Venture Gabble

Now is the time to completely reinvent online customer shopping experience

Thanksgiving and Black Fridays have changed - a lot these days! The tradition of waiting in line outside stores, and busting doors are things of the past. Sitting at home with your family and snagging cool online Black Friday deals is the new normal. WSJ reports that online shoppers accounted for nearly 40% of the $52.4 billion shoppers spent during the Black Friday weekend last year, according to the National Retail Federation. 

While customers have continued to evolve significantly in the buying behavior (as expected), for more than a decade online storefront formats have evolved incrementally with no revoltionary change. Yes, the graphics are cooler, the website resolution and product displays are crisper, sites are mobile enabled etc. But considering the leaps that technology and tools have made over the same period in changing customer experience, it feels to me as if online customer experience has just stagnated. E-commerce is ripe for disruption- especially on the online store front! 

Pick any e-commerce site today, and you still feel like you are shown a catalog of things that you barely might be interested in. The products displayed could be relevant based on what I have bought in the past or what "similar customers" bought or recently viewed items. But it still is a product-centric online world. In some ways, the rise of social networks is responsible for this huge gap. Over the last few years, social mania gripped everyone that $$ went into social enabling sites (liking, sharing, reviewing, crowd sourcing opinions and everything else). Now that the social hype cycle has settled, it is now time to get back to basics.

What we need is a customer-centric online experience. It starts and ends with the customer. Imagine an online store front that is created only for that customer. When they come to the website, they are greeted by an intelligent agent to understand the purpose behind their visit and display the products they are interested, provide information about deals that are relevant, nudge them towards products they should probably look at, listening to feedback and react realtime to their requests. 

The key to all of the above and differentiator is the delivery mechanism.For long, we have used webpages. It is not enough - we need a new online delivery solution to make the shopping experience more interactive, real-time and value adding for the customer. Technology solutions of today (software, Big Data, computing environment, analytics etc.) have more than enough to make this a reality. What is missing is a Steve Jobs kind of product genius to craft the next big breakthrough solution.

Happy Thanksgiving to the blog readers!

 

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Delivering the Best Online Shopping Experience

The growing chasm between consumer and corporate technologies

I am here on a plane traveling to New York and reading "Physics of the future: How science will shape human destiny and our daily lives in 2100" by Michio Kaku. Needless to say, it is an awesome some read so far. Kaku's insight into the world of tomorrow includes everything from surfing the web through your contact lenses, pulling up a person's bio you meet for the first time on your glasses, DNA scanner enabled toilets that scan for cancer or other diseases way ahead of the arrival of symtoms, to smart robots and intelligent systems that do a lot of things differently directly impacting how we live as a society.  

2100 vision seems far away, but we can see science and technology make advancements by leaps and bound every day towards that goal. Siri the intelligent assistance from Apple is smart, effective, funny, and in a weird way closer to human behavior that any other technology in the recent past. It will very quickly give Google search a run for its money! There are several other cool technologies such as the new iRobot Roomba that completely takes care of your house cleaning needs on its own when programmed. Face.com's (recently acquired by Facebook) facial recognition technology is yet another example that could have significant impact on how we use technology in the future. Like.com (acquired by Google) is another. I could go on and on..

One thing that is common to all these cool developments is that all of them are around consumer technologies and not enterprise technologies. Not to say that technology isn't advancing on the enterprise side, it is just the pace is much slower..much much slower that what's happening on the consumer side. Companies are still dealing with obsolete infrastrcuture, complex application and tech workforce that is stuck in the past decade. Leave alone siginifcant leaps of technological advancement for enterprise, in many cases companies are struggling to keep pace with the demands of their customers, employees and partners to better use advancements in consumer technologies for their work. For example, companies are still evolving in supporting basic mobility solutions like smartphones and tablets, integrating social communications into their information, cloud storage and multi-platform video conferencing.

The time is now for companies and their CIOs to wake up, and adapt quickly to address the growing chasm between consumer and corporate  technologies. Every day that corporate IT ignores these developments, it runs the risk of widening the chasm. Many take comfort in the fact that most companies are in the same boat - but it is only a matter of time before the innovative companies will lead the next generation of productivity gains and competitive advantage through the aggressive  adoption of newer technologies. If the chasm is wide enough today, one can imagine how wide it would be when Kaku's vision for 2100 is realized.

All this buzz about big data!

Earlier this year, I was reading an interesting report about a case where Target, the retailer was able to predict a high school girl's pregnancy before her father did. Meeting with a Target manager while clutching some printed ads that had been delivered to his home, the customer was outraged by their product placement aimed at his young daughter. Like any service oriented company would, the store manager apologized and then followed up with a phone call to him later on, to apologize again. By this time, the man had had a talk with his daughter and the teen girl had acknowledged her pregnancy and the father apologized to the store manager for his outburst.  

Logo of Target, US-based retail chain (Photo credit: Wikipedia)

Welcome to the new reality! Increasingly, more and more companies are looking at data inputs from a variety of sources and making intelligent decisions from who to target, how to target, how to price and how to service customers and more.

Target it appears clues in on sales information on items such as vitamin supplements, large quantities of lotion, and hand sanitizers, typical to many pregnant women, to make predictions about other items the consumer may need. A couple decades ago, this kind of work was mostly the domain of a few credit-rating and mailing-list management companies (ah! the hey days of database marketing). Then the new age technology companies such as Google, Facebook and Yahoo built similar capabilities to improve and influence user behavior on the internet and it was largely limited to the online world. They tracked user behavior and what you were searching for across the internet and made the right ad placements at the right moment for users to click on.

Not anymore! The abundance of data in the world of today combined with advancement in technology has made next generation analytics within the grasp of everyone and every enterprise in this world. In other words, this is the democratization of high-end analytics. Not to be leftout of the party, venture capital has embraced big data in a huge way! The buzz around Big Data has raised a lot interest for venture funds. In 2011, Thomson Reuters estimates that US venture companies invested a total of $2.47 billion into new big data, database and data processing technologies.  That’s up from $1.53 billion in 201 and $1.1 billion in 2009.  Total venture capital investments in 2011 were $28.43 billion and $23.26 billion in 2010. While, most investments have so far been focussed on analytics, I would like to see more action on "data sets" itself. That is where the long term competitive advantage for startups will be.

All this stuff about data and how companies are leveraging it is inherently changing the way businesses and customer, suppliers and others interact. It is changing the way we think about society! Over the last year, my interest in this area has grown exponentially and in some ways feels like 1998-1999 all over again!

 

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Speed is the new stealth

The beauty of startups and new product ventures is in market opportunity. Constant changes in the wants and needs of consumers and businesses drive the need for new products and services.

An important characteristic of an entrepreneur or a leader is to sniff these opportunities and make a business out of it. Most startup cofounders and high tech leaders are good with the first part and less than 1% can do the second. It is not that they don't know how to create a business put of it, but they just run out of time.

In this age of information everywhere, all the time, to anyone who wants it, it is a very difficult to one company to think they could have an competitive advantage over others for long - whether it is some kind of proprietary info, coolest of ideas or technology advantage. In other words most competitive advantage has a shelf life and entrepreneurs and product managers would be well advised to take notice.

Here is an example. A couple of years back, a startup team known to me came up with a really cool product idea. The team was so focused on building a great product for the first beta launch, they missed deadline by several months. In those few months, their competitors caught up with them and even some of the larger competitors introduced similar features on their platform. When the startup launched the product, the ideas weren't new or fresh anymore and it was difficult to make users switch to a new platform even though the product on a feature-to-feature basis was superior.

Consumers and their needs are real. But the competitive marketplace waits for no one. Speed is the new stealth!

source: dilbert.com

Seed stage valuation bubble does not bode well for tech startups in the long run

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!

Related articles

• Facebook's $56 Billion Valuation and More Signs of the Tech Apocalypse (thedailybeast.com)
• Seed stage investment bubble? (dondodge.typepad.com)
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• NY Investors Want to See Some Bubbles Pop (observer.com)

Understanding how customer acquisition cost impacts viability of a business model

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.

 

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Criticality of getting product roadmap right in early stage ventures

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.

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Businesses need to catch up with consumers on mobile internet adoption

Image via CrunchBase

In December 2009, mobile data traffic (surfing the net, checking email, exploring social networks etc.) officially exceeded the volume of voice calls across the world’s wireless networks for the first time.  Global data traffic has nearly tripled in each of the last few years with some 400 million mobile broadband subscribers generating more traffic than 4.6 billion voice subscribers. Mobile data usage has been primarily fueled through the increased market penetration of smartphones which increased its market share from 11% in 2008 to 17% in 2009, and the rise in social media access via mobile phones. 3G phone ownership increased from 32% to 43% from 2008 to 2009. The trend is expected to continue in 2010 and beyond with mobile data usage expected to double each year as better smartphones become available and better networks are built.  
 

 

While it is very clear that consumers are aggressively embracing mobile as a platform for uses beyond just making phone calls. It feels to me that businesses have been slow to react to this huge trend and the results have been mixed at the best. This is surprising since businesses have had an interest in leveraging mobile as a channel since the dot-com days, but could not drive user adoption then. Maybe it was the recession that held businesses back from adopting mobile more aggressively. To me, the mobile platform offers the same type of opportunities to businesses that the internet provided in 1990s. It has the potential to spawn new businesses and differentiated business models, open up new channels for web services, online, as well as brick and mortar companies and could provide huge efficiencies and improvements in business operations and employee productivity.  
 
Of the three impact areas mentioned above, the only area where there has been some progress from the business side is in mobile focused startups – a majority of which concentrate on making everyday life easier for people on the go (read iPhone and Andriod apps) or devising new services (e.g. Mobile TV, electronic wallets, geo-social networking services such as FourSquare, Zyb etc). Web services and online internet based businesses on the other hand, have used mobile as an extension of their online presence – introduce an iPhone or Andriod app that enables online functionality on a mobile device. I think this approach is sub-optimal. What is needed is a mobile centric product strategy that leverages the true potential of the mobile platform (location based services, push technology, availability of mobile storage space etc.) that complements the online platform - not compete with it. Brick and mortar companies barely have a presence in the mobile space at this time. While some retailers and CPG companies have been experimenting with online coupons and mobile marketing, banks are pushing with mobile payment platforms. Yet, brick and mortar businesses have a long way to go in coming up with innovative strategies in using mobile as a growth platform. Lastly, businesses have been very slow in adopting enterprise mobile technologies (platforms and applications that could be delivered on employee mobile phones), which I believe will drive the next generation of employee productivity improvements.
 
With the global mobile data user base expected to exceed the current number of internet users almost by a factor of 2, mobile as a platform will have a major impact on businesses in the next 3-5 years. In some aspects it could be very similar to the dot com days when businesses that refused to embrace newer technologies and related business models were passed over very quickly. It is important that companies develop foresight on the strategic impact of mobile platform on their business and leverage it to their advantage. I am sure we will hear more about mobile as a strategy from businesses in the coming days.
 
Have a great rest of the week. 

Searching for the killer app to replace Email

My post today is about a market opportunity in the enterprise technology space that is 20 billion+ of dollars in size with deep pain points, mired in legacy and no clear solution for the future. It is entirely possible for a new entrant to come in and become the next Google, Apple or Microsoft. I am talking about a replacement for Email.

For almost three decades, Email has been the undisputed champion in enterprise messaging and collaboration space. An Email address in some ways defined a person’s identity. It was a container that held multiple social networks and kept them separate from one another – e.g. one’s Email threads with their office network are different from those of their family or friends. Over the years, Email communication evolved to provide a sense of formality in an enterprise environment that other forms of digital communication did not. But according to Gartner, this might be changing real fast.

Gartner predicts that by 2014, newer social networking services will replace e-mail as the primary vehicle for interpersonal communications for 20 percent of business users from a negligible percent today. This is an understandable development, if we look at current trends both from a demand and supply perspective. As the popularity of web 2.0 has grown, enterprises have become more interested in harnessing its nature to add collaborative value for internal purposes and have become more willing to experiment with new internal social networking tools and technologies. Not to be left behind, many Technology companies are launching new web 2.0 platforms that could potentially challenge Email. Recently Google not so successfully launched Wave and then came up with a variant with Google Buzz (these are services that combine Email + social networking + collaboration all into a single product). 

Here is the interesting fact about this – there isn’t a solution today to replace Email or even something close to it. Attempts by companies like Google to combine Email and social network collaboration haven’t been successful. There are pockets of new solutions coming up in the collaboration space – e.g. Jive Software (funded by Sequoia Cap), Clarizen work management solutions that are focused on niche areas and might not have a broad functionality to be an Email Killer. On the other side, enterprises that have attempted to adopt social networking services for internal use haven’t had huge success (less than 30% according to Gartner). Impediments such as organizational structure, issues with change management, and a lack of value creation understanding has often limited the success from such initiatives. Hence, the search continues for the killer app that can ultimately replace Email.

I am sure there are many smart people that might be working on developing a solution that could challenge Email. If anyone has good ideas or knows someone who might be working on this topic, please do feel free to contact me.

Make the customer your product manager

Traditionally, technology companies have competed primarily on the basis of underlying technology and functionality, every company striving to provide its customers the latest and greatest. Naturally companies want to be visionary and want to come up with something that no one else has thought of. But this effort hasn’t been very successful for tech companies that intend to end up at the top of the pile. The primary reason behind this is that customers are over-served. Typically, less than a third of customers actually use all of the advanced features in a technology product. In fact, less than half might even know about the advanced features. So in the case of startups, by the time they realize their cutting edge technology or advanced functionality isn’t what the customer values most, they run out of funds to continue operations and in the case of larger tech companies, they close the books on this particular initiative and move on to other product ideas. 

The problem lies with companies making the mistake of thinking that they know what is best for the customer and hence do not listen. My suggestion is to put the customer first and let them drive product development, once the initial core product has been envisioned. Asking what pain points customers are trying to solve enables tech companies to create a credible value proposition for functionality that could be added to the core product. Developing those product features in collaboration with customers translates to more buy in. Understanding economic value added to customers reveals what the customers are willing to pay for those features. Designing the product with features that customers truly want increases product profitability by cutting down development costs. Here is an example of this type of product development strategy at work. 

Soveryn from Unified Marketplace (one of the companies founded by a U of Chicago Booth grad, that I work closely with) is an eCommerce on-demand product company that services SMB segment. Soveryn adopts a smart way to solve a customer’s problem while developing its own product – listen, collaborate and update. This company developed its first product version or base version based on the founder’s knowledge about the market needs. Since then every minor and major release has been developed in collaboration with one or more of its customers. One of the earlier version of product extensions was developed in close collaboration with one of their biggest customers SePRO (product marketer for specialty segments). Custom features developed for one or more customers are evaluated for inclusion into the next product version, socialized with its current customer base and then mass customized and released into the next version.

The CEO of Soveryn mentioned that this approach was a great way for him to bootstrap the company and update the product continuously while getting instant validation from his customers on additional product features required by them. An added benefit to Soveryn is customer buy-in and less churn since its customers feel ownership for the product that they help develop. The customers benefit as well since they get to influence product development and get a custom solution at no premium pricing. End result, a win-win for both the company and its customers. 

In closing, I want to mention that this type of an approach might take little longer than traditional product development practices. But it sure does increase the chances of the product success since companies have their customer on their side.