AGILEVC My idle thoughts on tech startups

May 13, 2013

When we meet with entrepreneurs and ask about their competitive advantage or special sauce, one of the common responses is first mover advantage.  “We’re the first company to do X in an rapidly growing market” or similar.

I’ve always felt being the first mover is a comparatively weak advantage and have been thinking about this more recently.  While our portfolio at NextView is roughly equally weighted to consumer facing and B2B companies, it seems that for consumer companies in particular being first mover confers little benefit and the drawbacks probably outweigh whatever weak advantage might exist.

If you think back to the monster consumer software and internet companies that’ve been built in the last 2-3 decades, it’s actually far more likely they were fast and/or particularly innovative followers rather than first movers.

First Movers

  1. Atari (home video game consoles)
  2. Twitter (microblogging)
  3. Amazon (e-commerce)

Fast/Innovative Followers

  1. Microsoft (OS – both text & GUI based, office productivity, game consoles)
  2. Apple (today’s Apple of smartphones & tablets… early Apple’s attempts at being first mover largely flopped like Lisa, Newton, etc)
  3. Facebook (social networking following in the footsteps of Friendster, MySpace, etc)
  4. Dropbox (cloud storage)
  5. Netflix (video streaming)
  6. Google (search… lots of predecessors)
  7. Square (card present payments on smartphones - predecessors like ROAM Data, et al)

The one segment of consumer companies where being first mover seems to have conferred real advantages has been “collaborative consumption” broadly.  The final chapter has yet to be written for most of these companies but being a first mover does seem to have aided the likes of ZipCar, AirBnB, and Uber.  I think this has less to do with network effects which are distinct from first mover (though the two are complementary) and more to do with locking up preferential access to supply.

So why might it be better to be a fast follower?

  • Don’t Have to Evangelize - Perhaps the key downside of being first mover with a consumer product is having to evangelize a market and build it from a niche to broad adoption. This usually takes a lot of time, money, and energy. Evangelizing towards a mass market is arguably harder in consumer than B2B given individual consumers adopt based on a broader set of qualitative and quantifiable factors, where as businesses often attempt to quantify ROI more objectively. Google didn’t have to convince people that Internet search was needed… they just had to make it work better (via PageRank and subsequent innovations) and monetize it better (by copying GoTo/Overture with paid search advertising).
  • Work Out Early Kinks - Dropbox wasn’t the first consumer cloud storage service.  Companies like xDrive and others let you upload and retrieve files from the web nearly a decade earlier, and there were others like Carbonite that created hybrid local/cloud storage solutions.  But Dropbox realized that one of the kinks of existing cloud storage services was that they were only well suited for alternate or backup storage, not primary storage. For the cloud to work seamlessly for primary storage Dropbox built client side products for an array of platforms, and worked very hard to make this client experience feel super native on every one. By finding a way to work out out this kink they’ve grown larger than all the other consumer cloud storage products out there.
  • Wait For Complementary Technologies to Mature - Apple didn’t pioneer the smartphone but obviously the iPhone rightly deserves credit for defining the category and making it a global mass market.  Of course Apple did some truly innovative things with the first gen iPhone launched in 2007 and also harmonized software and hardware better than anyone else. But part of their success was simply due to the vastly improved state of cellular data networks relative to when the first smartphones emerged. The Treo was a revolutionary device, but using one kinda sucked in the early days of digital cell networks.  Similarly RIM had to build their own proprietary data network (after initially launching on Motorola’s ARDIS/DataTAC network) in order to get emails to Blackberries in a reliable and timely manner.

We sometimes think of being a fast follower in pejorative terms. Somehow first mover seems sexier, and to be fair some first mover startups have become category leaders or have successful acquisitions by larger companies. But the reality is that most fast followers are incredibly innovative companies, sometimes even more so than the early pioneers in their category. And at the end of the day most great entrepreneurs are focused on trying to build enduring, category defining companies. Being a fast, innovative follower might be the way to go…

April 2, 2013

It occurred to me that we usually refer to entrepreneurs associated with a startup as being “behind” the company or phenomenon.  As in Mark Zuckerberg, the Harvard drop-out behind Facebook or so-and-so, the folks behind startup X.  Upon further reflection it seems like this phraseology has things backwards… we ought to be talking about the teams in front of a new or important concept.

I mean this not simply as a paean for entrepreneurs.  While the broader society’s esteem of entrepreneurs waxes and wanes, entrepreneurs have been getting plenty of love in recent years both from within and outside the startup ecosystem.

But the reality is new companies and new products don’t simply come into being themselves.  As we all know too well a lot of time, energy, and creativity goes in first before any new innovation comes to market.  All this work goes in before customers and the broader public ever sees anything.  So to me thinking about founders and early employees being in front of a new product isn’t about stroking peoples’ egos, it simply makes more logical sense.

The other phrase we use is people X invented Y as in “Steve Jobs invented the smartphone”.  But we usually reserve that terms for a select few, and in fact most entrepreneurs put their hard work not in coming up with an idea (most ideas are commodities) but in executing in the face of limited resources and a competitive marketplace.  So most founders don’t really feel like “inventors”.  And so we end up with so-and-so, the folks behind company X.

So I’ve resolved myself to think, speak, and write about teams in front of a product.  Or at least “responsible for company X” rather than being “behind” it.

February 28, 2013

hungaryYesterday was Apple’s shareholder meeting and as many of you know, there’s obviously been healthy debate about what they should do with the ~$137 billion in cash they’re sitting on.  I had read somewhere that Apple’s cash pile was equivalent to Hungary’s GDP so I tweeted out the suggestion that perhaps an activist shareholder should push an acquisition of Hungary rather than thinking small (e.g. increasing dividends or issuing preferred stock).

Hungary probably wouldn’t sell their sovereignty and entire economy for 1x sales, but Apple has no debt so they could probably lever the deal and borrow money on top of $137 billion in equity.  For some reason the notion of Apple hiking the taxes of Hungary to fund a dividend recap just amuses me…

But in all seriousness, what should Apple do with a massive and growing pile of cash?  The three obvious buckets are of course to invest heavily in new products (the Apple TV or iWatch or whatever), return cash to shareholders (via dividends, buybacks, new class of preferred shares, etc), or acquire stuff.  Besides Hungary, what M&A strategies actually make sense?

FWIW Apple isn’t Cisco or Oracle.  Apple’s an incredible organization because of its long history of internal innovation rather than excellence in acquiring, integrating, and growing other businesses.  Over the long arc of time (by tech standards) Apple has done very few acquisitions >$100M and has never done a billion+ dollar deal.  Buying NeXT provided the foundation of what is now the desktop Mac OS plus brought Steve Jobs back to the Apple fold.  More recently acquiring Quattro Wireless created the iAds mobile ad network and Siri was of course a technology acquired from SRI.  Less auspiciously Apple bought a Swedish mapping technology company (C3) to form the basis of Apple Maps.  Lastly Apple has bought several component companies (chip companies Intrinsity and P.A. Semi, flash memory company Anobit, and security hardware – Authentec) to be integrated in various iStuff.

Apple is fundamentally great at creating innovative new platforms that consumers love because they’re easy to use and rationalize digital fragmentation.  They weren’t the first in PCs, MP3 players, smartphones, or even tablets yet Apple revolutionized each of those categories.  Apple doesn’t really make money by selling software or even digital content, but they seamlessly integrate software and content to support a high margin hardware business.

But Apple’s DNA is about quantum leaps, not incremental ones.  So if they were to become an acquisitive company, I’d argue they have to be as big & bold in buying as they are in product innovation.  The three main vectors Apple might pursue are:

1) Buy Content – Content is strategically important to Apple’s platforms, but in the grand scheme of Apple it’s a pretty meaningless part of their business.  If you add up all the content, software, and services (e.g. iCloud subscriptions) it’s about 6% of Apple’s revenue.  To put that in perspective, all the chargers and other accessory stuff amounts to about 50% of the revenue Apple generates from content + software + services.

Some people think Apple should buy Netflix.  On paper it makes sense… ~$10B market cap, deals with lots of content owners, a nascent library of Netflix developed content, and a happy/loyal consumer base.  But it makes less sense to me… consumers love Netflix because they can get it on all kinds of hardware devices (TVs from many makers, game consoles, tablets, etc) and content owners deal with Netflix because they don’t want iTunes to dominate digital video as it has digital music.  Apple could buy Disney instead (~$98B mkt cap) and own a vast library of content and the “infrastructure” to develop more (ABC/ESPN, movie studios, etc).  They’d probably divest the theme park business but the rest of Disney would give Apple an incredible platform to rethink video @ home in an on demand world.  It would also transform the company by making meaningful profits on content in addition to hardware.  Time Warner (~$50B mkt cap) would be the other logical choice in this vector.

2) Buy PipesMany have thought that communications infrastructure would become “dumb pipes” and the content and/or hardware companies would win home “infotainment”.  Pipes companies are still pretty valuable it turns out and on demand video hasn’t really eroded that… you still need cable or fiber to your home to watch Netflix, and it’s not like total revenue to the “cable” companies (Comcast, Time Warner Cable, Verizon Fios, AT&T Uverse) has really declined.  Plus building out a telecom network to the home is pretty hard and costly… there’s a reason Google Fiber is available in precisely 1 of the top 100 US cities.  The satellite TV guys (DirecTV, Dish Network) have good pay TV businesses and nationwide coverage but lack a true broadband internet offering so they wouldn’t be a fit.

Owning pipes and the content deals that go with them could strategically aid Apple in a couple ways.  First the reason the iPhone was such a profitable success for Apple was because they got to double dip… consumers paid Apple and wireless carriers paid Apple (in the form of subsidies) for each device.  No matter how awesome an Apple TV might be, it’s difficult to envision a similar scenario where cable companies subsidized the cost.  By the time the iPhone came out there were 3-4 wireless carriers with national scale so it made sense for AT&T to do an exclusive with Apple, but cable still tends to be a local duopoly or even monopoly so less incentive to try to shift consumer share.

But if Apple owned one of the big cable companies they could essentially boost the profitability of TVs by internally subsidizing with monthly subscription revenue.  They’d also instantly get access to a huge swath of TV and movie content out there.  Plus if they bought Comcast ($106B mkt cap) it’s essentially a twofer of #1 (content production) and #2 (pipes) now that Comcast has fully acquired NBC Universal.

3) Vertically Integrate - Apple could also vertically integrate in more radical ways.  I don’t mean buying Hon Hai (aka Foxconn) to control vast labor and production of Apple’s hardware.  I mean component suppliers like Marvell ($5B mkt cap) or STMicroelectronics ($7B mkt cap) for chips, or Sharp ($3B mkt cap) or Toshiba for LCD displays, etc.  Companies like Samsung and LG also supply Apple with displays, but since they compete in end-user devices trying to buy either of them probably wouldn’t make sense.  The display components are super low margin so Apple is unlikely to do that, but the semi companies conceivably could be a better fit.  But at the end of the day vertically integrating wouldn’t really transform Apple’s business in the way #1 or #2 would.

4) Buy A Social Platform - Really Facebook ($63B mkt cap) is the only one that makes sense to me from a strategic standpoint.  Twitter doesn’t really give the same depth of strategic synergy and and Apple is a consumer company rather than business-centric so that rules out LinkedIn.  But even though Apple could offer Facebook shareholders a 100% premium over the current stock price, obviously this one is never going to happen given Mark Zuckerberg’s voting control of the company.

My bet is that Apple does none of these things of course.  Maybe Hungary is starting to look more plausible…

January 31, 2013

tablet_arrayI’ve been enjoying my iPad Mini for a couple months month now.  I thought seriously about getting a Nexus 7 (in fact gave one to my sister as a gift recently), but because I’m frequently on the go with intermittent WiFi I got the Mini which is still one of the few LTE-enabled 7 inch tablets currently on the market.

As my partners & I have written about constantly, we think “mobile” is a terribly misleading term for what is a broad megatrend of ubiquitous computing.  More people are computing more of the time with a broader array of personal devices, not simply a substitution of “mobile” computing for “desktop” computing.  And now having lived with my iPad Mini for awhile it’s clear to me that 7 inch or other small tablets are further atomizing the overall world of ubiquitous computing.

Just as usage patterns between smartphones and the original generation of 11″ tablets (led by the iPad of course) are pretty different, and usage between Android and iOS devices varies significantly, I see 7″ tablets being used in different ways and potentially by different people than 11″ tablets or smartphones.  So what are the distinctions?

  1. Not A Laptop Replacement – I’m skeptical that tablets will completely replace a primary “computer” (laptop or desktop at home,  workplace, and/or school) for many consumers in the foreseeable future.  But for a meaningful swath of consumers, a large 11″ tablet can be a substitute for a decent chunk of the activities they used to do with a laptop or other primary computer.  In the business world you see some folks that used to bring a laptop to meetings now come with tablets.  In my own family, my wife now basically does all her computing at home using an 11″ tablet rather than her personal laptop.  But a 7″ tablet is marginally harder to use than a large tablet, so you’ll see them used less frequently in these laptop replacement scenarios.
  2. Better On The Go Device - For many of the same reasons a large tablet is better as a laptop replacement, a small tablet is better as an on the go device.  It’ll fit in a purse or a jacket pocket whereas an 11″ tablet won’t, making small tablets the kind of thing you use to consume content, do basic communication (e.g. quick emails), etc.  For example, I find my iPad Mini to be a far superior e-reader than a full-sized tablet since the size and weight make it easy to hold with one hand.  Smartphones are nearly ubiquitous (passed 50% US penetration at end of 2012), but many consumers don’t want to use them for more than brief sessions lasting <5 min.  A small tablet on the other hand is convenient and useful for a much longer (e.g. 10-30 min) sessions, so even though you won’t carry it everywhere like a phone people will use small tablets a lot on the go (e.g. the coffee shop, mass transit, quick meeting or waiting period scenarios).  Several people have told me in recent weeks they carry their iPad Mini or Nexus 7 or Galaxy Note similar small tablet wherever they go.
  3. Low Cost = Broader Entry Point - We’re >5 years into the smartphone adoption cycle (more than that if you want to count Blackberries and Treos) and barely 2 years into the tablet adoption cycle.  Prices for all tablets will continue to come down over time, but certainly for the next several years 7″ tablets will be several hundred dollars cheaper than large tablets and will therefore be a tablet “entry point” for a broader swath of consumers.  A significant majority of consumers in the US do not have a tablet today, and I believe that by the time we reach >50% penetration of tablets overall, ~7″ tablets could be as much as half the market despite being manufactured and sold for less time than large tablets.

So small tablets are expanding the trend of ubiquitous computing and also will drive higher tablet penetration.  They’re simultaneously atomizing the “mobile” ecosystem.  Developers already have to think about smartphones and tablets distinctly just as they think about platforms (iOS, Android, etc) distinctly.  A bad ecosystem outcome is if small tablets create yet another class of experience that software developers have to consider.  It’s something I’ve been pondering as I think about the broader shifts that are going to happen at an OS and core app level (mobile browser, etc) in the next 0-5 years.

January 3, 2013

I’ve been using Google’s Chrome browser on my iPad Mini for about a month now.  There are several things I prefer over Apple’s Safari, including the bookmark and search history sync with my other Chrome usage (on laptop) and some small UI touches.  But for now there’s no way to make an OS-level switch to make Chrome my default browser.  So if I click on a URL in another app, say an email reader or Twitter or whatever, iOS me to use Safari.

As we all know the mobile ecosystems have remained mostly walled gardens to date.  Apple has taken the fully integrated OS/hardware approach and while Android is an open source OS adopted by Samsung, HTC, and other device makers Google’s becoming more integrated via it’s Nexus devices (built by partners) and of course the Motorola acquisition.  While there’s a broad ecosystem of third party developers at the app level, even there you’ve seen the platform owners fight hard to bundle their own apps most notably in the maps showdown between Apple and Google.

We’ve seen this before through multiple generations of computing platforms largely driven by antitrust efforts.  The first chapter began more than 40 years ago with IBM being forced to unbundle software and hardware on mainframe platforms.  IBM “won” a Pyrrhic victory in the legal case by the early ’80s against the DOJ but by then they’d already given in to the pressure.  Microsoft famously had to open it’s desktop OS to allow other web browsers to complete against IE.  They further had to open up IE to allow consumer choice of embedded services like search and media players.  And of course the FTC and others have been poking into all sorts of practices at Google in recent years.

Smartphone and tablet platforms are likely to be no different in the coming years.  You’ve already seen a small handful of third-party apps achieve meaningful scale in replacing bundled apps – Instagram for camera, Evernote for notes, Sparrow had some modest traction in client email.  Apple and Google haven’t deemed these monopolies worth fighting for, though Google acquired Sparrow, and Apple’s already gotten it’s hand slapped on the iOS platforms for e-book pricing collusion.

In the not too distant future you’re going to see a broader array of apps being used in core categories (browser, email, contacts, calendar, maps / local search).  You’ll also see antitrust pressure to break the OS level shackles that favor the bundled apps, so a consumer can choose a default browser for instance.  A lot of the opportunity will still fall to incumbents with scale… Apple and Google themselves in most categories, Yelp et al in local, Facebook in social, etc.  And the power of the default will remain immense… there’s a reason why IE remains the dominant browser on desktop (esp on Windows machines) Apple Mail dominates client email on iOS / OSX.  But there will be some opportunities for ISVs and even startups in nearly all of these categories.

Smartphones and tablets are ushering in a paradigm of ubiquitous computing, where consumers compute with broader array of devices across a larger portion of their day.  But at the end of the day, the forces of unbundling at the application level that have prevailed on nearly every prior computing platform are likely to persist.

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