Today Cloze has started to talk more publicly about their funding and also is starting to open their product more broadly. The company has been in stealth mode for the last couple months but I wanted to take this opportunity to talk about NextView’s investment in the company and our enthusiasm to be working with co-founders Dan Foody and Alex Cote.
Cloze is helping outbound professionals understand and utilize their professional network more comprehensively than ever before. We amass all of this information in our emails, social networks, smartphone address books, and other software tools (e.g. CRM) but it’s rarely easy to browse or search all of this contact information from a single interface. And in it’s raw format, just searching for a contact may not provide much value. Cloze lets users figure out not just who they know but helps them understand their strength of connection, how often they’ve communicated with someone, and surfaces timely information about these people.
Having been involved in the formation and early growth of LinkedIn, I saw a clear opportunity for Cloze’s product. I’m obviously biased, but I still think LinkedIn is an awesome platform today and they continue to innovate, grow, and evolve nearly 10 years after we started the company at the end of 2002. And of course email, CRM, and other tools for managing your network of contacts are far older. But there are few products out there that federate the data across all of these systems and none that are solely focused on the individual user’s needs, as opposed to products designed to benefit company-wide usage or salesforce-wide usage. And Cloze’s product is designed from the get go around mobile usage in addition to the desktop web (>20% of LinkedIn traffic today is smartphones & tablets).
I first met co-founder/CEO Dan Foody a little over six months ago. In addition to being a repeat entrepreneur, I was immediately impressed by his ability to build product. Though he’s been both a CTO and a VP Product and managed large teams before, he built all of Cloze’s initial product himself from the back end through to the presentation layer. His co-founder/CMO Alex Cote has run customer acquisition programs that have attracted millions of users via a range of channels. So in addition to our enthusiasm about the product & market opportunity, we were thrilled to support an experienced pair of co-founders who really executed from Day 0.
I hope you’ll have an opportunity to check out Cloze’s product. I’m pleased to join Cloze’s board with this funding round, and all of us at NextView are obviously excited to help Dan and Alex build a great company.
Mobile payments are the trillion dollar industry that everybody’s been waiting for but has never materialized. At first glance, mobile payments seem like a no brainer… consumers [seemingly] want the convenience of paying with a phone rather than cash or credit card, merchants dislike the cost associated with accepting credit cards, and mobile ecosystem players (e.g. carriers, Google, et al) covet an economic stream they believe they can take a slice of.
I’ve been an interested observer of electronic payments for 12+ years. In fact my first job as an early employee of PayPal was as Product Manager responsible for our mobile products (WAP-enabled cell phones and our legacy Palm Pilot IR port product) and the first international version of PayPal. That sounds like a lot of responsibility for someone fresh out of undergrad as I was then, but in reality both of these were peripheral elements of PayPal’s core web-based payment product which was still heavily concentrated on eBay auctions at the time. Back then we were already talking about using our monochrome display, 12-key interface Motorola Startacs to pay for everything. But in 2012 it turns out I still pay for all my offline and online purchases with a credit card or cash, and not my infinitely smarter mobile phone.
The gap between enthusiasm for and the reality of mobile payments is primarily the result of a fundamental misunderstanding of the nature of payments. It’s not for a lack of technological effort from both startups and huge companies in all of mobile payments’ incarnations – SMS, mobile web, native apps, NFC, etc. But nearly everyone has wrongly placed emphasis on the mobile technology part and not on the payments aspect.
Payment via mobile device will only see widespread adoption if it’s fundamentally coupled to a store of value that is widely dispersed among consumers and accepted by merchants. There’s nothing intrinsically interesting about a piece of plastic with a numerical token and a magnetic stripe encoded with that token, aka a credit card. What’s interesting about that card (see note #1) is that it’s attached to bucket of real money in the form of a revolving credit line, a checking account, or a prepaid electronic account. When a consumer pays with a credit card they understand they’re using up a portion of that bucket of money, and the merchant knows they’ll get paid from that bucket assuming they hold up their end of the bargain (see note #2). And there’s a layer of financial intermediaries on both the consumer and the merchant side promising to stand behind the transaction.
Thus far mobile payments have failed to create or be coupled to a new store of value. Virtually every mobile payments system in the developed world (see note #3) just piggybacks off the credit card system. The mobile phone becomes a different token instead of the plastic card, but fundamentally it’s still just adding another technical and financial layer on top of the existing system. Also on the merchant side there’s a vast installed base of infrastructure supporting traditional credit cards. So even though mobile phones are ubiquitous on the buyer side, mobile payments won’t be adopted unless the acceptance mechanism on the merchant side is similarly ubiquitous (classic chicken & egg problem). These mobile payment approaches rely on changing user behavior too… a consumer fumbling with their phone while a merchant fumbles with whatever acceptance device they have, while everybody else waits on line to check out.
So be skeptical when you hear statements like “mobile payments will take off when ______ happens” where the blank is stuff like:
- A different form of data interface (e.g. NFC, SMS)
- A new form of user authentication (e.g. Facebook Connect)
- Cross platform support across various devices (e.g. Android, iOS, etc)
So what if anything could make mobile payments take off? FWIW, I’m not totally a skeptic on mobile payments and like any other consumer I see how they could be a lot more convenient than cash and credit cards. But IMO it’ll take a “big bang” multi-party effort rather than an incremental innovation, so it’ll favor large organizations (big companies and/or governments) rather than startups. A couple conceivable scenarios that could bring us to the mobile payments promised land.
- Visa/MC/Amex shift merchants and consumers to mobile devices. This is far and away the most likely path to ubiquitous mobile payments. The fundamental financial infrastructure remains largely unchanged, i.e. consumers get cards tied to a financial account from banks and bank-like entities and merchants are supported by acquiring banks (or Amex itself in their system). Visa, MasterCard, and Amex still run the core “rails” of the payments system but the mobile phone becomes the consumer token and perhaps merchants have newfangled acceptance devices (e.g. POS systems, payment terminals, etc). There may be some losers of the incumbent ecosystem (e.g. ISOs which are a middleman layer between small merchants and acquiring banks) and perhaps some new winners but the system changes far less than some expect.
- Google or Apple go big or go home. If you had a massive installed base of mobile users and were willing to spend billions (not millions) to couple these consumers to a new store of value and spend billions (not millions) to embed this payments system in the merchant ecosystem, it might be possible to create a truly ubiquitous mobile payments modality. The universe of companies capable of all of the above is exactly two. Google is the one more likely to do it… they certainly have the resources, ambition, and intent. They thrashed about with Google Checkout for online payments and NFC for offline over the last couple years. But while it was a little less understood outside the payments world, their acquisition of TxVia theoretically gives them some of the plumbing they’d need to create a store of value or couple a Google mobile payments product to existing financial accounts. If Google buys a small bank or gets a banking license of some form, that would indeed be a game changer. I wouldn’t put it past Google, but if I had to bet I still see this as being significantly less likely than #1. Or Google may be one of the new winners in scenario #1 (e.g. next gen POS platform) albeit not the one that runs the core rails of mobile payments.
- Government fiat. A store of value has value because it contains or represents hard currency. If you can create a parallel currency or supplant an existing one in a form conducive to mobile transactions, obviously you can catalyze a mobile payments system. Systems like M-Pesa (see note #3 below) took off because in developing nations prepaid wireless minutes were a parallel currency, fungible for real money. It’s highly unlikely but conceivable a newly-sovereign nation or a government unexpectedly bereft of it’s existing currency (e.g. Greece) might attempt a half-crazy experiment like this. Another more likely scenario is if a government started issuing transfer payments via mobile device, e.g. sending welfare, food stamps, pensions, or other payments via mobile. These payments are themselves a store of value, which is why merchants readily accepted them either when in paper form (e.g. original food stamps) or now more typically in electronic form (e.g. electronic benefit transfer cards – EBT – now issued here in the US).
For the record at NextView we’re investors in two payments related companies, Swipely and Plastiq, though neither is a pure mobile play. Swipely is focused on payment marketing, namely unifying loyalty programs and payments for main street merchants. Plastiq is focused on extending the use of credit cards into high-value transactions like school tuition, buying a car, or rent/condo payments with a unique economic and transaction model. Both are building on top of the existing credit card infrastructure because as Swipely Founder/CEO Angus Davis points out, millions of people are walking around with a mobile payment device in their pocket… it’s called a credit card.
Notes & FAQs:
(1) I use the term “credit card” here instead of “payment card” for simplicity sake. The latter includes credit, debit, and prepaid stored value cards all using the common transaction infrastructure originally devised for credit cards. Today the total transaction volume (in $ terms) of debit/prepaid cards is roughly comparable to that of credit cards in the US [see Nilson Report - PDF link].
(2) Yes the merchant must follow settlement rules and is exposed to varying levels of risk depending on the nature of the transaction (card present / not, etc).
(3) You do see some truly innovative mobile payment systems in developing nations, which typically lack meaningful payment card infrastructure and have much larger unbanked populations. M-Pesa created by mobile carrier Safaricom in Kenya is the best known example of this. Some people suggest that this is just another example of developing nations “skipping a generation” in terms of technology, e.g. skipping copper POTS telephony to wireless is analogous to skipping payment cards to mobile. But the reason M-Pesa initially took off (and similar systems in the Philippines and elsewhere) is in developing economies prepaid mobile minutes are inherently a store of value parallel to the local currency. They are fully fungible for hard currency through Safaricom’s network of retail partners for either the sender or recipient of an M-Pesa mobile payment. It’s conceptually no different from the early days of Western Union’s original payments business when people “wired” money to one another at each end of a physical distribution network. But again the store of value in prepaid minutes was the key.
FAQ A: What about Square? –> Square is a remarkable company, and a number of my former PayPal colleagues are involved there. But they’re not fundamentally a mobile payments company. In fact outside of the SF tech scene extraordinarily few consumers actually use the app. What Square has achieved is broadening acceptance of credit cards for in-person (aka card present) transactions to new classes of “merchants” (e.g. food trucks, farmers market vendors, small retailers, event organizers, etc), most of whom previously didn’t accept credit cards. In that sense it’s akin to what PayPal did with acceptance of credit cards for online transactions among eBay sellers and other small online merchants that previously transacted via check & money order. In addition to expanding card acceptance among small offline merchants, Square also has a great opportunity to displace traditional credit card terminals and POS systems among newly formed businesses. But even though merchants plug Square dongles into mobile devices like smartphones and tablets, virtually all of their transactions are still a card swipe payment.
FAQ B: What about ACH via mobile device? –> ACH is really a poor system for handling any type of merchant payments, mobile or otherwise. It lacks real-time authorization, guarantee of good funds, anti-fraud tools like address verification, and has longer settlement periods than credit cards typically. ACH is an outgrowth of the Federal Reserve’s Fedwire system and was never intended for merchant payments (it was designed to replace paper drafts for certain interbank transfers like direct deposit). PayPal is really the only example of widespread ACH use in merchant payments and it took a huge amount of effort for us to get it to work properly and overcome all of the limitations above, and it was literally a do or die proposition for the company.
FAQ C: Apple has more payment-linked accounts than PayPal or Amazon, doesn’t that mean they’ll be the leader in mobile payments? –> No. Unless they radically change course as described in scenario #2 above. If Apple takes all these payment-linked accounts, even with a new interface like Passbook might evolve to be, they’ll still simply be replacing the token used by the traditional credit card infrastructure not creating a new mobile payments system.
FAQ D: What about Jumio and Card.io? –> Both of these companies have created unique approaches to capturing credit card information via image processing. But again these are both just examples of systems riding on top of the credit card infrastructure, rather than creating a new store of value. The promise these companies hold is the potential to lower transaction costs for card not present transactions (e.g. online, over the phone), but that will only happen if Visa/MC accept these systems as having comparable security and choose to create lower interchange categories for these card capture mediums. That’s why a merchant accepting a card via card swipe with Square pays a lot lower fee than one processing with Card.io.
FAQ E: What about mobile payments via carrier billing? –> We don’t really talk about this much anymore, but 5-10 years ago there was some hope that mobile carrier billing systems would create a new store of value for mobile transactions. Again in developing nations prepaid wireless schemes have typically dominated and where prepaid minutes became fungible with currency it created opportunities like M-Pesa (see note #3 above). But post-pay schemes are more common in the US and years ago some folks thought we’d be transacting with our phones and then simply having these purchases added to our cell phone bills. But carriers never really wanted to become banks and deal with the financial risks associated with widespread payments (e.g. extending large amounts of credit to their subscribers). So carrier billing remained a very expensive (transaction fees were 10-30%, e.g. 5-10x a credit card acceptance fee), and very limited use proposition and never took off beyond phone related services within the carrier ecosystem (e.g. ringtones).
Apple and Facebook are both platforms, in the sense that their software and user networks are utilized by countless software developers to build their own businesses. In 2011 Facebook paid out $1.4 billion to developers and Apple paid out something like $2B or so. Outside of gaming, there haven’t been any big new businesses (what we’d refer to as ISVs for past platform eras) for these two platforms yet. But Facebook has produced Zynga and Apple has fostered Rovio and others, so presumably there will be more big businesses built on top of these two platforms and possibly beyond gaming & entertainment.
Both companies generate direct revenue from their platform in the form of a revenue share / platform tax (typically 30%) on software and digital goods sold through the respective platforms. Facebook generated a little less than $600M in direct revenue from its “platform” in 2011 and we can infer Apple generated something like $800M – $1B (see note 1). Facebook’s direct platform revenue accounted for about 15% of the company’s overall sales whereas Apple’s was less than 1%. Of course both companies use their platform to increase user lock-in which indirectly helps their core revenue streams of advertising (in Facebook’s case) and hardware sales (for Apple).
At the end of the day, Apple isn’t really a software platform company. To be fair Apple designs products in a holistic fashion… iStuff is remarkable not just for the physical product design but for the software user interface. But essentially all of their revenue and profits come from selling high margin devices (gross margins >40% which is incredible for a hardware company). Their software platform, and for that matter their digital content business in iTunes, exist solely to make Apple devices more attractive to consumers. We don’t know the precise figure but it’s safe to say that the subsidies Apple receives from telecom carriers alone (separate from the purchase price borne by end consumers) are many times larger than their software platform revenue. Apple generated nearly $130B in revenue in 2011. Any reasonable chance to double that revenue in the next couple years will surely come from selling more iPads and iPhones as well as potentially entering new hardware categories like TVs. Even if they increase software platform revenue by 5-10x, it’ll still be meaningless to the company’s overall financials.
What about Facebook? Facebook’s platform revenue is still a small minority of their overall business, but it’s a lot more meaningful to them than Apple’s. As they seek to grow from being a ~$4B revenue company to a $10B+ business, odds are that revenue growth will come mainly from new forms of advertising rather than direct platform revenue. But the tie between Facebook’s ad business and platform are a lot closer than Apple’s device revenue and software platform. FB generates a meaningful amount of consumer usage by way of third-party apps (which drives Facebook ad revenue obviously) and the platform gives FB a lot of information about what sites their users frequent, what games they play, what content they consume and share. This data will likely be invaluable for creating new forms of digital advertising so I believe Facebook will innovate and nurture their platform a lot more than Apple may in the coming years.
FWIW, how do Apple and Facebook stack up in historical context of other widespread software platforms? If you think about software platforms in the last 20 years a few stand out. Microsoft has two huge ones in the Windows OS and Xbox. Windows Mobile has been a disappointment to date but Azure (an outgrowth of the .NET framework) is growing as a force on the cloud/server side. Sun Microsystems is no more but in the ’90s and early ’00s the Java platform was the gold standard for server-side & workstation applications. Adobe has done it with Flash and PDF.
Proprietary OS’s like Windows are example of a software platform propelling pure software businesses. Microsoft makes money not only from every additional Windows license sold (see note 2) but the OS platform then directly propels other software products like MS Office on the desktop and Exchange, Sharepoint, and others on the server side. Adobe is analogous… they give away software for consuming Flash and PDF content but as a result they have big software businesses selling the tools used to create this content (Creative Suite, Acrobat, etc). By contrast game consoles like Xbox and Playstation and others before it are examples of a software platform making a low/zero margin hardware business profitable.
Apple’s iOS App platform is most similar to Sun with Java, i.e. using a low/zero margin software business to propel a high-margin hardware business. Technically speaking Sun “sold” software in addition to hardware, but generally speaking software products like Solaris were bundled with Sparc stations, disk arrays, etc and Sun reported all of this revenue as “products” or “systems” rather than discretely breaking out software and hardware sales. In fact Sun’s profit margins were nearly comparable to Apple’s today (nearly 40% for Sun, a little over that for Apple) and at it’s peak Sun was a ~$20B revenue company.
But we arguably have never seen a true software platform which drives a core advertising business, in the way Facebook does. In some senses all bets are off in terms of how Facebook’s platform will drive their core business. But my bet is that they’ll find some interesting new ways to indirectly drive their core ad business by virtue of the platform and not just their own product.Notes:
- This is just the estimated revenue from iPhone / iPad App Store which Apple reports lumped in with iTunes music sales. The whole category was about $6B in revenue in FY2011 but the vast majority of that was music
- 75%+ of all Windows licenses are bought by OEMs to install on new computers, not end consumers
In the wake of the undue frenzy leading up to and now ex post recriminations about Facebook’s IPO, the mainstream media and normal folks keep wondering if the non-existent “bubble” for internet companies has now popped. Silly stuff like this. Turns out commerce and advertising are kinda different businesses actually. But a lot of people who don’t live & breathe internet innovation on a daily basis the way I do just lump everything together, and whether out of ignorance or envy or some other bias all this internet stuff seems like black magic.
I’m not sure whether it’s 10 years from now or 50 years from now, but at some point in the medium to long term future we’ll cease talking about “internet” companies in any meaningful sense. I believe with unshakable conviction that the internet has been and will continue to be the most distruptive innovative force of of my lifetime. It’s easily on par with broad waves of innovation of decades and centuries past… railroads, electricity, the automobile, the integrated circuit.
A little over a hundred years ago, when electricity was still fairly novel, people used “electricity” to describe companies in many of the same ways we talk about “internet” companies today. The corporation Thomas Edison formed to commercialize the lightbulb was literally called “Edison’s Electric Light Company” to distinguish it from the old ways of generating light like candles, whale oil, and such. Today we don’t say that GE (of which Edison Electric Light was a precursor) is in the “electric light” business as that’s basically obvious and redundant… nobody generates light with anything except electricity anymore. Similarly there were “electric pump” companies and “electric elevator” companies and such since previously these tasks were accomplished with mechanical energy via humans or draft animals. Once electricity became part of the fabric of our existence, and really the only means used to power anything, society stopped using the “electric” qualifier for all this stuff.
We now only think about “electricity” companies in the narrowest of senses… the small number of businesses (relative to the overall impact of electricity in the economy) that are actually in the business of generating and distributing electrical current. Similarly when integrated circuits were new there were “computer calculator” companies and the like because one had to distinguish between calculators which did their tabluation with a chip rather than mechanical means. There were transistor radio companies and transistor watch companies. Now we only think of chip companies in the narrow sense of semiconductor manufacturers like Intel. We don’t think of Apple as a “chip” company even though literally every product they make only exists because it’s chock full of semiconductors.
We still talk about “internet” companies because the internet is still relatively new for society… just over 15 years or so. It’s been less than a decade that most Americans had broadband in their homes. And it’s very recent that meaningful chunks of society have an internet-connected device in their pocket at all times. So it’s only natural to still think about businesses for whom the internet is a key part of their existence as a distinct group. This is particularly true for new businesses that didn’t exist pre-internet. That’s why we talk about Amazon as an internet company but we don’t refer to LL Bean as an internet company. E-commerce accounts for the vast majority of LL Bean’s revenue today (it crossed 50% in 2010 though was as low as 15% in 2000), but because LL Bean is over a hundred years old and started as catalog & physical store retailer we typically don’t refer to it as an internet company.
As a VC I’m thankful for the fact we still talk about “internet” companies. It means that for quite a while (e.g. within the extent of my professional lifetime) there’s a great opportunity for newly formed startups to disrupt vast swathes of the economy with internet-enabled innovation. The internet has already had meaningful impact on industries ranging from commerce to media to software. The transformation of those sectors is still very much underway and other areas of the economy from education to physical engineering will be impacted in the future.
Someone I used to work with insisted on capitalizing the word “Internet” whenever typing or printing it. It wasn’t that this person was dumb or didn’t believe in the transformative power of the internet, but it was considered a proper noun in years past rather than a common noun (and many spell-checkers treated it as such). We capitalize “Internet” a lot less these days but still use it as a qualifier for a wide range of businesses. But I look forward to the day when society stops thinking of internet businesses as some distinct part of the economy. It means the benefits of internet innovation will be truly pervasive in our world.
For the last 5-7 years the universe of potential acquirers web-based businesses has been fairly concentrated. On the consumer facing side, the number of companies doing multiple acquisitions of $100M+ was extremely short… Google, eBay/PayPal, Amazon, and Microsoft are at the top of the list. IAC and Yahoo! were fairly active a few years ago though neither is as active today and big media conglomerates like Disney are fairly sporadic as they embrace web-based media.
On the B2B SaaS side or enabling services (e.g. ad-tech, analytics, development platforms, etc) the list is slightly different. Included are some of the large companies above like Google and Microsoft but also active on the B2B/enabling side have been acquirers like Salesforce.com (Radian6, Heroku notably) and Apple (Quattro Wireless, Siri). Oracle and IBM have made some acquisitions of SaaS businesses though many of their deals are more old school enterprise software businesses that have matured.
So no matter how you look at it, the universe of buyers has been fairly small and the really active buyers come down to just 4-5 companies. That’s all starting to change slowly as a cohort of newly-public, but very large companies joins the fray. Facebook, LinkedIn, Zynga, and Groupon have all been doing smaller (e.g. <$100M) acquisitions for several years now, but they’ve mainly been acquihires. Here in 2012 you’ve already seen the first $100M+ acquisitions for LinkedIn (Slideshare), Zynga (OMGPop, Draw Something), and Facebook (Instagram) and it’s probably only a matter of time before Groupon does one. There’s also a meaningful cohort of newly public companies that now have valuations of $1B+ who could seriously contemplate an acquisition of $100M+ for stock or cash… Yelp, Zillow, Tripadvisor, Jive Software, Splunk, and others.
The expanding universe of potential buyers is a great thing for founders. And it’s not just because there will be more transactions and more competition for exciting startups. We’ll see how long they remain exciting, innovative places to work but at least for now I think most founders who contemplate an acquisition would be open to having their company and team be part of a Facebook, LinkedIn, or Zynga. The same can’t always be said of some of the more established companies.