies have pointed out, the real-time Web is starting to rival search engines like Google as a source of website traffic. For example, Mark Cuban talked a few months ago about how his blog receives more visits from Twitter and Facebook than from Google. Secondly, the real-time Web opens up communication opportunities that the traditional Web could not have provided. For instance, if an airline wants to sell off its last minute tickets, the real-time Web provides a great outlet for advertising this very time-sensitive deal.  Thirdly, by making information instantaneously accessible, the real-time Web can create, or erase, instances of information arbitrage. As an example, take a look at Skygrid, a service that provides high quality financial news in real time, giving its users an edge, but at the same time leveling the playing field between professional investors and amateurs in terms of the speed of access to reliable information. Finally, because the real-time Web is very conversational, it becomes a repository of people’s sentiment, and mining this sentiment can be very useful to marketers and others. Taking advantage of real-time Web Beyond creating an account on Twitter, how can you take advantage of the real-time Web?  Here are some thoughts to get you started: Engage with the real-time Web with tailored offers and content. Several companies are seeing success with time-sensitive programs that could not have been conceived without the real-time Web. Jet Blue’s “cheeps” and United Airlines’ twares are exclusive Twitter promotions for last minute fare deals. Another company that has encountered great success with offering exclusive deals on Twitter is Dell. A Dell blog post from June mentioned that Dell had surpassed $2 million in Twitter sales fro Dell Outlet, which sells refurbished items, scratch and dent items, and previously ordered new laptops. The real-time Web also acts as a place where people express their intent to shop (e.g. someone may tweet “thinking of buying an ipod touch.”) Selectively targeting such users, without spamming them, might also be a great way to help your customers make real time buying decisions. A service like Twitterhawk can be used to automate this kind of marketing. Make use of real-time Web tools for business intelligence. The real-time Web is a great source of knowledge and sentiment about your customers, your competitors and your industry. You can use services like Firstrain to research the real Web for the news that matters to you. You could also use Twitter’s search functionality in simple ways to keep track of some of this information, or go to one of the many real time search engines. A recent article in mashable talks about the many tools that help analyze Twitter content. Join in the conversation about your company. In one of my previous articles, I had talked about how companies like Comcast are using Twitter to understand their customers’ concerns and address them. The conversational nature of real time web can be very powerful in building relationships with your customers. Create the infrastructure that allows your company to respond in real time. Real-time enterprise data integration has been around for a long time. However, with the emergence of the real-time Web and the opportunities it creates, it is becoming increasingly critical for companies to be able to access all their internal data in real time. In other words, “real-time data integration is no longer a luxury.” Vijay Chittoor is the director of product management at Kosmix, an exploration engine that offers a 360 degree view of any topic on the Web.  A former McKinsey consultant, Chittoor is a graduate of Harvard Business School and the Indian Institute of Technology, Bombay.  He shares his thoughts on technology at his blog.

About 1359 days ago E-Commerce

Social Media: More than Creating Connections

One of the biggest challenges for entrepreneurs is to scale up their business, and to manage the growth by hiring more people in every function. But what if you could achieve growth by just letting your community of users do most of the work? Several creative companies have used social media tools to get their customers involved in core aspects of their business, all the way from marketing to product design, product testing, and customer service.  Here are some great examples of organizations that are using social media to drive sales and efficiencies, while still connecting with customers: Effective marketing using social media By now, most people know that social media provides many tools for creating brand awareness, as well as for generating sales leads. Fiskars, a Finland-based manufacturer of scissors realized that scissors are very popular among scrapbookers, and set out to reach this community. After identifying four Fiskars users who were extremely passionate about the brand, the company set them up with a website and a blog, and made them consumer evangelists. The “Fiskateers” program has since then grown to more than 5,000 Fiskateers across 70 countries, each actively blogging and evangelizing the brand. Having so many “marketers” on its payroll would certainly have been unsustainable for the company, but by leveraging the power of its community, and using online tools like blogging, Fiskars has created a strong brand identity among its target audience. Blogging isn’t for you?  Try Twitter to connect with your audience. Naked Pizza of New Orleans, which prides itself on making the “world’s healthiest pizza,” has latched onto Twitter as a means of promoting its fresh ingredients and offering promotional deals. Twitter has been so effective that they’re now using billboards to drive more people to the Twitter account. More and more restaurants are finding Twitter to be an effective way to boost their sales. Finally, no discussion of social media marketing is complete without talking about viral videos. Blendtec, a division of the Utah-based K-TEC, manufactures high powered, durable, commercial blenders. In 2006, Marketing Director George Wright had the unenviable task of creating a brand campaign with a budget of $50. When Wright saw CEO Tom Dickson and some engineers testing the blenders with heavy duty chunks of wood, he hit upon an idea and used the $50 to buy the domain http://www.willitblend.com. Since then, the “Will it Blend” series of videos has seen more than 80 million views on YouTube and increased Blendtec’s sales by more than 700 percent. Involve customers in product design How can you add value and create customer loyalty if you don’t even control your product design process? Threadless, an online T-shirt store operated by the Chicago-based skinnyCorp, has found the secret to that, selling more than a million T-shirts a year, none of which were designed by the staff. All the designs are submitted and evaluated by the community of users on its website. Hundreds of artists submit their designs, and users vote on them. Every week, the best designs are selected for printing, and the winning designers get $2,000 in cash, $500 in gift certificates, and another $500 for every reprint. According to some reports, the company generates more than $30 million in revenue and $10 million in profits. Muji, a Japanese retailer, has latched onto a similar concept through its website muji.net, where it invites submissions for innovative furniture designs. Muji, which means “without brand,” has a community of half a million people who submit and evaluate designs.  Shortlisted designs are then sent to professional designers, who polish them before sending them off for production. Web companies often launch products in a “beta” state and invite selected users to test the product. Joffrey’s Coffee & Tea Company took this idea and applied it to coffee. It invited bloggers to beta-test its coffee by sending them free samples. More than 1,500 bloggers participated, and generated enormous buzz for Joffrey’s on the Web. Based on feedback from these bloggers, Joffrey’s launched Coffee 2.0 with many “bug fixes and improvements.” Even the name Coffee 2.0 came from one of the beta testing bloggers. Not only did Joffrey’s use social media effectively to do product testing and improvements, but it also created enormous buzz around the product.  Get customers to help with customer support Customer support is one of the most difficult things to scale as the business grows. Consumers are increasingly logging on to social media sites to express their frustration with poor service. For example, the consumer complaint video “United Breaks Guitars ” has had close to 5 million views on YouTube. Innovative companies are using social media in a couple of different ways to provide customer support. eBay has outsourced almost its entire customer support function to its users from its very beginnings. In his book The Perfect Store, Adam Cohen writes about eBay in 1996: “Omidyar did not have time to explain to each individual user how to write a listing in HTML, or to give advice on bidding strategy.” The solution was to launch a Bulletin Board where users could “gather, share information and ask for help.”  Later, eBay ended up hiring some of the people who were the most active and helpful on the forums to work for it, answering customer emails and providing additional support. A different model of support treats social media as another channel for the in-house customer support team. Frank Eliason, Comcast director of digital care, has a following of more than 25,000 people on his “Comcast Cares” Twitter account, where he answers user questions. The real-time nature of Twitter and its search functionality allow Eliason to even reach out to Comcast users who haven’t actively sought help. By applying a bit of imagination to social media tools like blogs, Twitter, Facebook, and YouTube, these forward-thinking companies have grown their businesses by leaps and bounds. Take cues from these examples of the power of community, and you’ll avoid some of the growth pains that arise from controlling and managing all of your business functions in-house. Vijay Chittoor is the director of product management at Kosmix, an exploration engine that offers a 360 degree view of any topic on the Web.  A former McKinsey consultant, Vijay is a graduate of Harvard Business School and the Indian Institute of Technology, Bombay.  He shares his thoughts on technology at his blog.

About 1451 days ago E-Commerce

The Long Tail and the Black Swans

In his Wired article in 2004, Chris Anderson pioneered the use of the phrase “The Long Tail” as a proper noun. He observed that the reduced costs of distribution over the Internet are making it easier for businesses to serve consumer demand for niche items, and that collectively, the niches added up to quite a significant market for companies like Rhapsody, Netflix, or Amazon. This collection of all niches, “the long tail,” he argued, generates substantial value for a variety of businesses. The long tail effect liberates consumers from having to buy what everyone else is buying, and enables businesses to serve specialized needs, rather than just serving the lowest common denominator. This idea flies against the traditional distribution networks, which only stocked those items that are most likely to sell a lot of units. Traditional supply chains needed to play this “blockbuster” strategy because their fixed costs of carrying any item and making it accessible to customers were very high. And the only products that could justify that cost were the ones that were likely to sell a lot of units. For example, in the movie industry, this “supply chain” consisted of theaters, and DVD sales through large retailers, both of which have high fixed costs and limited shelf space. The Internet reduces many of the fixed costs, removes the restriction on shelf space, and makes every item easily accessible through searchable interfaces. No wonder, then, that Internet companies have chosen to carry larger inventories than their offline counterparts, enabling them to cater to niche interests. Backlash against the long tail Despite the widespread use of this idea, there has been recent backlash against it. Criticism of the idea recently started with an analysis by Anita Elberse, and was picked up by many others in the media. The critique centers around the idea that long tail companies make most of their profits from a small percentage of items sold; the classic 80-20 rule still applies. Based on this, the critics recommend that entrepreneurs and managers should continue to focus on the blockbuster strategy. This analysis, however, overlooks the fact that it’s impossible to predict what will be a hit. Consider the list of top 100 rentals on Netflix a good indicator of consumer demand. At least three of these movies are independent films, each with a budget of $6-8 million. Juno, with a budget of $6.5 million, went on to gross 35 times that in earnings, and Little Miss Sunshine, which cost $7.7 million to make, earned more than $100 million in revenues. The Last King of Scotland, with a budget of $8 million, completes the trio. Compare these 10x returns with a mainstream movie like The Dark Knight, which made less than six times its budget of $185 million — and that’s among the more successful hits. Before they made it big, movies like Juno, Little Miss Sunshine and The Last King of Scotland seemed like films that would end up in the long tail. And the entertainment executive who focused purely on the blockbuster strategy would have missed out on the financial returns of these movies. When the critics of the long tail theory account for revenues and profits, they look at data compiled after the masses have picked the winners and the losers. Some of the “winners,” the items that made it to the top 20 percent of revenues, might have come from the long tail of investments (e.g., the low budget movies). So when the critics recommend not investing in the long tail, they’re confusing the tail of revenues with the tail of investments. The real value of the long tail is that it helps pick the winners like Juno. You might think the cost of picking winners in this way is prohibitive, but that’s no longer true in the new digital world. In the traditional supply chain, an average long tail product would not make any money at all, because it wouldn’t be stocked anywhere. However, in the digital world, even the product that starts life in the long tail and stays there makes some money because it reaches a niche audience. And, who knows, there’s always the chance that some of these long tail products could become popular someday, and make tons of money. The author Nissim Taleb deals with phenomena like these where the outlier (like Juno) has a significant effect on the average performance. He calls this effect the “Black Swan.” In the blockbuster strategy, which requires heavy investments, the returns on all movies would perhaps cluster around one, and an outlier like The Dark Knight returns six times its investment. The exposure to the outlier, or the Black Swan, is much greater in the tail. As we’ve seen, an outlier in the tail can have a much more significant return. These effects only get amplified with digital distribution, where shelf space is unlimited and the investment in distribution costs is negligible. As The Arctic Monkeys, Clap Your Hands Say Yeah, and many others have shown, it is possible for small indie bands to rise to stardom by the buzz they create on the Internet. While the long tail is exposed to the positive Black Swan (unexpectedly good returns), the blockbuster strategy is only exposed to a negative Black Swan, because the strategy requires heavy investments.  A prime example is the movie Waterworld, made with a budget of $175 million, which grossed only $88 million worldwide. Does this mean that the blockbuster strategy is dead? Not at all. After all, the Netflix 100 has a lot of room for high budget movies. Amazon and Netflix understand this very well, and put as much focus into the likely hit as they do into carrying all the indies. Their infinite shelf space allows them to stock the Harry Potter book or The Dark Knight DVD as well as lesser known title, and their search and review mechanisms help the community vote up an occasional obscure title to become a hit. The lesson?  Success is about finding the right balance of long tail strategies and more traditional approaches. Vijay Chittoor is the director of product management at Kosmix, an exploration engine that offers a 360 degree view of any topic on the Web.  A former McKinsey consultant, Vijay is a graduate of Harvard Business School and the Indian Institute of Technology, Bombay.  He shares his thoughts on technology at his blog..

About 1482 days ago Internet and Online Business

Lessons from Web 2.0: Fast Track Innovation Process

Over the last few years, Web 2.0 has evolved to become not only a design paradigm, but also a development methodology that has become synonymous with innovation. Web 2.0 companies are able to innovate rapidly for four simple reasons: Low cost of innovation. You don’t need a bucketful of cash to prototype a Web 2.0 product or launch a Web 2.0 company.  Costs of computing and storage have fallen dramatically, and services like cloud computing virtually eliminate the need for heavy IT infrastructure, reducing fixed costs. Case in point: Y-Combinator, a seed fund that invests an average of just $15,000 per venture, has helped many young companies get their start.  Y-Combinator success stories include Reddit (acquired by Conde Nast) and Zenter (acquired by Google). Rapid bite-sized improvements instead of massive launches. The software that powers the Web services can be updated constantly, because it’s delivered over the Web. As a result, Web 2.0 companies often upgrade their services every day or every week, launching new features and fixing bugs. Ease of “measuring” user interactions with the service. Web services have the advantage that user interaction with the site or the service can be measured in a very precise manner. It’s easy to record the time spent by an average user on the site, the number of page views they saw, the trail of clicks and pages that helped them complete their task, and a lot of other such data. Because everything can be measured, Web companies have developed a philosophy of testing and measuring a lot more and guessing a lot less. Before any feature is launched to the entire audience of a site, it’s often tested on a small portion of the user base. An open innovation model. Web 2.0 companies have realized that some of their most innovative ideas might not come from within the company. Using Web-service application programming interfaces (APIs), they have exposed some of their most precious data to outside developers who can build innovative applications. Real-time search, one of the most used applications on Twitter, was developed by a company called Summize, using Twitter’s API. Twitter later acquired Summize. Taken together, all these methods are geared towards a new model of innovation — one that emphasizes rapid experimentation and serendipitous discovery. Since every idea is cheap and quick to try out with real users, and the results are easily measurable, Web 2.0 companies get to road test several ideas without spending excessive amounts of time trying to prioritize between them. Similarly, by allowing outside developers to use the company’s data to create applications without any restrictions, Web 2.0 companies are in effect launching hundreds of experiments simultaneously. This throws the traditional model of product development and innovation on its head. In the old days, companies performed exhaustive (and costly!) analysis to determine which one or two ideas would be most likely to succeed, and then invested accordingly. The Web 2.0 model makes it possible to experiment with a lot of ideas, without investing a lot of upfront cash or forcing assumptions about which idea will deliver the biggest upside. This new model is great for a world in which consumer preferences are difficult to predict and change rapidly. While your business might not have the same natural advantages as a Web 2.0 company, with a little bit of redesign of your processes, you could use elements of the same philosophy to fast-track your innovation. Here are some tips to get you started: Lower your cost of new product development. Be on the lookout for opportunities to reduce your costs of new product development. Using technology for knowledge management and outsourcing to low cost countries are among some of the ideas that innovative companies use. For example, in the electronics industry, Original Design Manufacturers (ODM) companies based in low cost countries like China have emerged as choice partners for prototyping and launching new designs. Create experiments that lead to continuous bite-sized improvements.If any aspect of your offering is a service, you can keep innovating by adding small features or by improving the workflow. In order to do that, you need to build a test-bed for trying out lots of experimental ideas. A few years ago, Stefan Thomke, a professor at Harvard Business School, published an insightful study detailing how Bank of America turned its branches into “Service Development Laboratories.” For instance, Thomke talks about an experiment designed to solve the problem that users perceived their wait times to be longer than the actual time. In order to remove the perception, the experiment involved testing user perception when televisions were installed over teller booths and comparing that with a standard branch without televisions. By measuring the improvement in customer satisfaction ratings with the television, the team was able to develop a case for wider rollout to some of the bigger branches of BofA. This is a great example of an experimental setup that leads to constant improvement in the quality of service. Measure everything and create feedback loops. You should aim to find opportunities for measuring user interaction with your product or service directly at the point of interaction, without relying on “marketing surveys.” Harrah’s is a great example of a company that invested in business intelligence solutions around its loyalty program, and made all of its marketing efforts highly data driven. Whenever a customer conducts a transaction using their Harrah’s card, the information is transmitted to a database, and used in a variety of ways to target the customer. The success of marketing campaigns is also measured using this data, and the campaigns are optimized accordingly. Soon after the program was launched a few years ago, its success made Harrah’s the most profitable company in its sector. Open up the innovation process to others and plug in with the ecosystem.  In his book Wikinomics, Don Tapscott talks about how Goldcorp Inc., a struggling Toronto-based gold mine, opened up its sensitive geological data to the public to help the company get accurate estimates of the location of gold in its mines in Red Lake, Ontario. Within weeks, solutions poured in from all kinds of unexpected quarters, and identified more than 110 targets, half of them not previously identified by the company, with 80 percent of the new targets yielding substantial amounts of gold. In another example, Proctor & Gamble has developed a program called “Connect and Develop” with a goal of having 50 percent of its new products come from outside the company’s labs. The program also opens up access to P&G’s innovation assets. On the other hand, if you can’t find good ways of exposing your own data, you could instead think of using the data and APIs exposed by others — for example, Pure Digital, the manufacturers of the Flip Video Cameras, used YouTube’s APIs to make it easy to upload videos directly into YouTube, and in the process out-innovated the competition. It’s clear through all these examples that the new model of innovation is for everyone, and not just Web 2.0 companies. Find applications for these ideas in your business, and use them to change the world for the better. Vijay Chittoor is the director of product panagement at Kosmix, an exploration engine that offers a 360 degree view of any topic on the Web.  A former McKinsey consultant, Vijay is a graduate of Harvard Business School and the Indian Institute of Technology, Bombay.  He shares his thoughts on technology at his blog..

About 1786 days ago Setting Up a Website

Stop E-Mail Overload with Wikis, Blogs, and IM

E-mail is the central nervous system of most modern organizations, from startups to large corporations. Every communication, from the most important (planning for the big client meeting tomorrow) to the most trivial (fresh donuts in the kitchen) takes place through the corporate e-mail system. The results: e-mail overload and lowered productivity for the entire organization. Employees are tethered to their e-mail via BlackBerrys even over the weekend leading to communications burnout. The biggest single reason for this is the inherent nature of e-mail itself: it is a point-to-point communication medium. The sender has to decide both the content of the message as well as whom the recipients are. If the recipient list is too large, it contributes to e-mail overload. If it is too small, that could lead to communication gaps and “informational silos” in the organization, where one group in the company doesn’t really know what the other group is doing. Another problem is that each e-mail message is a single unit, making it hard to track conversations among multiple parties. Many e-mail readers thread conversations, but that is done at a syntactic rather than semantic level. Finally, putting everything in e-mail makes it difficult to build institutional memory. We hit the e-mail wall at my company Kosmix recently. When we were less than 30 people, managing by e-mail worked reasonably well. The team was small enough that everyone knew what everyone else was doing. Frequent hallway conversations reinforced relationships. However, once we crossed the 30-person mark, we noticed problems creeping in. We started hearing complaints of e-mail overload and too many meetings. And despite the e-mail overload and too many meetings, people still felt that there was a communication problem and a lack of visibility across teams and projects. We were straining the limits of e-mail as the sole communications mechanism. We knew something had to be done. But what? Sri Subramaniam, our head of engineering, proposed a bold restructuring of our internal communications. He led an effort that resulted in us relying less on e-mail and more on three key Web 2.0 technologies: wikis, blogs, and instant messaging (IM). Here’s how we use these technologies everyday in running our business. Blogs Each employee and each project has a dedicated blog. People can post as often as they wish to their personal or project blog, but they are required to post at least one weekly status update. All blogs are visible to everyone in the company. Anyone can subscribe to the feed for any particular team or individual blog. So for example, Josh in engineering can follow the blog of Mike in sales, if he’s curious what Mike is up to. This results in complete 360-degree visibility throughout the organization. People can also post comments on these blogs. Someone might post a problem they are facing, and others can post comments providing suggestions. This results in automatic grouping of conversations based on topics of interest. The biggest advantage of the blog approach is that it is a publish/subscribe mechanism. I don’t need to decide who to direct my communication to;  I just post on my blog. Anyone in the company who is interested in what I’m doing can subscribe to my blog to be notified of updates. And if someone just has a passing interest, they can always read my blog periodically without subscribing to it. This approach also breaks silos, for example, between engineering and marketing, or between marketing and sales. Sometimes the best product ideas come from sales people. And sometimes the best sales ideas come from engineers. No one is required to read any particular blog, with two exceptions: Managers are expected to read the status updates of their team members and post feedback. People working on a project are expected to read each other’s blogs. The blog approach has reduced e-mail overload at Kosmix and even reduced the number of time-consuming “status update” meetings.  Most important, the blog serves as an institutional memory — an electronic record of our business. Conversations do not get lost in the ether but are recorded and can be searched at any time in the future by new people on a project or new company employees. Wikis While blogs are great for status updates and discussions around ideas, they are not the best place to put items that serve as reference material: for example, documentation, specs, reports, and so on. The problem is that blogs are in reverse chronological order, and each blog can have just one author, preventing collaborative editing. For these situations, we use a wiki. The internal corporate wiki has sections corresponding to each project and each functional group in the company. Documentation, specs, and reports go into the wiki. The other critical section on the wiki is the “team” section. Every employee has a homepage on the wiki, with a recent photo, describing their responsibilities at work and interests outside of work. As the team grows, and you see a new face at the office, this is a quick way of finding out who that person is. Instant messaging As Kosmix has grown, we now have people working from more than one physical location. In addition, we promote a culture of people working from home whenever it is compatible with their job responsibilities. Thus, we need a substitute for the face-to-face hallway conversations that cannot happen because someone is working from home or from another location. E-mail is not the best option because it is asynchronous and thus loses the spontaneity of a hallway chat. IMing fills this need very well indeed. The entire Kosmix team is on IM. Each team member is required to set the “status” message on their IM client during normal sane working hours to indicate where they are working from. They can also post a “Do not disturb” message to indicate that they don’t welcome interruptions at the moment. IMing leads to quick resolution of many issues without spawning interminable e-mail threads. The effects of the communication restructuring have been immediate and very visible. They include a lot less e-mail and almost none on weekends; better communication among people; and 360 degree visibility for every member of the Kosmix team. After we instituted these changes, everyone on the team feels more productive, more knowledgeable about the company, has more spare time to spend on things outside of work. Online Resources We use twiki for our wiki and blog software at Kosmix. The wiki functionality in twiki is great, but it took a bit of customization work from our indefatigable Subramaniam to make it work well as a blogging platform too. We are planning to release Subramaniam’s twiki tweaks as open source in the next couple of months. Another great option for blogs is WordPress, which allows you to host blogs internal to your company. We went with twiki because of the integrated wiki/blogging solution. We have standardized on Yahoo! Instant Messenger for instant messaging. However, the other IM products such as MSN Instant Messenger and Google Talk have comparable functionality. I would suggest you pick the one most people in your company already use for personal communication. Anand Rajaraman is co-founder of Kosmix with consumer properties www.RightHealth.com, www.RightAutos.com and www.RightTrips.com.  He also sits on the board of several technology companies and is a consulting faculty member at the Computer Science Department of Stanford University. His latest thoughts and discussions can be found at http://anand.typepad.com/datawocky.

About 1816 days ago Tools on Managing Technology

Angel, Venture Capital, or Bootstrap?

our beautiful site

Greg Linden was one of the key developers behind Amazon’s famous recommendations system — the system that recommends books, movies, and other products to Amazon customers based on their purchase history. He subsequently went to Stanford and picked up an MBA. In January 2004, he launched a startup named Findory to provide everyone with a personalized online newspaper. You cannot imagine anyone who could be more qualified to make a startup like this a success. Yet Findory shut down in November 2007. In a brilliant post-mortem, Lindensays his big mistake was to bootstrap his company while trying to raise funding from venture capital firms; he just couldn’t convince them to invest. He should have raised his funding from angel investors instead. This is an important decision every startup founder has to make — where to raise their funding. Fortunately, there are resources on the Internet that can help you make the right decision. The three viable sources at the very early stages of a company are: Friends and family. Or yourself, if you can afford it. The Web provides an assortment of resources to read up on bootstrapping, from online communities of entrepreneurs to Guy Kawasaki’s blog. Angel investors. Usually wealthy individuals, but includes outfits such as Y Combinator. (My firm Cambrian Ventures is also in this category, although we are currently not actively seeking investments) Venture Capital (VC). These are private firms that manage pools of equity capital that is invested in high growth, entrepreneurial companies. The National Venture Capital Association provides resources about VC as do such private firms as VentureOne and vFinance. To understand which option is best for your startup, you need to understand how investors evaluate companies. While investors evaluate companies across a range of criteria, three that stay consistent are: Team, Technology, and Market. Angels and VCs evaluate them in different ways. Here’s how. How VCs evaluate startups Market. Venture Capitalists want to invest in companies that produce meaningful returns in the context of their fund size, which typically is in the hundreds of millions of dollars. To interest a VC firm, a company needs to be attacking a large market opportunity. If you cannot make a credible case that your startup idea will lead to a company with at least $100 million in revenue within four to five  years, then a VC is not the right fit for you. It’s often OK to use consumer traction as a substitute for market opportunity — many VCs will accept a large and rapidly growing user base as sufficient proof that there is a potentially large market opportunity. Team. Venture Capitalists use simple pattern matching to classify teams into two buckets. A founding team is deemed “backable” if it includes one or more seasoned executives from successful or fashionable companies (such as Google) or entrepreneurs whose track record includes a least one past hit. Otherwise the team is considered “non-backable.” Technology. Venture Capitalists are not always great at evaluating technology. To them, technology is either a risk (the team claims their technology can do X; is that really true?) or an entry barrier (is the technology hard enough to develop to prevent too many competitors from entering the market?) If your startup is developing a nontrivial technology, it helps to have someone on the team who is a recognized expert in the technology area — either as a founder or as an outside advisor. Here’s the rule of thumb: to qualify for VC financing, you need to pass the Market Opportunity test and at least one of the other two tests. Either you have a backable team, or you have nontrivial technology that can act as an entry barrier. How angels evaluate startups There are many kinds of angels, but I recommend picking only one kind: someone who has been a successful entrepreneur and has a deep interest in the market you are attacking or the technology you are developing. Other kinds of angels are usually not very high value. Here’s how angels evaluate the three investment criteria: Market. It’s all right if the market is unproven, but both the team and the angel have to believe that within a few months, the company can reach a point where it can either credibly show a large market opportunity (and thus attract VC funding), or develop technology valuable enough to be acquired by an established company. Team. The team needs to include someone the angel knows and respects from a prior life. Technology. The technology is something the angel has prior expertise in and is comfortable evaluating without all the dots connected. Here’s the angel rule of thumb: you need to pass any two out of the three tests (team/technology, technology/market, or team/market). I have funded all three of these combinations, resulting in either subsequent VC financing (e.g., Aster Data, Efficient Frontier, TheFind ), or quick acquisitions (Transformic, Kaltix — both acquired by Google). I’ve written about the stories behind the Aster Data investment and the Transformic investment previously on my blog.  In both cases, my personal relationship with the founders, as well as my passionate belief in the technology, played big roles in the investment decisions. Friends and family or bootstrap This is the only option if you cannot satisfy the criteria for either VC or angel. But beware of remaining too long in this “bootstrap mode.” An outside investor provides a valuable sounding board and prevents the company from becoming an echo chamber for the founder’s ideas. An angel or VC can look at things with the perspective that comes from distance. Sometimes an outside investor can force something that’s actually good for the founder’s career: shut the company down and go do something else. That decision is very hard to make without an outside investor. My advice is to bootstrap until you can clear either the angel or the VC bar, but no longer. Back now to Greg Linden and Findory. By my reckoning, Findory passes the team and technology tests from an angel’s point of view — if you pick an angel investor who has some passion for personalization technology. The company doesn’t pass any of the VC tests. Given this, Linden should definitely have raised angel funding. My guess is that this route would likely have led to a sale of the company to one of many potential suitors: Google, Yahoo, or Microsoft, among many others. Of course, hindsight is always 20/20! I have deep respect for Linden’s intellect and passion and wish him better luck in his future endeavors. For further reading, I highly recommend Paul Graham’s excellent article How to Fund a Startup. Anand Rajaraman is co-founder of the Kosmix with consumer properties www.RightHealth.com, www.RightAutos.com and www.RightTrips.com.  He sits on the board of several technology companies and currently teaches at the Computer Science department of Stanford University.  His latest thoughts and discussions can be found at http://anand.typepad.com/datawocky.

About 1816 days ago Internet and Online Business

Angel, Venture Capital, or Bootstrap?

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Greg Linden was one of the key developers behind Amazon’s famous recommendations system — the system that recommends books, movies, and other products to Amazon customers based on their purchase history. He subsequently went to Stanford and picked up an MBA. In January 2004, he launched a startup named Findory to provide everyone with a personalized online newspaper. You cannot imagine anyone who could be more qualified to make a startup like this a success. Yet Findory shut down in November 2007. In a brilliant post-mortem, Lindensays his big mistake was to bootstrap his company while trying to raise funding from venture capital firms; he just couldn’t convince them to invest. He should have raised his funding from angel investors instead. This is an important decision every startup founder has to make — where to raise their funding. Fortunately, there are resources on the Internet that can help you make the right decision. The three viable sources at the very early stages of a company are: Friends and family. Or yourself, if you can afford it. The Web provides an assortment of resources to read up on bootstrapping, from online communities of entrepreneurs to Guy Kawasaki’s blog. Angel investors. Usually wealthy individuals, but includes outfits such as Y Combinator. (My firm Cambrian Ventures is also in this category, although we are currently not actively seeking investments) Venture Capital (VC). These are private firms that manage pools of equity capital that is invested in high growth, entrepreneurial companies. The National Venture Capital Association provides resources about VC as do such private firms as VentureOne and vFinance. To understand which option is best for your startup, you need to understand how investors evaluate companies. While investors evaluate companies across a range of criteria, three that stay consistent are: Team, Technology, and Market. Angels and VCs evaluate them in different ways. Here’s how. How VCs evaluate startups Market. Venture Capitalists want to invest in companies that produce meaningful returns in the context of their fund size, which typically is in the hundreds of millions of dollars. To interest a VC firm, a company needs to be attacking a large market opportunity. If you cannot make a credible case that your startup idea will lead to a company with at least $100 million in revenue within four to five  years, then a VC is not the right fit for you. It’s often OK to use consumer traction as a substitute for market opportunity — many VCs will accept a large and rapidly growing user base as sufficient proof that there is a potentially large market opportunity. Team. Venture Capitalists use simple pattern matching to classify teams into two buckets. A founding team is deemed “backable” if it includes one or more seasoned executives from successful or fashionable companies (such as Google) or entrepreneurs whose track record includes a least one past hit. Otherwise the team is considered “non-backable.” Technology. Venture Capitalists are not always great at evaluating technology. To them, technology is either a risk (the team claims their technology can do X; is that really true?) or an entry barrier (is the technology hard enough to develop to prevent too many competitors from entering the market?) If your startup is developing a nontrivial technology, it helps to have someone on the team who is a recognized expert in the technology area — either as a founder or as an outside advisor. Here’s the rule of thumb: to qualify for VC financing, you need to pass the Market Opportunity test and at least one of the other two tests. Either you have a backable team, or you have nontrivial technology that can act as an entry barrier. How angels evaluate startups There are many kinds of angels, but I recommend picking only one kind: someone who has been a successful entrepreneur and has a deep interest in the market you are attacking or the technology you are developing. Other kinds of angels are usually not very high value. Here’s how angels evaluate the three investment criteria: Market. It’s all right if the market is unproven, but both the team and the angel have to believe that within a few months, the company can reach a point where it can either credibly show a large market opportunity (and thus attract VC funding), or develop technology valuable enough to be acquired by an established company. Team. The team needs to include someone the angel knows and respects from a prior life. Technology. The technology is something the angel has prior expertise in and is comfortable evaluating without all the dots connected. Here’s the angel rule of thumb: you need to pass any two out of the three tests (team/technology, technology/market, or team/market). I have funded all three of these combinations, resulting in either subsequent VC financing (e.g., Aster Data, Efficient Frontier, TheFind ), or quick acquisitions (Transformic, Kaltix — both acquired by Google). I’ve written about the stories behind the Aster Data investment and the Transformic investment previously on my blog.  In both cases, my personal relationship with the founders, as well as my passionate belief in the technology, played big roles in the investment decisions. Friends and family or bootstrap This is the only option if you cannot satisfy the criteria for either VC or angel. But beware of remaining too long in this “bootstrap mode.” An outside investor provides a valuable sounding board and prevents the company from becoming an echo chamber for the founder’s ideas. An angel or VC can look at things with the perspective that comes from distance. Sometimes an outside investor can force something that’s actually good for the founder’s career: shut the company down and go do something else. That decision is very hard to make without an outside investor. My advice is to bootstrap until you can clear either the angel or the VC bar, but no longer. Back now to Greg Linden and Findory. By my reckoning, Findory passes the team and technology tests from an angel’s point of view — if you pick an angel investor who has some passion for personalization technology. The company doesn’t pass any of the VC tests. Given this, Linden should definitely have raised angel funding. My guess is that this route would likely have led to a sale of the company to one of many potential suitors: Google, Yahoo, or Microsoft, among many others. Of course, hindsight is always 20/20! I have deep respect for Linden’s intellect and passion and wish him better luck in his future endeavors. For further reading, I highly recommend Paul Graham’s excellent article How to Fund a Startup. Anand Rajaraman is co-founder of the Kosmix with consumer properties www.RightHealth.com, www.RightAutos.com and www.RightTrips.com.  He sits on the board of several technology companies and currently teaches at the Computer Science department of Stanford University.  His latest thoughts and discussions can be found at http://anand.typepad.com/datawocky.

About 1877 days ago Online Marketing

The New Advertising Medium: Social Media

A recent piece in  the Economist raises a provocative question: social networking sites such as Facebook, MySpace, and Bebo have grown tremendously in usage, but are they viable businesses? In other words, is it possible to monetize these services in an effective fashion? To answer this question, it helps to take a step back and look at the monetizability of social media as a whole. Since most social media sites rely on advertising revenues, let us restrict ourselves to advertising as the monetization mechanism. Regardless of the ad model used –cost per impression (CPM), cost per click (CPC), or cost per action (CPA) — advertisers value three key measures: reach, frequency, and targeting. Many social media sites certainly score high on reach and frequency, but how do they fare on targeting? Targeting is key, because it determines the CPM rates advertisers are willing to pay. And CPM rates vary very widely: from $16-20 for TripAdvisor to $0.10 for Facebook and MySpace. What drives such a wide divergence in CPM rates among social media sites? Are the low rates at social networking sites a transient aberration, with higher rates around the corner? Is there a simple model to predict the targetability of different forms of social media? Remarkably, there appears to be a single factor that explains a great deal of the available data. Consider the difference between a Facebook profile and a TripAdvisor travel review. A typical pageview on the former is by someone known very well to the creator of the profile — a close friend or acquaintance. On the other hand, a TripAdvisor travel review is seen by people completely unrelated in any way to the person or persons who wrote the reviews on the page. We quantify this distinction with a measure called “affinity.” The affinity of a social media service is the average closeness of relationship between a content creator and someone who views that content.  The affinity of Facebook is very high, while the affinity of TripAdvisor is very low. Now for the key observation: There is an inverse relationship between the affinity of a social media service and its targetability. Why is this true? The act of viewing a Facebook profile gives us very little information about the viewer, other than the fact that she is friends with the profile creator; when someone views a TripAdvisor travel review, she is definitely interested in traveling to that location. There is a strong inverse proportionality between the affinity and the targetability for several forms of social media, with a couple of outliers. We’ll get to the outliers in a moment; for now, note that social networks and photo-sharing sites have even higher affinity (and therefore lower targetability) than e-mail. This is because we often e-mail people we don’t know or know only in passing. Instant messaging (IM) has the very highest of affinities: my IM buddy list includes only my very closest friends, who I trust with the ability to interrupt me any time of the day.  (See graphic at my blog.) What about the outliers? Video sharing sites, such as YouTube, have low affinity, because the majority of people see videos posted by people they don’t know. However, the targetability is lower than we would expect, because of a compensating factor: herding. Most people see videos featured on lists such as “Most Popular,” which reduces the targeting value of such videos. This is also true of social news sites, such as Slashdot and Digg. A  couple of caveats: This is a broad brush-stroke, and individual services might well differ from the overall category. For example, popular blogs have much lower affinity and therefore much higher CPMs than the typical blog. Targetability is not the only factor determining CPM; there are others. For example, certain viewer intents are inherently more valuable than others. But with these caveats, this simple model is highly instructive. We may conclude that the CPM rates of IM services will not exceed those of social networks, which will not exceed those of e-mail. These are inherently low CPM businesses. What can social media sites do to increase their CPMs? There appear to be two options: Create sections of the network that are more topic-oriented, and less about individuals. For example, band pages and groups on MySpace, and Facebook groups. Mine individuals’ profiles, or their off-site behaviors, to target them behaviorally rather than contextually. This approach carries with it dangers of privacy violations, as the Facebook Beacon fiasco demonstrates. If social networks are to become a viable business, and therefore a viable advertising medium for businesses, particularly small and mid-sized companies, they need to aggressively pursue one or both of these approaches. Of course, it may be possible for some services to sidestep this question entirely and develop business models that don’t depend on advertising. We haven’t seen such a model emerge yet, but there is so much creativity and ferment in this space that it might just happen. Anand Rajaraman is co-founder of the search engine Kosmix. He also sits on the board of several technology companies and currently teaches at the Computer Science department of Stanford University.