The other day, I was watching my 6 year old use the internet to find information she was looking for. She opened up Google, typed in the search terms, used the auto suggest feature to pick the right words that she wanted, found the right website and navigated effortlessly around the site and printed the stuff that she wanted. Not to outdone, my other kid who is 15 months, uses his finger to swipe to change photos on the iPhone. All this makes me wonder if the kids of the current generation are of different breed altogether. They are so plugged into these things, and technology changes that have to be learnt by so many of us seems very intuitive to them.
Image by WnY .'. via Flickr
That set me thinking as to how the next generation of users might use technology - and by next generation, I do not mean the current 5 year olds, but the current teens to 20 year olds. I believe that a new generation of technology users emerge every 5-7 years, and their technology needs and how they leverage it in their everyday life is vastly different from the previous generation of users. Just in the past decade or so, we have had three huge technology shifts based on user preferences. The first half of the previous decade was the generation of the savvy online user (the Google generation). The second half was the generation of the social users (the Facebook generation) and the current generation is one of ‘everything mobile’ and we are in the middle of it.
So what would the next generation of technology users look like and what might their expectations be? Here are some bold predictions.
These are just a few trends that I think will catch on in the coming years. They forebode tremendous opportunity for new technologies and ventures. One should thank the users for expecting more all the time.
Image via Wikipedia
Recently Blockbuster (the DVD rental company) was planning to go up for sale months after it filed for bankruptcy. The sticker price was a measly $300M. That is such a steep fall for a company that had over 5000 stores and 60000 + employees, revenues of over $4 Billion and was profitable as late as 2009. Blockbuster’s decline started a few years before with the arrival of Netflix and its disruptive business model. But wait, Netflix was given a run for its money by RedBox which opened self-help DVD rental kiosks at numerous locations and rented new movie DVDs for $1 per night. However, RedBox wasn’t able to hold on to its short term success and with the increasing popularity of Video on Demand streaming services over the internet, Amazon, Netflix 2.0, Hulu Plus and iTunes are taking over and will continue to surge ahead.
Image by Getty Images via @daylife
This is a lot of action and churn within a short period of time (5 years) for an industry, and the credit goes to technology, how fast it keeps improving and how it disrupts older business models even before they mature. In the 21st century, business model obsolescence sets in much earlier than what we had assumed before traditionally, and this is especially true in technology and technology enabled businesses. Typical venture models assume 3-7 years in the (venture phase), 3-10 years in the growth phase and a stable value phase beyond that. I think this is no longer true and cannot be used as a default scenario for most ventures or early-stage tech companies. The time lines are getting compressed in each stage.
This is especially true for companies whose product/service value proposition is a better solution than what is available, to a current problem for the customer or user (“better mouse trap” type of ventures). That is not to say that these are not great product/service ideas – but one should realize that the life expectancy for such ventures would be shorter than previously assumed and an appropriate growth and exit plan developed, or the business plan should include developing better “mouse traps” time and again. How one can sustain competitive advantage in the long term by continuous business model innovation, while not short changing short term profitability is a key question facing most tech executives of today.
It is to the surprise and frustration of many (including me) that in the last ten years, India has not produced a blockbuster online services company. A much celebrated and reasonable success in 2010 was the IPO of makemytrip.com – an online travel portal. This is a little bit of a disappointment since India with its 1.15 billion people with its unique culture and diversity would be an ideal canvas to build new companies with large online user base addressing local market requirements. China, a similar market like India has had more success in building locally focused large online communities.
The reason for lack of success in online businesses in India has been discussed by many and for a long time. It primarily comes down to two things. One is the limited availability of internet connectivity (especially broadband) for the masses and two, is the lack of demand for new online services from users. Here are some facts that support the above theories.
- India has around 50 million active users with 80% of them in the cities (10% household penetration and less than 5% of Indians have access to internet).
- 83% of users access the internet through DSL and Dial-up; Half of DSL users have speeds less than 256kbps.
- Global websites Google, Yahoo, Orkut etc are more popular and get more traffic than local websites which are part of a long tail. In other words, content accessed by users is limited to just a few global sites.
But all this could be changing quickly and I see some very encouraging signs in the Indian market in the coming years that could address both limitations mentioned above. Many of the Indian ISP’s are planning upgrades in their broadband infrastructure and that is a good thing. BSNL and MTNL, both government run ISPs which together account for 70% market share, are getting ready to roll out WIMAX. Other players such as Reliance are embracing LTE and reports indicate that pilots are being planned. These investments would make India’s broadband infrastructure comparable with other countries. Assuming that the pricing is affordable, it would encourage millions of users (almost 83% of total users) to switch from dial-up and DSL based internet connectivity and copper wire limitations, to a much newer technology.
From a demographic perspective it is estimated that India has over 200 million people in the teens and young adult age group. A considerable portion of this segment is in urban areas and pretty much grew up with technology. Many have their own laptops, mobile phones, Facebook/twitter accounts, play Farmville and get their daily dose of information mostly online. Also, trends indicate that increasingly more ‘online users’ are turning ‘online buyers’ and are more receptive to marketing efforts. The demand for newer products/services and appetite for e-commerce from these segments will only increase with time.
With some of the constraints for adoption going away in the near future, there is huge potential for online services in India, if done right. Already a new breed of online services websites such as letsbuy.com, flipkart, Naaptol, Exclusively.in, buytheprice.com and motorexchange.in have launched recently and more startups are being conceived every day. I am hoping that this also ushers in a new breed of young entrepreneurs. In the last decade, we saw how quickly and widespread (with over 500 million users) the Indian market absorbed mobile technology. Though a decade late, this could be the time for online services in India to claim its rightful place.
Tech startup valuations have gone up significantly in the last year. One research indicated that stock in leading private tech startups was up 54% in the last six months. This trend is across stages and that is a worrying trend especially for early stage ventures. It is one thing for Facebook, Groupon and Twitter to be overvalued and a completely another for a seed stage company to be overvalued. For the biggies, it just valuation correction, but for the seed stage companies this could mean harakiri!
Case in point, a seed stage web services company with zero revenue and product in development was looking for funding at a pre-money valuation of $2.5 Million and is getting traction from some angels. Gone are the days when any seed investment valuation was in the range between $500K to $2 Million. Seed valuations have doubled in the last year. Most of this is driven by supply side economics of availability of angel capital for startups. Companies have embraced this trend and the general approach seems to be to raise as much capital as needed for at least a few years of operations (that includes founder salaries, office expenses etc.). For entrepreneurs, this could be great in the short term to raise significant capital by giving up lower equity. But I think they might be setting themselves up for failure for the long term and here is why.
:: One, higher seed valuations translate to high expectations - For example, if a company raises 500K at pre-money valuation of $2 Million, the investor expectation is that this venture would be worth between $40-$50 Million in the next 5 years. That would mean revenue expectations of at least $8-$10 M per year. That is a huge expectation from a company that has barely gotten its original value proposition and market position clearly defined.
:: Two, if the young company does not hit the ball out of the park the first time or even otherwise needs additional funding, future rounds (from institutional investors or other angels) would come if at all, at a deep discount much to disappointment of initial shareholders and founders. This in turn significantly reduces the incentive to succeed for the founders and hence would be sub-optimal.
An alternate and more effective approach would be for entrepreneurs to raise only as much capital as needed (in multiple rounds) to hit the next milestone, while using realistic valuations. First place to start would be to establish realistic revenue and EBITA goals for the young company. If a startup is able to prove its value prop and generate $2-$3 Million in revenue within the first 3 years, I think it would a great foundation on which something tangible can be built on. Otherwise it is just vaporware! Also, when done in a very low cost way - no or minimal salaries for founders, and either low salary and equity combination or offshore staff, tangible enterprise value can be created in an efficient manner. Such a company would be much more credible and attractive for institutional investors down the line and have a much better probability of becoming a successful venture.
Recent trends in Web2.0 and cloud based infrastructure has made it much more easier for new ideas to germinate. There are a lot of great ideas and good ventures being launched every day. If startups can embrace the notion of 'deferred gratification', we might be able to create something very special. Happy Holidays to all readers!
Recently we had a discussion in our team about the direction web service startups needed to go to mobile enable their service. The discussion revolved around building a native mobile app (android or iPhone app) versus creating a mobile version of the site using HTML5 and accessing it on a mobile browser.
As I looked around the web for my own enrichment, I was pleasantly surprised to see rich user interfaces created with HTML5 that looked very similar to a mobile app. Just check out popular sites like YouTube (m.youtube.com), CNN (m.cnn.com) on your smartphone and you will understand what I talking about. HTML5 now offers some really cool things that developers can incorporate such as geo-location features, application data caching etc. In fact, I like the mobile version of YouTube running on a mobile browser better than the app on my iPhone. Netflix leveraged HTML5 as well in their design for the new user interface on PS3 platform and it looks really cool!
Does this mean that HTML5 is a direct threat to native mobile apps on the iPhone and Android? I think so. Maybe not right away, but definitely in the near future, as wireless bandwidth constraints are eliminated and 4G becomes more main stream, HTML5 can be expected to challenge the app world directly.
Image via CrunchBase
I've always disliked the idea to download apps that provide only content delivery or services (like CNN, eBay etc.) I would rather download apps that uses the phone’s intrinsic features - such as games, or those apps that are computing intensive or network related. Also, the hassle of downloading an app and periodic updates is an irritant to say the least for most people (not to mention those app downloads that stop mid way). HTML5 could be an option for sites and web services that primarily need to deliver content to mobile users.
Finally, the native app scene is getting too crowded (300,000+ iPhone apps and 100,000 Android apps). The average smartphone user typically already has between 25-40 apps on their phone and hence it is becoming increasingly difficult for new apps to make them download new ones. Adopting HTML5 to develop a rich mobile version of the site would be an attractive option for new entrants.
So stay tuned for more HTML5 and a new bunch of sites with cool features and services.
Business plan presentations and pitches from early stage companies in Web Services, SaaS and Mobile applications have been on the rise (and rightly so). Most pitches seek capital to expand marketing and sales dollars to grow the business. It is always intriguing to see in these presentations, revenue and EBITDA projections along an exponential curve. A common implicit assumption behind those numbers is viral growth (i.e. one signed up user brings in other users/members at no cost to the company), which very few companies can actually accomplish. Most companies typically would have to spend a lot more on marketing and sales to hit their projected revenue numbers and that is where most business models and EBITDA projections break down.
Understanding how much it would cost to acquire and retain customers is critical to the viability of the business. To elaborate, the cost to acquire and retain a customer should be less than the revenues realized from them. Otherwise the venture would not be profitable and managers would need to rethink how they make money.
Say for example a Web Service company drives customer acquisition through online advertising paying $1 for each click and 1 in 5 clicks result in a user signing up. So that makes it $5 to acquire a new user. Let’s assume that the cost to retain a user is 1/5 that of acquiring them (you still want to advertise to your existing customers!). So add another $1 in costs to retain this user over their lifetime. So the cost to acquire and retain a user is $6. Now not all users who sign up will generate revenue for a company. If we say 1 in 10 users who sign up actually pay for the service/buy a product, then the cost of acquiring a revenue generating user/customer becomes $60. So unless the revenue generated from that customer is more than $60 over their lifetime, the business model is not viable and needs to be fixed. SaaS companies might have different types of costs, but the principle is the same.
One can address the situation by reducing the cost of customer acquisition (try something other than online advertising) or tweak the business to generate more revenue per customer by cross-sell or other means. But the key point here is entrepreneurs and managers need to think and understand this clearly before coming up with growth projections. This lends a lot of credibility to the business plan itself. A good practice is to check if your business model supports recovering the customer acquisition costs within the first 12 months. Then you are on safe ground.
As you might know, one of the successful ventures in the last few years or so has been GroupOn – a site that negotiates huge discounts on popular local goods, services and cultural events. I blogged about GroupOn earlier this year and the post continues to gets hits every day even now. I have always been interested in new business models that challenge status quo and GroupOn and its innovative marketing machine was a cool idea, in my opinion. I had predicted at that time that there would be a wave of new startups that would be launched in this space and today there are 130+ GroupOn clones only in North America – not the kind of startups I was hoping for.
My venture partner Mike and I noodled on this trying to come up with something different that just be a GroupOn clone. After a few beers and some nonsensical discussions, we came up with dealigee (www.dealigee.com) - a marketplace to buy & resell Daily Deal vouchers from GroupOn, LivingSocial, and others. With initial investment from my side and a great deal of effort from Mike, dealigee went live a few weeks back!
Image via Wikipedia
Our hypothesis is that since Daily Deals make customers to buy on impulse, there is potential for buyers remorse once the deal is over. On the other side, for every person who has the time to get on a site like GroupOn and buy these deals, we predicted that there would be many more who can not do so. So we decided to experiment with a marketplace concept to facilitate buying and reselling Daily Deals. We made sure to include marketplace features that facilitate easy and safe buying and selling practices. Considering the explosion in the number of daily deal companies, we think the secondary market will only grow.
I like our venture experiment because it is a win-win for all stakeholders. Daily Deal sites win because customers who otherwise might have had second thoughts if they would actually user the Daily Deal, would now buy it since dealigee takes away the risk of getting stuck with it. The customers win because they don’t lose money on deals they bought, but can’t use. dealigee is free to use for anyone and all one needs is a Facebook Id to sign up.
Here is a short video of dealigee and what it offers. Try it out and let us know your comments.
Imagine having cameras placed in the front of your house, in the backyard and in every room of your house, with advertisers and businesses being able to follow anything and everything that you and your family do. And based on that data, they suggest products and deals when you walk into a store the next time. When you leave the store, the business assigns a private investigator to follow you around to collect more information about you and your activities (which other stores you go to and everything else that you do in a typical day). How would you feel about that? What would amount to gross violation of privacy in the real world is called behavioral targeting in the online world by advertisers and large ad networks. Does it really have to be this way? I don’t think so, but more on that later.
This became a front burner issue for me since a few months back when I noticed that the online ads I was being shown became very repetitive, irrespective of the sites that I went to. I could be on a sports website or a news channel site or ecommerce site and I would see the same advertisement. I had a creepy feeling and when I started looking up some of the latest product developments on online advertising, what I learnt wasn’t something I liked. The original simple version of the ‘cookie’, which used to store basic information about a user and their website profile to enable better online experience, has morphed into more advanced and intrusive ‘tracking cookies’, ‘flash cookies’ and 3rd-party cookies’. All of the new variants could potentially violate user privacy and are being adopted by some businesses to do exactly that in the name of behavioral targeting. Tracking cookies engage in the profiling of people's web browsing, collecting the URLs of sites visited and report back to the business that planted the cookie in the first place. 3rd-party cookies are planted by sites on behalf of an advertiser and enable them to track a user across multiple sites and to target advertisements to the user's “presumed” preferences. Most importantly, all of this is happening without the knowledge of the user.
Whenever someone discusses the topic of online privacy violation, advertisers, browser product companies and businesses react defensively by saying that different users have different definitions of what is private data and hence the line isn’t clear. They would argue that is precisely the reason they provide privacy controls on their products and websites so that users could turn it on or off depending on their preferences. I am not sure if I agree with that since l would assume less than 5% of the users even understand technical jargon like “enabling or disabling cookies” etc. My suggestion would be to go back to first principles and the law. It is a violation of privacy if a business knowingly collects, uses, or discloses personal information about a user without first obtaining their permission. The key phrase here being ‘without first obtaining their permission’. So when in doubt, business should ask and not presume it will be ok for the users.
I have always believed in targeted advertising and for businesses to provide the best customized online experience for its users/customers and I still do. But this has to be achieved with better intelligence and analytics around information voluntarily shared by the users and not by snooping around. Somewhere along the way, we seem to lost our way and have crossed the line. I am hopeful that companies like Google, Microsoft and others like them will discover their moral compass and make the right call. If not, companies will only end up frittering away the trust users have in them and if history is any indicator, the consequences have never been benign for mistakes such as these.
It is common knowledge that the success or failure for a new venture is primarily dependent on three factors – market, product and team. Entrepreneurs are traditionally good at identifying a market need and hence the two potential areas of fatal failure that one should watch out for are team and product. In this post, I would like to discuss the importance of getting the product roadmap right.
Many of us would have heard of or had experience with ventures that collapsed because they ran out of funding before they could complete product development or released an over-complicated product that users could not understand or, released products that fell way short. The common underlying cause for failure might not always be the product itself, but rather the way it was rolled out and its inability to meet user expectations specifically at the time of its launch or release.
User expectations from a product are always dynamic and continuously changes with time. In fact, one could draw a chart on how a user expectation varies with time. Initially, users (typically a small number) expect the product to address their core ‘pain points’ along with some ‘nice to have’ features, while taking into consideration any constraints that they might have. With time, expectation increases significantly (with more number of users) with need for more ‘nice to have’ features. I call this the expanding ‘band of user expectations’.
To be successful, it is critical that the product roadmap be aligned with the band of user expectations (like Company B indicated by the green line). Deviating from it spells potential doom. In the example above, Company A attempts to deliver a complete product at a very early stage and ends up over engineering its product and potentially leaving its users confused. Considering that startups have limited resources, it unlikely that a company like this would have enough funds left in the bank to develop the next version. Company C on the other hand adopts a ‘throw it and see if it sticks’ approach and falls way short of user expectations. Both are not helpful scenarios.
Companies that successfully align their product roadmap against the band of user expectations typically adopt a hypothesis-driven approach to product development. They test which features are desirable for their users, and aggressively seek feedback about their product and its features. They also constantly iterate on development to ensure that their product fits well within the band of user expectations. Of course, there might be some companies like Apple that will exceptions to this kind of an approach, and are well capable of telling their users what they need. But 99.9% of the startups would be well advised to take structured approach to product roadmap.
I look forward to hearing your thoughts and experiences on this topic.
