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Not all marketplaces can increase prices after winning the market. Can yours?

Not all marketplaces can increase prices after winning the market. Can yours?

Any marketplace facilitates the exchange of value between the “producer (of the value) and the “consumer (of the same value). By easily matching the two sides in one place, the marketplace adds a lot of value to both.

Typically, the exchange of value is also accompanied by an exchange of cash. In such a case, the marketplace takes a small commission/tax in return for the value it adds. Let’s call the person paying with cash the “buyer”. Similarly, the party receiving the cash in the transaction will be labeled the “seller”.

To keep terminology straight, let’s recap the four members that potentially exist in the marketplace:

  • Producer: adds value into the marketplace.
  • Consumer: consumes the value from the marketplace.
  • Buyer: adds real money into the marketplace.
  • Seller: receives real money from the marketplace.

Note that each of the four parties above can be a person, group or corporation. Thus, this framework applies to all marketplaces, B2B, B2C, C2C, etc. Note also that exchange of cash is not a necessary requirement in all marketplaces.

As we shall see though, not all marketplaces are the same in their ability to reach monopoly status. Furthermore, even if some marketplaces are able to capture a significant portion of the market, they still do not have an ability to increase prices significantly.

There are three basic kinds of marketplaces based on the dynamics of the different parties involved.

Consumer = Buyer

This is the strict two-sided marketplace where the consumer is the same as the buyer, and is typically also accompanied with the fact that the producer is the same as the seller. This marketplace is the most common. Key examples are eBay, Amazon, Uber& AirBnb.

Let’s take Uber as the prime example. The drivers are producing the value of rides, and riders are consuming that value. The riders are also the buyers as they pay with cash into the marketplace. Uber takes a cut, and then passes on the rest of the money to the drivers (sellers). Since the commission taken by Uber is a strict tax on the system, the marketplace must continue to keep on adding value to keep it’s lead ahead of competitors (like Lyft). Furthermore, until they win a significant portion of the market, Uber must also keep lowering their prices across the board to aggregate demand and get more riders. See this tweet by David Sacks to understand how more rider demand leads to more drivers despite lower prices. The same logic applies to all the marketplaces in this category.

So, let’s consider what happens when Uber has a significant portion of the market and then raises prices? Unless Uber’s value in the matching algorithm is so high that it cannot be replicated by competitors, as soon as Uber increases prices to increase profitability beyond economic equilibrium, it opens the door for a competitor to come in and compete with similar value and lower prices. Thus, to maintain the lead, Uber will be better off with lower prices and a larger market share, and will not increase prices for riders. Economists call this “perfect competition”, and companies in perfect competition in the long run are both productively and allocatively efficient. In the short-run, Uber might give incentives to drivers to flock to their marketplace in order to increase supply, but in the long-run, drivers will have no power left and must compete with each other to find equilibrium in prices.

These marketplaces benefit the consumers/buyers, but producers/suppliers typically have no power, and hence, hate them. From a societal perspective, that is a good thing.

Such marketplaces can enable the exchange of value through services (Uber, Instacart, Postmates, Doordash) or products (Amazon, eBay). In case of services, sometimes there is an additional 5th party that is involved — typically the party providing the underlying product. In such cases, the marketplace can expand the underlying market, and thus, demand $$ from the underlying market itself as an additional source of revenue. Example: Instacart can get a kick-back from Whole Foods for increasing their total sales. But from a consumer perspective, Instacart will raise prices only at their own peril.

Consumer = Producer

Ah, this is the kind of marketplace that dreams are made of. In this kind of marketplace, the consumer and the producer belong to the same group. Because of this, it has the additional effect that the marketplace itself becomes the seller. Because there is only one seller, if the marketplace reaches massive scale, by definition, it becomes a monopoly.

A good example is Facebook. Since all the users are both producing and consuming content, Facebook continues to add value through network effects, new features and superior feed updates for user engagement. Facebook tries very very hard to add value and keep all the people on their marketplace. Once scale is reached, the activity itself is monetized primarily through ads — typically through the entrance of 3rd party buyers. Facebook then takes this increased activity and attracts buyers into the system. Thus, Facebook is the seller of the user attention and advertisers become the buyers. Facebook does not share this cash with anyone, certainly not the users who are both producing and consuming the value (content). Furthermore, there is no competition and hence no incentive for Facebook to decrease prices from the buyers. The only competition exists from the outside world via companies like Google, which are also similar monopolies. Economists call this “monopolistic competition”. In such cases, the two products are not interchangeable, and thus, the companies compete more on features than on price. It actually serves both companies really well to add more features and keep increasing prices. Even if all advertising were to move to only Google and Facebook, the price/click for both platforms will continue to go up without the two companies actively colluding with each other.

In general, if the buyers do not have better alternatives anywhere, they are forced to pay the prices commanded by the marketplace. Such marketplaces can quickly become monopolies and use their position to set prices. Beware though, such marketplaces are very tough to build and require massive scale to succeed. Most successful communication apps fall in this category.

On the flip side, if the total volume of transactions (exchange of value) in such marketplaces is low, buyers have many more opportunities outside of this marketplace, and thus are in a much better position to dictate prices. For example, smaller websites with a tenth of the traffic of Facebook typically earn less than one hundredth the cash.

Producer = Buyer

This kind of marketplace is very tough to build — perhaps, the toughest to build. In such cases, the marketplace has to entice the producers first. To do that, the marketplace works very very hard to build the supply first, and once the consumers are aggregated, the burden of building up the supply moves to the producers. At that point, the producers also compete with each other and thus must pay the marketplace for listing or ads. Craigslist is a great example of such marketplaces. In case of Craigslist, the producer of value (party adding the listings) also has to buy listings for special kinds of listings — homes, rentals, jobs, etc. Thus, the producer is also the buyer (not of the rental, but rather adding money into the marketplace).

Such marketplaces tend to be the hallmark of a highly fragmented producer market. Additionally, marketplaces also need to control/monopolize distribution and access to the consumers at scale. The fragmentation of producers makes it very difficult to have enough liquidity initially (think listings for Craigslist), but also adds enough competition between producers that they have to become net buyers (typically of ads) to promote themselves, primarily because of the wild fragmentation. Once built successfully, such marketplaces are the most defensible.

Yelp is an example of a hybrid of this style of marketplace and the other monopolistic one (consumer=producer). In terms of reviews, the producer and consumer belong to the same group. However, a large part of Yelp’s value comes from having complete and accurate listings, and thus, Yelp provides a lot of tools to businesses to maintain their own page and even showcase flattering reviews and delete negative ones. Because Yelp’s business model lies firmly in this style of marketplace design, they are forced to provide these toolsets to the producers of the content and cannot contend with simply selling user activity on their platform.

There are additional combinations possible, but the economics are such that they don’t play out. I have listed them below for completion.

Producer = Seller

Same as consumer=buyer above. In such cases, the consumer also belongs to the same group as the buyer. Not a different scenario.

Consumer = Seller

This is not a valid scenario, as the consumer of the value in the system cannot be selling and getting money in return. In theory, this can work where the consumer=producer and hence is adding all the value in the system. Again, theoretically, all consumers can revolt together and ask the marketplace to share part of their bounty. But, in practice, this kind of organization is not present on the consumer side, and hence, the consumers never become sellers.

Buyer = Seller

This is not a valid scenario. If buyer=seller, then there is no reason for the marketplace to exist, and the transaction takes place outside.

Well, there it is. A fun way to look at the different kinds of marketplaces, and what business models can work in each dynamic. Some of them are definitely harder to build than others. All of them want to be larger to get network effects and aggregate the consumers, but payout at the end of that road is not the same in all cases. Some of the marketplaces will reach the end and take all the available cash, while others will have to contend with a tax in the system and only take a small commission. It is very important to keep this in mind so one can accurately plan for the size it will take for the marketplace to be wildly successful like Etsy versus Instagram.

This essay is a follow-up to 10+ factors to evaluate online marketplaces.

10+ factors to evaluate strict two-sided marketplaces

10+ factors to evaluate strict two-sided marketplaces

I have recently been giving a lot of thought to the product considerations in building two-sided marketplaces. A lot has been written about this topic, and some of the posts have been excellent. However, despite the plethora of articles out there, I have noticed that in all the discussions that I have had with other strong product designers, we tend to go around in circles while describing some of the key concepts and how they fit into the exact problem we are trying to solve. In other words, there isn’t a cohesive framework that lists the underlying metrics or key variables that can help a product designer quickly evaluate the merit of an idea for a two-sided marketplace.

This post by the great Bill Gurley details some of the most important considerations while evaluating marketplaces. It is a fantastic post with lots of great nuggets that reveal themselves over and over again, and I urge all who are interested in this topic to read the post and extract the learnings for themselves.

Before we get into the specifics, let’s first understand the nature of the space itself. From Wikipedia:

Two-sided markets, also called two-sided networks, are economic platforms having two distinct user groups that provide each other with network benefits.

The wikipedia article then provides examples of companies like Facebook, Match.com and eBay as two-sided marketplaces. While technically true, there is a subtle-yet-important distinction between a service like Facebook and a service like eBay when it comes to the two-sidedness of the marketplace. Specifically, it matters greatly whether the consumer of the service is also the buyer of the service. In case of eBay, the consumer and the buyer are the same person as the buyer is paying with real money in return for the value provided by the seller (supplier). In Facebook’s case, the consumer consumes information provided by suppliers (publishers) and pays for it with attention, but not money. This attention is then monetized through the Facebook platform and paid for, in real money, by the buyers (advertisers). Thus, Facebook is serving three different entities: suppliers, consumers and buyers, and can be considered to be a three-sided marketplace. This distinction matters greatly in how the incentives are structured for the supply side (adding value) and demand side (consuming value).

Since the distinction is important, but not clearly vocalized, I am going to define the term “strict two-sided marketplace” to mean two-sided marketplaces where there is an explicit monetary transaction between the consumer and the seller, and thus, the consumer is also the buyer. In short, marketplaces like eBay, Uber and AirBnb, and not like Facebook, Google or even Medium.

In this article, Ben Thompson talks specifically about innovation, Apple and Clayton Christensen, but the core point of his thesis is that it matters greatly whether the consumer and the buyer are the same versus not. The main point here is that the distinction is vastly important, and as such, it manifests itself greatly in the specific actions that designers must take to solve the two most important considerations in marketplace design — viz. trust and liquidity.

The authoritative article on building trust in such marketplaces is written by Anand Iyer and is available here. Anand has done such a good job that everyone who is thinking about building marketplaces must read that article at least a few times to grok the fine points. Most people intuitively understand the importance of trust and as consumers, we all make decisions based on trust (or lack thereof) when we decide whether or not to consume products and services. Product designers will thus do well to keep the idea of trust first and foremost in their minds. Ultimately, the key question behind building trust is whether or not the marketplace delivers on the promise of the use case for the consumer in a consistent, timely and predictable manner. To make good on this promise, the marketplace must provide the right set of tools for the supplier and enable them to deliver on said promise. This leads us directly to the other important consideration: liquidity.

I am going to focus the rest of this essay on specific considerations in evaluating a strict two-sided marketplace and understanding the key variables that can expand or shrink the total addressable market (TAM). Some of these can be controlled, while others are dictated by the nature of the goods/services being exchanged.

Evaluating Marketplaces

As mentioned above, Bill Gurley does a fantastic job in detailing some of the key considerations while evaluating marketplaces. The key point is that a lot of these variables are dictated by the nature of the goods/services being exchanged and product designers have very little control over them. However, while thinking through the design and specific decisions, one can target the marketplace to have the most chance of success in building liquidity.

To be comprehensive, I am going to list all the points made by Bill Gurley in his post, but am also going to add a few others that I think that he missed. While possibly less important for the kind of marketplaces that he had in mind, they keep coming up whenever I have discussions or am thinking about newer ideas. Here are the ones listed by Bill, in order, with my own thoughts for each of them:

  1. New experience versus Status Quo
    – whether or not the experience is a significant improvement over current use case. For example, the Uber experience is vastly better than that of a taxi.
  2. Economic Advantage versus Status Quo
    – To me, this advantage must be on the demand side. i.e. whether the marketplace offers a cheaper alternative. Again, UberX is cheaper than a taxi for comparable distances.
  3. Opportunity for technology to add value
    – For most discussions, this is a given. If this does not exist, the rest of the discussion is usually moot.
  4. High Fragmentation
    – Here is one where I disagree with Bill’s thesis, and subscribe more to Ben Thompson’s Aggregation Theory. Bill makes the point that high fragmentation is good as it provides easier entry into the market with less resistance from incumbents. I would argue that this was true when the suppliers still had a lot of control over distribution. But the internet has driven the marginal cost of distribution to zero, and as such, if the other factors are in favor, then marketplaces can, and will, take on concentrated incumbent suppliers and modularize them. In other words, high fragmentation is not necessary if the marketplace does a good job of aggregating demand. Even in highly controlled supplier markets, there are examples of hacking this kind of supply liquidity, and while initially challenging, these can deliver great results over the long run (e.g. Netflix).
  5. Friction of supplier sign-up
    – Again, this is a lot more tactical. Whether there is low or high friction, there are different strategies that can solve either problem. Bill does correctly surmise that the critical part is not supplier aggregation, but demand aggregation.
  6. Size of the market opportunity (TAM analysis)
    – Obviously, bigger is better. But yeah, no vanity here. Examine the TAM with optimism and paranoia.
  7. Expand the market
    – This is one of the points that I am yet to grasp in its entirety. While doing TAM analysis, one has to look at the factors today and what part of the market is addressable by the addition of the new service. The analysis to figure out new use cases and whether the marketplace expands the market is much harder to do, but also captures a lot of the value. Most entrepreneurs come up with far-fetched scenarios that expand their market. A realistic yet optimistic analysis is very difficult, but separates the good entrepreneurs, product designers and venture capitalists from everyone else.
  8. Frequency of transaction
    – Obviously, higher frequency is better. The flip side is to consider how low can the frequency get before the marketplace starts losing value to the consumer. In other words, at what frequency will the consumer go back to the status quo? For example, if the AirBnb experience was only marginally better and cheaper than comparable hotels, then demand stickiness would be a much tougher problem to solve because the frequency of transaction is very low.
  9. Payment flow
    – Excellent point that if the marketplace is part of the payment flow, then it can dictate some terms of commissions (and also, as we will see, liquidity). Some marketplaces simply match buyers and sellers, while the transaction takes place outside the marketplace (e.g. autos). In this respect, one must follow design principles for aggregation theory. In general, strict two-sided marketplaces have a lot more opportunity to be part of the payment flow, unlike the aforementioned three-sided ones. For example, Yelp is not part of the payment flow, and as such even though it is widely used to make consumer choices with high frequency of transaction + high average cost, it had to define itself as a slightly different marketplace where the supplier is also the advertiser/buyer.
  10. Network effects
    – Most successful marketplaces have some kind of network effects, but they are not all the same. All strict two-sided marketplaces have network effects on the supply-side where greater demand increases incentives for supplier (higher utilization and thus lower cost for services-based supply, or economies of scale for goods-based supply).

The above list is excellent. In addition, I keep coming back to a few more:

  1. Cumulative nature of supply
    – It matters greatly whether the supply is cumulative in nature, or is transient. There is always some ingress and egress of supply as new suppliers come in and old ones go out, some marketplaces have a more-or-less cumulative supply. For example, a house listed on AirBnb is much more likely to remain there. To some extent, that is less true for an Uber driver. For marketplaces selling goods, like Etsy, each seller listed adds greatly to the cumulative nature. This has benefits for all parties involved: buyer, seller and the marketplace.
  2. Size of transaction
    – Yes, this has to go in concert with the frequency of transaction. All things being equal, bigger is better. The key question though is how these two variables relate to each other. For example, AirBnb has low frequency, but a large size of transaction (rumored to be ~$400 on average). Thus, even if the AirBnb transaction occurs once a year, the fee collected (~$58) is very high ARPU (average revenue per user). The rest of the $400 is passed on to the seller. Uber, on the other hand, has a lower average transaction size, but the frequency is much higher. If the product of the two numbers is the same, higher frequency trumps larger size, as it also begets brand loyalty. Consumers are less likely to switch if they are already using one marketplace more often. On the other hand, if the product of size times the frequency is larger because of a larger average transaction size, then the marketplace must be designed with that in mind.
  3. Temporal nature of supply
    – Is the supply transient in nature, or mostly there? This is slightly different from the cumulative nature of supply. For example, a restaurant added to a marketplace is cumulative, but events at the same restaurant are transient in nature. Once the event has already transpired, it does not add any value for future liquidity. All transactions are ephemeral in nature, but if the underlying supply is transient itself, then it shrinks the marketplace liquidity. The marketplace designers will then have to keep adding new supply constantly, and this presents a significant challenge while balancing liquidity and demand.
  4. Local or global nature of the transaction
    – The Internet has done a wonderful job in bringing information about global supply to local areas. AirBnb is a great example of this, and even though supply is local in nature, the demand it spurs is global. Uber, on the other hand, is very much of a local player, and as such, can be looked at as the collection of many different local marketplaces. Yes, there is crossover where some consumers (riders) will travel and use Uber in other markets, but the large part of the design has to account for both supply and demand locally. This is why the marketplace dynamics for Uber is different in each city. As the product designer thinks about this issue, it is important to keep in mind that a strictly local marketplace shrinks the potential supply for demand. Over time, it can be built and exploited, but the job is much harder than building the whole network at once. Thus, for purely local marketplaces, a city-by-city (also called market-by-market) approach usually works best, even if it all happens at the same time.
  5. Single player mode
    – This is a really important concept from the demand side. Imagine Uber where there is no other rider in the system. The service will still be immensely useful to a single rider. In fact, a single rider does not care whether other riders are present in the system as long as the supply is liquid enough. So, while network effects will make the system more powerful, this concept allows the marketplace designer to employ growth techniques for demand that are somewhat independent of the supply-side. In the absence of the single player mode, the designer has to balance both supply and demand together, a much more challenging prospect.
  6. Buyer/Seller ratio
    – This is a rarely talked about concept, but for increased utilization of supply, the lower this ratio, the better for the marketplace. Lower ratio means that there are many more buyers, and thus, each seller has to service a number of buyers. This increases the utilization of supply, and incentivizes sellers to make marketplace supply their primary occupation. If sellers are professionally tied to the marketplace for their income, they are much less likely to leave the marketplace. Said another way and with the lens of aggregation theory, as the marketplace controls demand, the supply side loses power and gets modularized and interchangeable.
  7. Cross-over between buyer and seller
    – In some marketplaces, increased activity by the buyer also moves the buyer towards becoming a seller. For example, people who buy things on eBay also tend to sell things on eBay. Sure, eBay has professional sellers that forms the backbone of the supply, but the initial growth in liquidity comes from these very important buyers who tend to be sellers. However, even in these circumstances, the considerations for the buyers and the sellers are different, and the marketplace design should keep that in mind. Some marketplaces are just not suited for this. e.g. Uber drivers are actually less likely to be riders.

I realize that this list is far from complete, but I find myself coming back to these considerations in multiple discussions.

Product design is highly subjective by nature, but our job as product managers/designers/thinkers is to balance the different forces and come up with valid frameworks that enable predictable action.

In future essays, I want to tackle the question of how to systematically add and improve liquidity if the TAM is big-enough. And once there is enough liquidity in the marketplace, how to employ specific marketing techniques for scale. And while the considerations above are meaningful in my own analysis, there is a lot of potential to formulate a theory and understand/quantify the relative value of the different variables.

If you have any questions, or comments, you can find me at anuragmjain — at — gmail.com

Hello World… again!

Hello World… again!

So, I have been on a low-information diet for the past many months. Actually, I kind of broke my fast a few months ago, but still hadn’t turned the corner with writing, and didn’t really feel like it. Mostly because I felt like I didn’t have anything very original to contribute. As usual, I mostly write to solidify my own thoughts, and not to be pedantic, but it was good to take a break from it all.

Until now.

I have been thinking and researching deeply about building and growing a consumer internet business, and the different aspects that it touches. There is a great deal of material on the web written by a lot of people way smarter than me. However, the challenge for new entrepreneurs has always been how to prioritize the material. Even smart people write mostly ‘in the moment’, so all arguments in one post are given to posit a specific point of view. The problem is that the reader keeps getting pulled in different directions, each direction defined by the preset point of view of the post at that given time. After reading a few posts, I feel like someone has taken me for a walk, and then decided to keep turning me in different directions with each step. After a while, it all feels woozy, and it takes a little bit to re-orient myself and walk straight towards my destination or goal.

Some people are way smarter than I am at doing this, and can constantly take in all the information and keep their eyes focussed on their destination at all times. But for people like me, the challenge is to decide which argument makes sense for their particular direction, and incorporate it within their products.

In a small subset of cases, very very smart writers have given their profound theories and frameworks on the workings of the consumer web, and some people have even gone beyond and given us prescriptive guidelines on how to tackle the issues. However, these approaches are mostly strewn across, without a single place to unify the wealth of knowledge.

I am going to try and compile this wealth of ideas here in this blog, mostly for my own sake. I expect to learn more about each technique and analyze each one to understand how it fits in the overall framework. I will also attribute and link to the articles I will take the ideas from so that those responsible get their due credit.

So, come along on this journey with me and together we hope to achieve only one thing:

How to make the process of building a consumer internet business more scientific and reduce the role of luck to the reality. i.e. a playbook for what it means to ‘execute well’.

Onward!

Change the world! But make $29.99/mo while doing it!

Change the world! But make $29.99/mo while doing it!

I attend a few tech conferences, primarily in the consumer internet space. Usually, these conferences have some way of demo’ing a bunch of new startups trying to peddle their wares and trying to woo the investor community. The format is a little different each time, but there is some version of the company’s CEO presenting on-stage, with a panel of judges trying to, well, judge the pitch and the business.

There are a few themes that I have seen consistently across these events, irrespective of which city the conference takes place in, and what the latest and greatest topic in the internet happens to be. For the most part, the takeaways from the conference are not very much, except for a few shining and unusual experiences (for example, I met a guy yesterday who makes flying cars).

Based upon my previous experiences, I can already predict what most of the judges are going to say. Typically, the judges’ panel consists of 4-5 members, with 2-3 members from the investor community, 1 entrepreneur, and 1 media person. It’s much easier to predict what the investors and media people are going to say than what the entrepreneur is. The entrepreneur focuses mostly on the CEO, while the rest focus on the quality of the pitch (and not the content), and the addressable market. I will write in detail about the problems of the addressable market theory in a future post, but for the purposes of this post, the feedback falls mainly across the following three areas.

1. ‘Refine the pitch’, or ‘I couldn’t really understand your product’

Although it has come to be accepted that one must have a good pitch to woo the investor community, the question still arises: Why? I see the argument that the pitch must be refined because often times the investor is a super-busy person (or claims to be anyway), so the investor’s time should be used by the entrepreneur as a scarce commodity. Good investors also get pitched a lot, so if you are only getting a short attention span from them, it’s better to make the most of it quickly. But when it comes to conferences, the situation is very different. The judges, as well as the investors in the audience, are for the most part captive audiences. They can be on their iPhones checking email or whatever, but they are not really going anywhere. So, I really think that although the entrepreneur should do his best to refine the pitch, practice and try to make most of the opportunity, the investor shouldn’t really be criticizing the pitch. Instead, they should be focussing on the content behind the pitch. Most of the tech entrepreneurs (with the exception of probably Steve Jobs) are not great presenters, so let’s just leave the feedback on the pitch on the backburner. For me, when someone criticizes the pitch, it really feels like trying to find faults in the grammar and spelling of an engineering report. Yes, it makes a difference, but please be smart enough to look beyond that.

2. ‘But none of these companies are changing the world’, or ‘I dont think your product will make too much money’

Ah yes! This one is my favorite. This is not common to just investors, but the audience at large. There are multiple forces pulling the company in different directions. The main ones are 1) be innovative, and 2) make money. Of course,  I don’t believe that the market is completely efficient, but it is not completely inefficient either. So, the two forces are actually pulling the company in two different directions, not quite 180 degrees apart (180 degrees apart would be in a completely efficient market), but you get the idea. Thus, the company has to find a way to change the world, and make shit load of money right off the bat. How many companies do you know that actually did that? You know, the ones that had an innovative product that a large portion of the world is using, and that had a strong plan to make money? I know zero. The reason is that if there is a clear way to make money, then it would already have been done. Efficiency in markets exists when the knowledge required to tap an opportunity is low. As the sophistication increases in a particular space, so does efficiency, since there are more people who are now approaching expert-level thinking. Therefore, it stands to reason that the fewer the number of experts in any domain, the more opportunity that lies in that domain. Consequently, it also follows that making money is not at all obvious. One corollary to this idea is that as making money becomes more obvious, more people becomes experts to fill in the gap.

3. ‘There isn’t an addressable market out there’.

The same case could be made for Yahoo, Microsoft, Google, Facebook, Twitter, and new products that will be out there. Asking for an addressable market is really a way of saying ‘I can’t see how you will make money’.  I can kind-of understand this coming from the investor because the pressures on their business is vastly different from the pressures on an entrepreneur. Even when investors have been on the other side of the fence, the truth is that they are now in a different situation in life, and obviously, they are going to judge things based upon their perspective. Of course, some are smarter than others, and also more risk-friendly than others, but fundamentally, their goals in life have changed. What I don’t understand is when other entrepreneurs think like that.

Most of the above feedback from investors really means that they don’t really like the team, and are not confident that the team will deliver and stay the course to solve a worthy problem in the space. One of the key ways to judge startups is, of course, looking at the person presenting, what she has done in the past, how passionate she is about the problem space and how committed the team is to the problem. Notice that I didn’t say that they need to be committed to the product, but only the problem space. Most of the time, the exact problem is a little unknown and the product is only a first iteration anyway. However, the effect of the feedback from these conferences is that a lot of entrepreneurs start taking less risks instead of more. Taking risk for it’s own sake is, of course, a gambler’s trait, so I am not advocating that. I am simply advocating trying to solve bigger and more important problems, which necessarily come with greater risk. I believe that true entrepreneurs quit their jobs to do that anyway.

For further reading on similar ideas, read this excellent blog by Ben Horowitz, as well as this one by Glenn Kelman.

Lessons from the Dancing Man – Build only when asked for it

Lessons from the Dancing Man – Build only when asked for it

A few weeks ago, Derek Sivers gave a talk on how to make a movement and things we could learn from a video he took (or maybe someone else did) of a dancing man in a park. I encourage everyone who hasn’t to go and read his article, but for completeness sake, and because I am not taking any ownership of the idea itself, I am embedding the video here. Derek Sivers gives a voice-over on the video, and it is very very instructive. Before I rant on an on, the lessons are obvious once you watch the video and hear Derek describe what is happening. Here you go:

Pretty amazing, isn’t it? In just 3 minutes, the video and the example of the dancing man bring the idea to the brain so forcefully that the power of the first follower becomes more than apparent. I was thrilled when I saw this video, and the lessons are profound. But I think there are also many more lessons that can be learned if we just extrapolate the example and apply it to the consumer internet (because that’s where I spend most of my time and energy these days).

To recap, the idea presented in the video is that the lone nut is a lone nut until the first follower comes along and validates the lone nut. The lone nut at this point publicly embraces the follower, and accepts him as an equal. This encourages the first follower to continue dancing, and even call out to his friends. One friend comes along, then two and soon the lone nut is transformed into a leader. There is validation, and soon there is momentum. The crowd then explodes, and people who didn’t want to join earlier for fear of appearing stupid must now join for fear of appearing uncool. Powerful idea indeed.

Consumer internet companies follow a very similar pattern as well. For every idea, every product, every feature, the product developer/entrepreneur is the lone nut. Notice that it is important that the lone nut appears to be doing his thing because that’s what he is all about. This soon attracts a few other people who have similar tastes and they join in. This is the crucial juncture. These are the people who shouldn’t leave, but keep dancing with you. These are the people who are going to attract other followers and turn your product into a movement. Unlike the free-flowing dance, the initial followers cannot express themselves in any way they want. They are restricted by the features that are available in the space. Thus, it is VERY important at this point for the product designer/entrepreneur to publicly acknowledge the initial followers and listen to their feedback. Unless you listen to their feedback, you cannot let them be part of the movement. Remember that by accepting the first follower as an equal, the lone nut transformed his idea into the follower’s idea as well. If the follower was forced to go along with the moves of the first follower, the movement would probably not have happened (unless they were doing the hustle).

If we were to place ourselves in the park with the dancing man, it is not difficult to see that if the movement had failed to pick up when there were 5-6 people, then it would have died unceremoniously. The initial followers would have stopped one by one and soon, the lone nut would go away to another part of the park. We can see this happening everywhere. If a few people leave from a party, suddenly everyone leaves from the party. A few people leaving from MySpace suddenly makes everyone leave as well. This is very very true for internet companies. Therefore, it is absolutely essential that the initial followers MUST NOT leave. These are the people who provide validity to your product, and will help it become a movement.

As an entrepreneur and of a consumer internet product, it is important for your product that there are at least some people who will form the foundation for the product by living and breathing it everyday. These people will evangelize your product and go on to attract their friends, and help transform it into a movement. Most of the other people will join because that’s what momentum does, but if you lack the support of this basic group, then the movement just might never happen.

I believe that every product begins with an idea that someone finds useful. As a result, you will always attract a few people initially. It is important at this point to listen to their feedback, and really give them something that they want, and not something that you think they might want, or something else that you think that many other people might want. Unless people are asking you for something, don’t build it.

How many people LOVE your product?

How many people LOVE your product?

Or how many people hate it? I attended a session recently where one of the speakers (Dave McClure) was very passionate about this topic. And with good reason. All of us who have tried making consumer internet ideas a success know that the enemy is not people hating our product, but people just not caring enough to comment, talk about it with others, or in any other way spread the word around.

Most startups rely on some form of word of mouth propagation. Assisted by tools for sharing, it is known as viral, but the basic concept remains the same. In either case, some user has to care enough to click on something and let other people know. People will spread the word around either if they love your product or if they hate it. But if they just like it or don’t care enough, then the product has very little chance of survival. Dave, at the conference, made it more dramatic by suggesting that we think in terms of how many people are willing to ‘fuck’ or ‘kill’ our product.

After coming back home, I realized that it is still very vague. How many people want to fuck my product? I don’t know if anyone wants to fuck Amazon, but there it is, a huge success. Killing the product is easier to understand, but I still fail to imagine how many people want to kill a bad product (maybe a competitor, but the competitor is unlikely to give any press). However, when I started thinking about it, I came up with my own paradigm. In addition to asking how many people LOVE your product, it is also important to ask how many people LIVE your product.

With every consumer internet business, the early adopters are the ones that will make the business. These early adopters do things which sometimes astonish the business owner as to why they are doing it. For example, there are people who have generated thousands of reviews on epinions in the early days. Noone could have know what those people will derive, except some form of satisfaction. The key is that some people should absolutely LIVE your product day in and day out. This means that if you are in a vertical, then go and find those people who live that vertical as a lifestyle. For example, for gigzee, we want to attract the youngsters who live the whole live music/club lifestyle. If even a small number of such people use our product every day and can remember it by name, then the chances of a positive recommendation from them is going to be very high. Additionally, the chances of them recommending to someone else is also very high. These early adopters form the basis for the increasing set of users who will derive the additional benefit from the product.

So, next time when you are designing features to move from 0 to critical mass, ask yourself, how many people will LOVE your product. But don’t neglect how many people will LIVE your product.

For more on how to measure the engagement from these early adopters, read this excellent post by Andrew Chen.

Learning how to pitch

Learning how to pitch

I attended the Twiistup event last couple of days in Los Angeles. It was a great event with lots of interesting people, and some decent companies. As usual, the best part of the conference is meeting with the people, and also seeing where the energy lies in the software space right now. There were 9 companies that were selected to show-off their product, with a tenth slot open for a wildcard entry. The wildcard companies got to present the day before, with an audience vote sending them to the show-off event.

It was really amazing to see that out of the 10 or so wildcard companies, only 2 managed to pitch well. Not really well, but well. The rest 8 were terrible. For all entrepreneurs out there, before you go out to pitch, do yourself a favor, and read the two excellent books by Gene Zelazny – Say it with Presentations, and Say it with Charts.

Not only do these two books make you a better presenter, they will help you structure your content in the most logical way, and present ideas in ways that make sense. And yes, please please please, practice your pitch a few times in front of friends before pitching to others. If that makes you a little uncomfortable, well, that’s the whole idea.

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