The Two Most Desirable Features of a Platform as a Service

Big Data?

Multitenancy?

Uber DB scaling?

Mad Hadoopishness?

Faster app development?

Universal Social Connectivity?

Not so much.  Some platform or other claims all of those things, but the two most desirable features of a PaaS appear to be revenue generation and commodity pricing, not necessarily in that order.

Let me first say that I’ve come to view AppStores as PaaS offerings of a sort, and their ability to generate revenue for developers drives those developers into their arms.  This also applies to more traditional PaaS offerings such as Salesforce’s Force.com.  As nearly as I can tell talking to folks and scanning the blogosphere for activity, people write for Force.com either because they need to integrate with the Salesforce CRM app or because they want the revenue tailwind you can get via Force.com.

The commodity pricing piece applies to what many prefer to call IaaS, or Infrastructure as a Service, with  Amazon Web Services being the most widely used example so far.  Let’s go ahead and keep them in our PaaS list for this discussion and ignore the IaaS moniker.  If we start cutting out things like Amazon and Force.com for various reasons, there is so little left it’s hard to talk about it.  I would submit we may have divided up the market into too many A-A-S’s a little prematurely without waiting to see what would stick.

This is the gist of my problem, BTW.  There’s been plenty of time for PaaS to get big, but it is kind of lumbering along.  Yes, we get things like Heroku.  Doesn’t that qualify largely under the Commodity category though?  Force.com we’ve already talked about and Amazon too.  But in this Cloudy-Cloudy-*aaSy-*aaSy world, what else is flying high?  There’s room for a ton of things, but you have to solve the revenue and commodity checkboxes first.

Here is the problem for all you would-be PaaS vendors out there–it’s darned hard to get design wins if your platform involves heavy lock-in, heavy rewriting, too much cost, or isn’t otherwise a requirement for a Minimum Viable Product.   Yup, there’s that darned MVP concept rearing its ugly head again.  The trouble is, it’s no longer just something the Cool Kids bandy about while sipping lattes.  It’s become something of a requirement for survival and an article of How Things Are Done In The Valley.  You can’t get capital to fool around with fancy products any more, so you have to go MVP all the way because you’re likely starving on your own nickel until you do.  In addition to the VC’s, Agile thinking and a general suspicion of Premature Optimizaton have really made it hard to sell Feature Density.  The trouble with that list of things at the top is they’re either not that commonly needed, they involve dealing with scale you should be so lucky as to get to (and are therefore not MVP material), or they solve problems you’re convinced you can easily solve as you’re starting your journey (e.g. multitenant).  Yes, those problems are harder than you think, but it doesn’t matter.  They don’t look harder when you’re eyeing what it takes to get an MVP off the ground.

PaaS vendors, you have a couple of choices available to deal with this.  You can ignore it, argue that it’s early days yet and your time will come.  It’s pretty hard to dispute that because it is early days yet.  But don’t get too target fixated at such an early stage either lest some upstart take the early days away.  You can still be Zucked pretty darned easily precisely because it is early days.  Note: To be “Zucked” is to be treated to the same fait Facebook dished out to MySpace.  Call it Fast Follower on Steroids with a Heavy Case of Rabies.  It’s not a pleasant thing to happen to your life’s dream.

Okay, so what’s the alternative for would-be PaaS Masters of the Universe?

Hey, this is a good time for the Cloud.  You know that.  We hear less and less whining about security and all that.  Clever marketers are even now letting IT get just a little bit infected with “Private Clouds”, a potent Trojan Horse strategy to win over their hearts and minds.  Whatever it takes, resistance is futile.  Once their apps and data are on my servers it’s only a matter of reconfiguring the subnets and voila!  All your Apps are be in my Cloud!

Given that is the case, there may be some first mover, network effect, and momentum issues to think about.  In other words, stop being so darned pure to your vision and line up as many customers as you can as fast as you can.  That’s how we win in this part of the Bubble, um I mean Business, Cycle.

What the heck does that mean?

I’m glad you asked, but it should be obvious:  PaaS vendors need to embrace these two desirable features and nail them before worrying about much else.  There are two simple questions:

1.  Are you directly delivering revenue producing traffic to your customers by virtue of some aspect of your PaaS?

2.  Do you have an offering that lets people buy into some commodity-priced-let’s-get-started-without-boiling-the-ocean version of your PaaS?

If you do, Hallelujah Brothers and Sisters!  You have a shot at the promised land and you can now start looking at more potent differentiation rather than table stakes.  If you don’t, back up and let’s figure something out, because this PaaS stuff can turn into a Darwin Test if you’re not careful.

There is room for innovation on the commodity side, but it’s getting harder.  The days may be gone when you can deliver commodity infrastructure.  Storage and CPU like S3 and EC2, in other words.  If you aren’t already spun up and doing good things, you need to start skating where the puck is going to be.  I have offered up my PaaS-as-bite-sized-pieces strategy before (Sell the Condiments, not the Sandwiches).  Check it out.  Lots to commoditize there.

There is also room for tons of innovation on the “delivering revenue producing traffic” front.  We’ve seen it for mobile platforms, in fact, one could argue the appstores are the defining element there coupled with the relative desirability of the platforms to their users.  The participants seem to be pretty mercenary about those two related dimensions.  I am mystified about why Amazon, which ought to understand App Stores better than anyone, is not doing so great with their Android App Store and doesn’t appear to have one at all for Amazon Web Services.  The latter is inexcusable.  There’s got to be all sorts of opportunity to create an App Store there.

Salesforce keeps wanting to be a major PaaS vendor, but they somehow misunderstand the data they were among the first to collect.  Yes, they do have the revenue producing traffic piece nailed.  But, they seem to be very much in denial about whether that is the main reason people will use Force.com, and totally opposed to solving the commodity issue.  Every time I talk to an entrepreneur or investor that wonders whether they should use Force.com or one of its offshoots, I ask them to consider a simple thought experiment.  Look up Salesforce’s current cost of service as a percentage of revenue.  Take the cost they will be charged to use Force.comand divide by SFDC’s cost of service.  That number is what they must charge to have the same margins as Salesforce, and that assumes they don’t spend another dime on anything else to deliver their service.  Most of the time that makes for a short conversation.  Oh, I didn’t think about it like that.  There’s no way we can be competitive if we have to charge that much.  And so it goes with a lot of other PaaS offerings too, BTW.  Perhaps Heroku is their way of covering both bases and a sign that they do understand.

For other PaaS vendors, maybe there is a sliver of hope.  If you can change that cost of service to be cost of service plus some cost of marketing, because the PaaS will deliver revenue producing traffic, you can afford to pay more.  Heck, Steve Jobs gets 30% just for delivering the traffic and not helping you in much of any other way.

The revenue producing traffic is by far the hardest thing to do.  You can’t materialize it out of thin air.  You either already have a solid traffic stream you can repurpose (that’s what Salesforce did), or you may have to look at partnering opportunities.  For those that have a stream, now is your chance to enter the PaaS business in an interesting way.  Casting eyes around, Adobe is well positioned for this.  Get an AppStore together, Adobe, and link your dev tools and *aaS efforts to it.  There are bound to be others too.  Open Source vendors in the tools business, maybe you have this sort of opportunity as well.  IBM, Oracle, HP, and whomever else this is a huge opportunity for you.  Maybe Cisco too as I think about it.  Trouble is, your Big Sales Force may think it hampers them in some way.  Ignore their parochial interests and charge ahead.  This is a Silver Bullet for PaaS and Cloud ascendancy.

Give it some thought.  It’s high time for some break out PaaS action.

Square: It’s All About the Momentum, Baby!

Reading about Square’s latest $100 million in capital raised at a $1 billion valuation, it’s tempting to write another Bubble Story.   While it’s undeniable that it would be hard to do that financing in the wake of the recent Sequoia RIP Good Times era, there’s something more interesting to think about here.

First, let me say the Square folks are doing exactly the right thing to raise as much as they can as soon as they can while the Bubble lasts.  That was essentially my advice to entrepreneurs in my message to Founders that the Bubble Clock is Ticking.  Enough said about Bubbles and Clocks, Square is an interesting deal from another perspective–it’s a “Golden Crumbs” financial scaling on the back of a new paradigm story.  Money guys love that story.  They love to get into it over and over again.

“Golden Crumbs” is a term I got from Bonfire of the Vanities.  It stems from business opportunities that involve taking a very small tax on a very large volume.  It’s a beautiful thing to have a Golden Crumbs opportunity, particularly when it is made all the more plausible by prospects of a paradigm shift.  We’ve watched first the Internet, then Social Networks, and lately Mobile (Square’s paradigm shift) step up as reasons to believe by way of paradigm shift.  The ideal paradigm shift is one the incumbents have a hard time participating in.  Such shifts are called “disruptive”, and they give the Golden Crumb harvesters time to get really big before they have to deal with the last generation’s Golden Crumb Landed Gentry.

Couple the sexy business model that is Golden Crumbs, the Team that made Square happen, the Mobile Paradigm Shift that makes it possible to Believe and it’s got to be hard for investors not to like Square.  After all, the last deal that was lined up this well was PayPal, wasn’t it?  If these guys can really change things with all that capital, the willingness to Believe in them, and the state of the market, they will have earned that valuation.

I can tell you one thing, payment processing is hard for small businesses, and the Internet has changed the landscape in so many ways that help foster small business.  Why not fix the payments problems too?

There’s a New Sheriff in Town and His Name is “Content”

Just read a great top-level overview of Google’s Panda on SEOMoz.  If you haven’t been following Panda, or you’re not involved with marketing much, it is Google’s latest algorithmic attempt to minimize the ability to game search results.  This article is at a good level for CEO’s, Board Members, Investors, and other Interested Parties to understand the flavor of this huge watershed event for marketing on the web.  I’ve talked to a number of companies that were impacted by Panda.  In most cases, the impact hurt their search traffic because they’d been relying on SEO games to get the job done.  In a few, it has transformed their search traffic for the better.   Those few are companies that had been almost overly focused on content.

Google wants to interfere with the SEO strategy of manipulating search results mechanically by delivering search results that searchers actually like.  Towards that end, Panda lets Google blend in subjective evaluations of search results to tune up their search engine and start to de-emphasize those sites we all come across that aren’t really that enjoyable or even informative despite great search ranking.  This is mainstream when you start to see Dilbert cartoons about it, and it is life threatening for Google when we read that measurable amounts of web traffic have left the general web and gone to sites like Facebook.

Marketers should expect a lot more of this sort of thing over time.  It will be increasingly important to quit worrying about SEO voodoo and start publishing content people are delighted to find.   I have been saying to everyone that will listen:  Marketing is a Product.  It has a User Experience.  Make sure yours is one that delights would-be customers lest they not only tune you out but have an increasingly difficult time even finding your content.  First impressions will matter more and more as feedback loops like Google Panda and Social “Like” buttons that affect search results are not going to give you a second chance if you blow the first one.

If you’re running an established business that focuses most of its efforts on SEO manipulation, start thinking about how to ramp your content quality up quickly.  If you’re an entrepreneur thinking about bootstrapping a business or an investor wondering where to invest, you need to add another couple of tests to your framework for evaluating potential ideas:

-  Is this space crowded and noisy due to an abundance of great content, or is it one where there is a tremendous hunger for scarce content?

-  Does this company already have a track record for producing differentiated content that is driving traffic?

-  Does the company have content creation talent on board and does it understand how to use content effectively?

You want to be a big fish in a small content pond when you’re starting out if you expect to be noticed.  And importantly, it’s hard to farm out the best content until you have a critical mass of folks familiar with your market and products who want to contribute.  Make sure you have the ability to operate with great content until you’ve spanned that gap.

There’s a new sheriff in town, and his name is Content.

Related Posts

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Pitfalls of Free Content and an Inbound Marketing Strategy

Quality is Part of the UX Too

Just had a back and forth with @dahowlett on Twitter about Dropbox’s recent breach of security.  For about 4 hours passwords didn’t matter to Dropbox–you could type in whatever you wanted and access anyone’s data.  Dennis went on a pretty good rampage about it, and I have a hard time blaming him.  Yes, accidents happen, this is software, and all software has bugs.  But some kinds of problems are sufficiently scary that there should be automated testing that is pretty bulletproof in preventing these problems from reaching customers.

Consider really terrible obvious painful problems that might afflict a service like Dropbox:

-  It might be impossible to add data to your Dropbox.

-  It might be impossible to retrieve data from your Dropbox.

-  It might be possible for anyone to access your Dropbox (this problem that prompted this post).

-  etc.

It’s not a hugely long list, but these are the obvious catastrophic things a service like that has to make sure can’t possibly get out the door.  Ever.

Isn’t this level of quality just table stakes?

We live in a world where VC’s and Angels want software developed on a shoestring.  They’d prefer it was done and working with customers and traction before they put a dime into the company.  We like to revel in the idea of Continuous Deployment–look, it’s so easy, even our VC can push code out to our customers.  We kid ourselves that programming tools are so much better than they once were that we can do the same things faster, better, and with far fewer engineers.  Never mind that you can look at things like Objective-C and wonder what people who think that are smoking.  The tools are better, but not that much better.  We’ve simply lowered our sights on what we’re building.

We think all the cool kids are on the consumer side, so much so that we want to “consumerize” the business side to make it better.  Quite apart from my belief that consumerization is something else entirely, isn’t all this hubris how we wind up with problems like Dropbox’s?

Let me ask it a different way: are we doing to our once innovative Software Industry exactly what the bean counters did to our once innovative Auto Industry?  We know how that turned out.  The once proud American Automakers eschewed innovation, style, quality and performance for cheap, cheap, cheap.  The bean counters and finance types ruled over the engineers and stylists and we cut costs everywhere we could, introduced planned obsolescence, Ford Pintos blew up when rear ended, yada, yada.  The car became a commodity.  Right up until Japan figured out that Quality is part of the User Experience too.  What now Ford, Chevrolet, and Chrysler?

Once upon a time the Valley stood for cool technology.  I’m not saying a lot of cool technology isn’t still being built, but it sure is a lot harder when the way to fame and fortune seems to involve catapulting cuddly birds at complacent pigs in rickety houses.  Do you remember the horrendous excuses for automobiles Detroit started giving us in the late 70′s?  The Mustang II.  The Chevette.  There are many more.  Even now Detroit hasn’t really recovered.  Are we building the equivalents in the software world as we speak?

I read Mark Sigal’s post, “The iPhone, the Angry Bird, and the Pink Elephant,” and I wonder if we aren’t on the same wavelength.  He bemoans the contrast between huge companies built on great products in previous iterations of the industry and the present.

The PC revolution gave us high profile names like Intuit, Lotus, Microsoft, Apple, Adobe, Symantec, Borland, CheckPoint, McAfee, Oracle, Siebel and Sybase, as well as many others.  Some have lived on and some have died, but you can’t deny they were all great at least at some point.

The Internet revolution added names like Amazon, eBay, Yahoo, Google and PayPal.  And let’s not forget the Enterprise side like Salesforce, VMWare, NetSuite, and others.  Again, some are not so great as they once were, but they each accomplished quite a lot.

Now we have the likes of LinkedIn, Facebook, Groupon, and Zynga.  Are they really in the same category as any of the prior players?  Do they deserve valuations that imply they are somehow even better than the prior giants?  Perhaps, but from my perspective each iteration seems like more and more the greater fool theory and less and less innovation, talent, and quality.

Could any of the more impressive earlier generations even be possible to found today?  Are we so obsessed with quick hits, bubble economics, and trivial software that we wouldn’t even try?

There certainly are some exceptions, and in some cases they have resulted in amazing companies.  Reed Hasting’s Netflix is no flash in the pan consumer web quick hit.  Steve Jobs’ latest efforts in the iPhone and iPad are likewise revolutionary.  But access to capital to do truly big things is pretty limited.  Hastings got Netflix done before the current funding mentality set in and Jobs needs no VC.

Everyone else either gets to be a digital sharecropper slaving to get lucky so their Darwinian seed can be plucked up and pumped full of uber-growth-hormone-capital for instant bubble inflation, or they go the bootstrap route and try to make it without capital.

At some point there will be the equivalent of the Japan Car Industry that reverses this trend to the inane, brings back Quality and Innovation as features of the UX, and knocks the current Tom Foolery right out of the park.  We’re already too far down the ski jump on this bubble cycle, but perhaps out of the ashes will come a resurgence.  Let’s hope so.

When Will Your Job Be Consumerized?

This post is on  behalf of the Enterprise CIO Forum and HP.

It’s become all the rage to talk about the Consumerization of IT in the last few years.  There are a lot of definitions of what the term means.  Those who are looking to downplay it somewhat will toss out the idea that it’s copying consumer web technology into business software.  One gets the idea that some are trying to argue consumerization happens when proper business software thinkers become bankrupt of ideas and so are forced to steal from other markets.  Wikipedia says it’s:

A stable neologism that describes the trend for new information technology to emerge first in the consumer market and then spread into business organizations, resulting in the convergence of the IT and consumer electronics industries, and a shift in IT innovation from large businesses to the home.

Okay, that’s a bit much (stable neologism?).  In 2005 Gardner said it would be the most important trend of the next 10 years of IT development and that, “the majority of new technologies enterprises adopt for their information systems between 2007 and 2012 will have roots in consumer applications.”  Better, but this all misses a larger point:

What drives Consumerization?  Why is it happening?

If we could understand that point, assuming it’s more than just business software companies being bankrupt of ideas, we might start to skate where the puck will be instead of where it has been in the consumer markets.

I believe consumerization is a much deeper phenomenon that simply copy consumer markets.  My manifesto and definition of consumerization is:

Consumerization happens when the consumers have choice in any market causing the market to have to leverage the user experience of its consumers to make them more satisfied.

Steve Jobs “consumerized” what was already a consumer market, the music industry, by leveraging a far better user experience in the form of choice, instant gratification, and the ability to manage that choice more easily.  Thus was born the iPod and the digital music industry as we know it today.  He radically improved the user experience for telephones with the iPhone, and before either one came along, the Macintosh improved the user experience for personal computers.  Netflix did it for movies.  Amazon did it for retail and especially books.  These are all consumer areas that were further “consumerized” because the digital everyone always connected world meant consumers had the choice to adopt a better user experience.  And they did so in droves.

What’s happening with IT is the realization that workers are consumers.  They’re consumers because they have choices.  Choice is what begets the opportunity for consumerization in most cases.  If we have to do something because we have no choice, why bother improving the user experience?  But, if there is one thing that has radically changed in Modern Society, it is the prevalence of choice in all things.  People no longer work for the same company their entire careers as they once did.  They do not expect to be doing the same job their entire careers either.  They have choices, and when they have choices, it’s important for those who depend on the outcome of the choices to pay attention.

It used to be good enough to save someone somewhere a little time with a piece of Enterprise Software.  Most of this software boils down to fill in a form and move the contents of all those fields around from database table A to tables B, C, and D.  We may make minor transformations to the information along the way, and we may even review the information at some later date in a report.  It’s a solitary pursuit though, and not much fun.  Not much of a user experience, either as anyone who has ever had the sort of job where you fill in such forms all day every day can tell you.  These applications are data assembly lines where the knowledge workers (to use that quaint old term) are the modern blue collars.  Guess what?  If you give them a choice, they’d like to have a better job.  They’d like to add more value and not just be blue collared cogs on your data assembly line.  They want to use their minds, have some authority they own where they make decisions, and they’d like a chance to collaborate with their coworkers.  They want to understand how their contribution fits into the corporate mission so they can take pride in it.  And while we’re on the topic of taking pride, they’d like others to see their work as something meaningful and valuable.  Hard to do that if you’re just punching data into forms all day.

How can business software do this?

It’s easier than you think.  Let’s take one of the most painful jobs out there–handling Customer Service.  My last company was focused on this problem.  The traditional Enterprise Software solution is part of the CRM space.  It involves what we’ve been talking about–a customer gets in touch and a “Trouble Ticket” is opened up.  The Service Rep fills out the ticket, and pretty soon we’re moving data from Table A to Tables B, C, and D.  Tickets get closed.  We track whether we responded within SLA requirements.  We collect metrics on our call centers.  And we spend a lot of energy trying to minimize the expense of all this to the business by making it efficient and tying Service Rep’s compensation to their metrics.  In the process we incent all kinds of bad behavior and generally piss off our customers beyond belief.  Service Reps have none of the things I mentioned.  They’re not empowered to make decisions of consequence, they’re only there to try to get you off the phone and the ticket closed even if the way to do that is to frustrate you so much you give up.  They are not able to use their minds to any great extent, they stick to a script.  We’ve all talked to many of these people who know less about the product we have a problem with than we do.  They don’t get to create anything of lasting value, collaboration is minimized because it interferes with the metrics, and so on.  These are very hard jobs to take pride in, and I’ve been hearing since I first started in the software industry that Customer Service is not a destination career.  People get out as soon as they can.

To counter that depressing backdrop, we had a very simple idea that today is called Social CRM.  We realized after watching all this machinery in action that a much better User Experience could be made both for the Service Reps and the Customers.  The idea behind Social CRM (today a very promising market with companies like Lithium and Jive, not to mention Salesforce.com’s Chatter) is to change all those negatives using the Social Web.  No, it doesn’t mean literally copying Facebook or Twitter, and it doesn’t mean copying them either.  It means engineering a user experience for Customer Service that better serves the Customer Service Reps and their Customers.  Because both have a choice.  In this case, a better User Experience involves helping these parties to collaborate via social software with one another.  When a Service Rep closes a trouble ticket they (may have) helped one customer.  When they have a collaborative discussion in a forum, our data shows they helped an average of 16 customers.  After all, if one customer has a problem, others are likely to have the same problem.  There are genuinely few one offs.  And, if you can make it possible for customers to help themselves to the answer to the question because someone before them had already asked it, they actually prefer it that way in many cases because it’s faster.  If they get to interact with fellow customers along the way, if the Service Reps get to have the fruits of their labors visible to a broader audience, and all the rest that goes with a modern Social CRM application, that’s a better User Experience for everyone.

So I’m back to my original question:  When will your Job be Consumerized?

There is a wealth of opportunity in the Enterprise to start Consumerizing.  After all, we largely finished building the data assembly lines as a result of Y2K and the first dot-com boom.  The work is getting done more efficiently.  Now it’s time to take the next productivity step and help people to actually like getting it done.

This post is on  behalf of the Enterprise CIO Forum and HP.

 

Founders: The Bubble Clock is Ticking

The incredible valuation of the LinkedIn IPO can only be interpreted as one signal:  the Bubble Clock has started ticking.  So long as it continues to run, we will live in a reality distortion where valuations are insanely high, capital is cheap, and smart businesses can leverage that to hyper growth.  When it stops, we’re back to “RIP: Good Times“.

What should responsible Founders do with their companies during this period before the sand in the hourglass runs out?

In The Art of Riding the Bubble, we considered the dynamic interplay between VC’s and Entrepreneurs when there is a Bubble.  For this essay, let’s focus on Founders who want to build their companies.

Just as we got a presentation from Sequoia discussing what to do in the wake of the crash, there should be a presentation about what to do when the starter shot for the Bubble is fired.  Bubbles have a very limited shelf life.  This one is no different, though one of the crucial signs we have a Bubble is that people will admit it exists and then work hard to convince you it’s different.  It’s not.  Bubbles only differ slightly in terms of whether they emphasize tulip bulbs, sock puppets selling pet food, or multi-billion dollar business card substitutes.  They differ slightly in terms of their timing, what starts them up, and what shuts them down.  All of that is minutiae to be analyzed after the rush has ended.

What we’re talking about here is a Valuation Bubble, where the sense of how to value a business has become highly skewed.  It doesn’t necessarily mean there isn’t a real business there, just that the business is fantastically more valuable than it will be before and after the Bubble.  It will seem as though the business has transcended the laws of physics.  You will hear that the business is based on fundamentally new forces and that the only way you can profit without being left behind is to jump into the fray.

Founders, forget all that psychology about the Bubble.  You only care about two things:

1. The Cost of Capital gets as close to zero as you are likely to see with this business.

2. The world is willing to go way beyond giving your business the benefit of a doubt if they become convinced it has the virtues driving the Bubble.

Your job, therefore, is clear:

First, you should accumulate as much capital as you possibly can–put more cash in the bank than you think you could ever use.  Put so much cash there that if you had to reinvent and restart the business three times over you could do so.  Easily.  Assume you are never going to see capital available so cheaply again.

Second, you need to leverage #2, where the world will believe in your business more than it ever could outside the business.  Leverage it by positioning your business so it has the virtues that drive the Bubble.  This Bubble is a Web 2.0 Bubble.  The last one was a Web 1.0 Bubble.  If you’re not a Web company, you’d better figure out how to become one.  Fast.  Otherwise, you’re sitting this Bubble out.

Third, having positioned your business and raised lots of cash, figure out how to convert that cash to scale as quickly and efficiently as possible.  Businesses that both have cheap capital and can spend it efficiently have a huge advantage over those that are clumsy with their capital.

The way you keep score is by either achieving a liquidity event for your business at a ridiculous valuation that benefits your shareholders, or by making your business so strong relative to the competition that it can keep growing and stay strong after the Bubble bursts.  The last Bubble killed a lot of companies, but out of those ashes we got companies like Google.  There are no other outcomes of consequence for you to seek.

Lastly, this is not a time for “business as usual”.  Business as usual will be easy.  It will be tempting to avoid risk, take the orders, and keep your head down.  If you take that course, you’re not leveraging the Bubble, you’re hiding from it.  You’re marginalizing your company’s shot at greatness.  There will not be another Bubble in time to help your company.  Don’t miss this opportunity.

Those are the high level nuts and bolts.  A word about some tactics:

The three elements work together.  The more your business is positioned with the virtues driving the Bubble, the more Capital you can get.  The more efficiently you can convert Capital to Scale, the more Capital you can get.  The more Capital you have, the easier it becomes to Scale and get unfair attention for the virtues of your Business.  We easily have time for a couple of cycles of this, meaning you need not raise all of your Bubble Capital in one shot.

Based on the reality of when the Bubble will likely end, Founders should draw their plans accordingly.  One way to do that is to plan an 18 month cycle that runs to 2012 with a follow-up 18 month cycle after that if the Bubble holds.  A cycle consists of fund-raising followed by execution leading to results that are good enough to raise more capital.  Stack your long-lead items for the first cycle up front along with the fund-raising.  If you’re planning a major technology initiative, for example, get the team going on that ASAP to maximize the benefit as early in the cycle as possible.  If you’re planning to upgrade your Executive Team, do it sooner than later.  Bubbles will accrete talent to the likely winners, and they will be hard to pry loose until there is an outcome.  Get your scarce talent aboard ASAP.

How long will the Bubble last?

I figure we have until somewhere in the 2012 to 2014 range.  There’s no way the Bubble pops before we know who our next President will be.  The incumbent wants a frothy economy anywhere he can get it while he is trying to get re-elected.  Therefore, consider 2012 the inside limit.  It’s possible some disaster can nip this in the bud sooner, but we live with risk in Bubbles–get over it.  The strength of the LinkedIn IPO is telling us there is a lot of fuel on the sidelines for this Bubble.  2014 is a function of economic cycles.  Some say the VC cycle is 14 years.  2014 is 14 years post the dot-com cycle.  Can the Bubble last longer than 2014?  Perhaps, but it’s very unlikely.

The Bubble Clock is ticking, are you sprinting for the finish yet?

Fred Wilson is Still Wrong About Streaming Music and Amazon’s Locker Will Rock

Fred and I have tangled before over the issue of owning your music versus streaming it.  Fred continues undaunted in his latest post, a reaction to Amazon’s Music Locker announcements:

I don’t get the idea of music locker services like the one Amazon just announced. If I’m going to stream music from the cloud, why should I continue to buy files and collect them? I’ve been a Rhapsody subscriber for something like 11 or 12 years and I love subscription streaming services. I’ve just stared using rd.io on my Android and on the web and I love it too.

Locker services seem like they are designed to continue the physical model of collecting music and buying music when there is a new and better way – just subscribe to music dial tone and listen to whatever you want wherever you want.

I’m bearish on locker services and bullish on subscription streaming services.

Naturally, I am equally as undaunted.  The answer for why we differ so much is a simple one: people interact with their music in different ways.  Fred seems to love variety.  In a comment to my original post, he says:

i may be wrong. it happens all the time!

but it’s how i see all of this playing out

i own close to a thousand vinyl records

i own at least that many CDs

i have a terrabyte server full of mp3s

all of that is available in our home to our whole family

and yet we listen to rhapsody and other streaming services close to 80% of the time

it’s just easier. we don’t have to wonder if we own it. we just decide what we want to listen to and then play it.

I like variety too, and I use streaming services sometimes when I want to go in search of it.  But I like curation better.  My curation.  The songs I know and love I want to be able to hear when I want to hear them.  Music is not background ambience for me.  I literally can’t have it on when I’m working, or pretty soon I’m more focused on the music than the work.  Moreover, I’m concerned about the future when I don’t own the bits.

Look, things change.  The music industry is arbitrary and capricious.  Fred himself has suffered the outrageous slings and arrows of their behavior to the point he eventually confessed to pirating some music to get access to it.

I don’t like the possibility that the streaming service I’ve paid for falls into a dispute with a music label and suddenly can’t stream some artist I love.  I don’t like the idea that some streaming service concentrates so much power they become a monopoly and decide to charge per listen or some such nonsense.  We only just got the Beatles on iTunes after years fer cryin’ out loud.  Let’s keep as much power as possible in the hands of the music lovers and not the record labels or distribution (e.g. streaming) channels.  I know the latter offer better ways for VC’s and Startups to make money, but that doesn’t mean I have to like it or support it.

If I am going to make the emotional commitment to the music, I want to be in control.  Amazon’s Locker Service is the ideal way to have my cake and eat it to.  I can get all the benefits of streaming and keep all the benefits of owning.  Fred may not value the benefits of owning, and that’s great for him.  He should stick to streaming. But his bearish predictions for the non-streaming world don’t reflect the whole universe of whole people interact with their music.

BTW, this is no different than insisting you be in control of your data when you sign up with a SaaS software company.  If they can’t deliver regular backups of your data whenever you want to see it, it’s time to start asking why.

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For the record, I agree with the sentiment that this isn’t innovative.  We’re past the Early Adopters.  Amazon’s service is the sound the Chasm makes when you’re already across it.  In light of that, I will see Fred’s Bearish call on lockers and raise with my own Bearish call on streamers.  Streaming music businesses that can’t also offer a locker service are going to be limited to either casual use as a second service and not the System of Musical Truth that is my music collection, or they’re going to be limited to the portion of the musical audience who, like Fred, don’t require a music collection.  In short, there will be a ceiling on their success if they can’t support both models, particularly in light of Amazon and Apple’s distribution strength.

 

 

 

The Art of Riding the Bubble

People are increasingly asking whether there is a Bubble underway in the tech business.  The answer is that by the time you know there is a Bubble it’s probably too late to do anything about it.  But if all you’re doing is asking whether there is a Bubble, the Bubble is probably not here, yet.

Riding the Bubble is what VC’s do, so you should understand how it works a little bit too if you’re going to be involved with them.

A VC has a portfolio, and only a certain number of the deals in the portfolio are going to be successful.  The VC must maximize the value of the successful deals as much as possible.  In the pre-Dot Com VC world, there was a lot more tendency for VC’s to help companies achieve a product market fit so they could take off.  Multiple rounds of failure were pretty normal.  Not so much any more.  The multiple rounds of failure are there, but you’re expected to pay for them yourself and have considerable traction by the old standards before you see much capital.  It used to be you could raise money for a slide show and a team.  People who think that represented a bubble just haven’t been at it long enough to know that’s how things worked pre-dot com.  Then, essentially as a reaction to the first dot com crash and its fallout, the bar has steadily risen.

Immediately post dot com bust, you had to build the product and team, and you could get capital.  This, BTW, was euphemized as being perfectly normal since all the new technologies made building a product so cheap.  Funny, but it really isn’t that cheap for significant SaaS business software, only for B2C consumer Internet, but we digress.  Not long after bootstrapping product became the norm, the bar was raised again so you had to find a few customers who loved the product and team, and you could get capital.  Now you have prominent VC’s like Fred Wilson, who say they don’t think companies should spend a dime on marketing.  ”Marketing is for companies who have sucky products.”  That’s just a blunt way of saying that today, you have to build the team, create the product, get some customers, and create enough viral momentum that it appears you don’t even need marketing.  Like I said, there’s not so much helping companies achieve product market fit going on any more.  VC’s want to use their capital to pour gasoline on what is already a raging bonfire.

This strategy can be extremely successful, as Sarah Lacy reports in her missive (via Techmeme) about whether Late-Stage investing is the new black.

But there are ramifications for the VC’s on how they must operate to succeed in this new game:

If you must continue to be Early Stage, Spray and Pray

Dave McClure does a good job explaining the Spray and Pray strategy for early stage.  If you’re going to get involved before you’ve seen enough traction that you know the company needs little marketing and has gone viral, you’ve got to invest in a lot of deals.  The reason is we don’t know how to predict which companies will go viral with much certainty.  Virality in a consumer Internet business is a matter of calling fashion trends, something nobody is very good at predicting until after it has already happened.

I say “If you must continue to be Early Stage” because a lot of VC’s that used to do Early Stage and Seed don’t any more.  They normally are reluctant to tell  you that, BTW.  Relationships get started in these early stages and they want the relationship so you’ll be back when you get to their stage.  Also, what’s called “Seed” or “Series A” is not very comparable to what used to be called “Seed” or “Series A”, it’s actually later.

If you’re going later stage, pony up the capital

Let’s face it, the VC’s that show up after the entrepreneurs have already built a raging success have a lot of selling to do (one reason they want the early meetings around early stage capital to keep the relationship intact).  They have not built a relationship with the entrepreneurs and they haven’t huddled in the foxhole with them during the early days helping create a product market fit.  To offset those shortcomings, they have to pony up a lot of capital at a significant valuation.  Welcome to some of the crazy numbers we see from Groupon, Facebook, and all the rest.

Exit Valuations are Enhanced By Bubbles

After you get done ponying up a zillion dollars in capital for a hot property at a ridiculous valuation, your next question is how to get back out again with a decent profit.  Momentum investing is such a timing game, and momentum, as opposed to Growth investing, is what today’s VC’s are doing.  The Old Style of VC, was much closer to a Warren Buffet growth investor.  Some of the Angels are still playing that game, and we’ll see whether they succeed.  But the name of the game for valuation is timing the Bubble properly.  You have to sell as near the top as possible, because this thing may collapse if we miss this wave.  A famous early example of missing the Bubble, ahead of its time, is the tale of PointCast.  In January, 1997, News Corp offered $450M for the company, which was tiny but had a lot of buzz.  By March, the offer was withdrawn and PointCast’s fortunes declined steadily from there.

I remember the application well because I was raising money at the time and every VC I visited had it running on a PC in the corner of their waiting room.  It was all the rage in the write ups too.  I remember not being able to figure out what the attraction was.  After all, here is an app that was essentially a screen saver that showed news and advertising when activated.  So, it would only present valuable content and monetizable ads when it was sure you weren’t using the computer any longer?  Something was wrong with that picture, but then, I’m not an arbiter of B2C Internet Fashion.

If You Miss a Window, Wait for the Next Bubble

The bubbles are like sets of waves arriving at the beach.  There’s hide tides and low tides and big sets and little sets.  But there is always another wave.  A lot of factors are involved.  High and low tide may be regarded as frothy or depressed stock markets.  The analogy to big sets versus little sets may be whether the competitive landscape is properly configured to cause a merger and acquisition frenzy.  The latter are not as exciting as high tide, because there aren’t as many dollars involved in private M&A.  It is, after all, fueled by some public company acquiring a private company.  Decorum must be observed with one’s shareholders and everything is easier if our public stock is riding high.

Now the ideal Mutha-of-all-Bubble-Windows happens when we not only have frothy public markets, but we also have strategic M&A going on like crazy.  Strategic M&A is not about entering new markets.  It’s about struggling to maintain advantage against a competitor that is scaring the heck out of you.  It’s about there not being enough time to do it organically or by building it internally.  It’s about not being able to hire all the talent you want and need.  It’s about running a once great franchise that’s getting tired alongside all the shiny new franchises springing up during a major paradigm change.  Dig it?

You Can Step on the Gas, but Hitting the Brakes Kills the Deal

When your job is to pour gas on a fire that’s already burning, you have to plan it carefully.  Maybe the fire needs to spread on its own until there is enough combustible material nearby before you add the gasoline.  Maybe you’re worried that the Big Bubble is going to come and go in the next 24 months and you had better pour gasoline on now so you’re big enough it matters.  People wonder how Color got so much capital, so fast.  The answer is not that the Bubble is here.  Color is too early to catch a wave that’s here.  It’s that the VC’s involved think the Bubble will have come and gone in 24 months or so and they want to make sure any deals they do now have enough gasoline to participate.

The corollary for deals that don’t have what it takes to be in this bubble cycle is not that you won’t receive capital, but that the VC’s may some day soon be thinking its time to use the gas very sparingly.  They’ll want into your deal so they can be ready for the next bubble, but they will be frugal.

Hitting the brakes will generally kill the deal.  You can’t pour the gas on, miss the window, and then go, “Hey guys, lets go back to our happy little bonfire, hunker down, and wait for the next wave.”  It’s too late.  You’ve hired like crazy, blown through capital like crazy, and every boy and his dog in the company has already test driven their new Ferraris and mentally become part of the landed gentry.  Hunkering down will be massive culture shock and will feel like failure.  Worse, the peeps you hire in the pouring-on-gas phase are not really entrepreneurs.  They aren’t doing it for the love of it, they’re chasing the new hotness, and they will move on if they doubt your short-term future.

Going Public is a Lot Further Out than it Used to Be and Each Year is Risk

For a whole lot of reasons, the US has systematically made it dramatically harder for companies to go public.  It has done so in a wide variety of ways, so many that it sometimes seems to be a result of the Law of Unintended Consequences that it is so hard to go public.  Sarbanes Oxley alone costs circa $6M to gear up for just before you go public and $3M or so each year thereafter.  Companies used to go public on maybe $40 or $50M in annual revenue.  SOX alone makes that difficult if the public market climate requires you to be profitable to go public.  So, maybe you have to be able to grow to $80 or even $100M.  If profitability is particularly elusive, you may have to wait for the right climate to go public as well.  Once you get public, life is not a bowl of cherries either.

If you have the sort of company that is Riding the Bubble, because it is more of a Fashion statement than an ROI statement, this is a problem.  Each extra year of growth needed to reach the public company initiation standard adds risk that your Bubble will burst before you can ride it to the finish line.  If President Obama wanted to fix the recession rapidly, he would figure out how to make it possible (forget easy) for a $50M revenue company to IPO.  I favor making regulations like SOX only applicable to companies with $1B or more in revenue.  Heck, let’s be generous and call it $500M or more.  Figure out how to get the analysts back in play too.  We were so afraid of skulduggery there that we’ve created a situation where there is almost no information available.

Entrepreneurs:  Conclusion?

Now that you’ve seen a little bit of the Art of Riding the Bubble, I hope you’re thinking hard about your strategy.  Make no mistake about it, Riding the Bubble can be very lucrative.  And, your VC’s very likely know a lot more about it than you do.  But if you really are an entrepreneur, there’s probably an element of all this talk that feels shallow and insincere.  This may not have been what you set out to do.  If you’re a builder not just focused on cashing in, it can be downright scary.  Bets are going to be made with what you’re building that can be very harmful if they prove wrong.  I can only offer two bits of advice:

First, the VC’s didn’t sign on to build something.  They have to make a return for their investors.  If you got good VC’s, they will be very good at this.  Regardless of whether they’re good or not, this is what they do and they will not let much get in the way of it.  You’re going to have to deal with it, support it, and learn how to succeed with it.  If you’re really good and the sort of entrepreneur who can grow with the company, you will figure out how to be a star at helping the VC’s do what they need to do.  That will give you the opportunity to build a lot more things down the line.

Second, have a realistic view of what you have built.  This is the hardest thing to get on the same page with your VC’s about.  Sometimes they’ll be wildly over enthusiastic, and maybe that’s what happened to Pointcast.  Sometimes you’ll be wildly over enthusiastic and they’re ready to cash out.  Never forget that companies are not sold, they are bought.  They’re not very liquid.  You can’t necessarily chose when you’re ready to cash out.  When opportunity knocks, give it careful consideration.  The next wave is a ways out, and every year is risk.

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Sure enough, mention Riding the Bubble as Momentum and Warren Buffet as Growth and along comes Warren saying the Social IPO’s will be overpriced.

Efficient Marketing Means Doing Something Different

Startups have to solve three problems to succeed:

1.  They need a great product.

2.  They need a business model that results in profitable growing revenue.

3.  They need an efficient marketing model that results in a profitable growing customer base.

As Om Malik’s great post on business models and Twitter points out, too many companies are exclusively product-centric.  They’re focused on #1.  But just adding #2 isn’t enough either.  You also have to get the word out, and as a startup, you can’t afford the luxury of advertising as your medium.  You need Efficient Marketing.

By “Efficient Marketing”, I mean marketing that doesn’t cost much in relation to the value it delivers.  It’s marketing that is profitable from day one.  You know, the kind of marketing startups and bootstrapped companies have to do, but also the kind of marketing larger companies want to do.

Efficient marketing only happens when you do something different.  Something the rest of the crowd isn’t doing so much of.  Marketing is about standing out and getting noticed, and that’s hard to do if your marketing plan is the equivalent of standing in the middle of Times Square at midnight on New Year’s Eve and trying to make yourself be heard.

What are some examples of Efficient Marketing, and what are the ramifications of thinking about “Doing Something Different?”

First, on doing something different.  It’s ironic that most of us go through life studying what successful folks did and trying to emulate that success by doing the same thing.  The irony is that most of the time, when the successful folks did it, they were doing something different.  By the time we get around to copying them, it’s no longer unique, but we still wonder why copying their formula verbatim doesn’t work.  In this case, the old saw about insanity being the expectation of a different result when we do the same thing tells us that Marketing takes a little bit of craziness.  We expect the same result when we do the same thing, but we should be doing something different to get that successful result!

Assuming that last bit hasn’t gotten you completely confused, let’s delve into Marketing Differently.

As my loyal readers know, I am a huge proponent of Content Marketing.  Content Marketing is still relatively rare, though it is rapidly gaining in popularity.  It is a sub-genre of what Hubspot calls “Inbound Marketing.”  If you make the decision to lead with Content Marketing, you’re already doing something different from the masses.  But, consider how much further you might take it.  Instead of leading with a conventional corporate web site that’s all about you, how about leading with your content that’s all about delivering the value of the content free to people who might one day become your customers?  That’s pretty different, and you can go much further down that path than the Carbon Fiber Gear folks.

If you’re going to focus on Content Marketing, you’ll want to make sure your content has the opportunity to be different.  Are you in a space where there isn’t a lot of quality content available?  Some markets are better about that than others.  The first one to bring premier content to a market lacking in good content will be a big winner that’s hard to unseat because they have the benefit of inertia (they’re in everyone’s blog readers and already receiving the newsletters) and network effects (everyone is already referring others to this wonderful source).  So in the spirit of the 3 problems a startup must solve, check into whether your proposed business has the opportunity to excel with content.

As I have mentioned in the past, App Stores are another way to market differently or market different, as Apple might say.  But not all app stores are equal.  While they are relatively new, and a lot of companies have benefited by being early to the App Store craze, some are getting very crowded.  You’re no longer doing something different if you’re counting on a listing in the Apple app store to get your product noticed.

What to do?

Check this great article on how one game developer is finding the Android store to be more profitable than Apple (thanks Techmeme for bringing me this one!).  According to the article, “Spacetime, which is supported largely by in-app purchases, says its Android users generate 30 to 50 percent more revenue than its iOS users do.”  30 to 50 percent is huge, but why does it happen?  I love the money quote from Gary Gattis, Spacetime’s CEO:

“Android’s a smaller pond for apps right now,” he says. “The support on the Google side has been much more tangible — they’re really trying to nurture the gaming community.”

Bingo–right now, being on Android is doing something different.  As a result, Gattis says Spacetime has stopped advertising on Apple entirely and thrown their whole marketing budget behind Android.  That too is something very likely different.  Most companies love the idea of balanced scorecards–a little bit here, a little bit there, spread the risk.   Unfortunately, where marketing and a lot of other business is concerned, unless you’re already big and protecting your position, spreading the risk isn’t your job.  Take exceptional risk by doing things different and doing them big.  Double down on what works and try another experiment when it doesn’t work.

We’ve got Content Marketing, choosing the less popular App Stores (and potentially platforms), what about some of the common patterns?  For example, stealth launches.  I’m not a big fan.  First, you should be building content day one to attract the audience who will eventually buy your products.  Second, it’s been done to death.  There’s even a service now to automate it for you. With respect to Scoble and LaunchRock, how much is your startup going to accomplish if it does the same thing the last 1000 startups have done and uses a service to homogenize the experience on top of it?

Let’s try some more, rapid fire bullet style:

-  In an age where business views customers as “people with our money in their pockets”, what happens if you take a different and refreshing view of your customers.  By now you must have heard the Zappo’s story of exceptional Customer Service.  Others are catching on, but there’s still plenty of opportunity to be different in how you treat customers.

-  Advertising:  If you must advertise, you’d better do it where others aren’t.  That means finding the long tail keywords if you plan to use AdWords.  Keywords that others haven’t discovered so your ads run where they’ll be noticed and can be placed very cheaply.  How about advertising in specific online forums where your tribe may be found?  This can work if your tribe is focused and there isn’t already a ton of advertising there.  Running a bunch of ads on Facebook probably won’t quality.

-  E-mail campaigns:  Not a big fan of email to get noticed.  In this age of Spam, it’s too easy to do yourself more harm than good.  As a tool to nurture your audience after they’ve asked to be on the list and could opt out at any time, it works.  But look for ways to make your mailings different in some way.

-  Social Media:  Yeah sure, but the opportunity to be different is fast dwindling as everyone gets focused on the new new thing and it suddenly becomes the tired old thing.  As with email, figure out how to be different with Social Media, and realize that folks on the receiving end are even tougher about Social Spam than Email Spam.  What can you offer that is genuinely fresh and isn’t just gaming the Social Web?

-  Snail Mail:  Marketing moves in cycles as the herd seeks to do something different to improve response rates and cut costs.  Snail Mail direct marketing has been around forever, so it has probably seen more of these cycles than any other venue.  If you can strike at a time when the Snail Mail Direct tide has ebbed, you can stand out.  You’re going to have to do something different with the piece you mail and you’re going to have to test it to see whether there has really been an ebb and you can stand out.

-  Viral Marketing:  Everybody loves the idea.  It’s so compelling.  And so hard to realize when it’s your turn to try.  It may be too late to catch this train, unless you can come up with something that is different.  Many people are starting to complain they’ve hit the wall with viral signups.  Many platforms no longer make it easy to go viral on their coattails.  Find a way to be different if you want to succeed here.

The next time you’re sitting in a meeting, hashing through marketing programs, ask, “What’s different?”  If the answer is, “Well this worked for XYZ, they got really big on it,” ask yourself whether it’s too late to jump on that bandwagon because what XYZ did is no longer different.

Ask, “What are we doing to be different?”

Does the Internet Mean There Can Only Be One?

I read with interest today Hubspot’s coverage of their new monster VC round.  They’ve raised a $32M Series D monster round from Sequoia, Google, and Salesforce–certainly an all-start cast.

There’s a lot of interesting data in these announcements, such as Hubspot’s view of what market shares look like for the Marketing Automation category:

If true, and we should wait to hear what the other vendors have to say before concluding it is, it suggests Hubspot is blowing away their competition at Eloqua and Marketo, and not by just a little.  That’s pretty big news too.

But there was one part of these announcements that really caught my eye.  Brian Halligan says:

In industries formed prior to the internet, oligopolies naturally formed where there is a market leader holding 20% market share, a 2nd place competitor having 18% or so, a 3rd having 15%, etc.  In industries that have formed in the last 10 or so years, the opposite seems to be happening where the winner takes all (or at least 80% of the market cap in that given industry).  A few examples include Amazon, VMWare, Zappos, Salesforce.com, Google, and even Groupon.

Dharmesh Shah follows with:

For the following leading companies, see if you can name the #2 player and #3 in their category.  You have 30 seconds, I’ll wait:

• Amazon
• NetFlix
• VMWare
• eBay

Difficult, isn’t it?  Chances are you struggled a bit with coming up with the #2 and failed completely to come up with #3.  The point here is, as these tech categories evolved, the #1 player became so dominant that we often don’t even know who #2 and #3 are.

I don’t know about you, but I’m skeptical about this new “rule”.  There’ve been so many “rules” that the Internet has supposedly changed in some form or fashion.  I think it’s worht delving into this one.  First, is it really true that there can be only “one”, or is there something about this list or this environment that makes it a temporary abberation?

First, we could as well have asked whether there can be “only one” SaaS company in each category.  Certainly that market is closer to what HubSpot is than these companies they’re holding up as examples.

While there are not tons of companies, there is often more than one public SaaS company in a category.  I’m going to call that a strike against the “only one” hypothesis.  But, I will point out, that it is very difficult to fund a new SaaS company today and they take a lot of capital.  It may very well be that a factor at work here that has nothing to do with the Internet is the funding environment.  VC’s today are focused on companies that can be bootstrapped before they bring their millions to bear.  HubSpot got their first capital before we had fully entered that era.  It would be hard to found a company today on a slide show and team, which is where most of the SaaS world started.  So that’s a factor that has changed, but that could change back.  Personally, I think that when VC’s get tired of funding 12 different add-ons to each popular service, each with no perceivable barrier to entry, and each at the mercy of services like Twitter, they may start to look for opportunities with more substance than the usual Consumer Internet Plays that need no marketing.  From that perspective, the more firms like HubSpot that succeed, the better.  But, for the time being, we’re immersed in Dot Com Bubble 2.0 as huge valuations roil around us in markets where “there can only be one.”

Second, some of these companies mentioned have profound network effects.  That’s an ideal reason for there only to be one.  eBay is the best example.  I did an auction e-commerce business called PriceRadar that was aimed at delivering some cool optimal merchandising and selling tools for online auctions.  When we started there were circa 8 auction houses and more being announced all the time.  There were going to be not only huge horizontal auctions like eBay, but every major Internet service would have one (like Yahoo!), and there would be vertical auctions for industry (DoveBid).  Within 2 years very little was left except for eBay.  That’s how strong the network effects are for that business.  Netflix has network effects.  How many subscriptions to movies will a household tolerate?  Amazon may have network effects.  They are the online superstore merchandise-wise, they control some key franchises like books, they sell readers that read their books and create further network lock-in, and Clouds may have network effects due to latency.

The upshot of network effects is that there is a very short window for competitors to respond.  If they don’t, the compound interest associated with the network effect and the lock in makes it impossible to catch up.  That should be a sobering thought if you’re competing in a market with network effects, but it isn’t clear to me that Hubspot is.  Do companies plug and unplug their marketing automation software?  To some extent they do.  I was given that perspective by no less an authority than a key executive at one of the three Marketing Automation companies I’ve mentioned so far in this post.  Color me skeptical about network effects for these guys.

What else leads to just one?

Platforms, which are related to network effects.  Sometimes they become so pervasive you must deal with them.  Google owns search.  Facebook is another.  The network effects aren’t as striking as eBay’s when you deal with a platform, but it is a function of needing to be compatible with the status quo and it being too hard to reinvent all the wheels you get with the platform.  Oracle and SAP have platforms in this sense.

What about VMWare?

That one is pretty easy–there are VM managers that are just as popular as VMWare, but they’re Open Source.  You could argue MySQL was just as popular as the big DB vendors, but never hit their revenues because they were Open Source.  This is a scary thing about building a business around Open Source–you may succeed without getting much for it.  It’s very tricky to find exactly the right balance that ignites passion while delivering profits.

How about properties like Groupon?

Man, hard to believe they won’t see a #2 and #3 that make good money.  Living Social is already on that road.  Moreover, there’s been a spate of articles lately that are finally recognizing that coupons aren’t really even all that unique and they may not be the best thing for you and your customers in terms of fostering a long-term relationship.  It’s like the world started switching from newspapers to online media and forgot to bring their coupons along.  So, wow, Groupon is great, I have coupons again!  And then pretty soon we’ve got coupons coming from 18 different mailing lists, we’ve got flash shopping sites, we’ve got small businesses getting hit with tons of visitors who buy below cost and then never come back, and we realize we weren’t missing all that much.

I’m not buying “there can only be one”.  There may only be one if the others don’t get moving soon enough, and the Internet may shorten that window, but that’s all it does.

What do you think?

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David Raab, longtime marketing automation expert, raises a little heck with the idea that the game is over, there can be only one, and it is Hubspot.  He also pointed to the little inconsistency in Hubspots graph of lead sources which shows email and not inbound to be the lion’s share.  That caught my eye too.  Read David’s article to see what Dharmesh had to say on that one (good explanation).