internet, start-ups

When You Build A Moat, You’re Just Digging a Big Hole

When you build a moat, you put yourself on an island.

A week or so ago, MessageMe launched their product. I wrote a brief blog post about why First Round loved their product and team. A lot has happened since then. MessageMe has signed up more than a million users who have sent tens of millions of messages, videos and doodles. And the product has been featured in the Apple App Store, Google Play, and *shut off* by Facebook.

One of these things is not like the others.

Facebook’s decision cutoff MessageMe and others has been covered in the press here, here and here. Make no mistake, they are well within their rights to do things like this. But just because Facebook’s decision is within their rights doesn’t make it smart.

It’s interesting to note that while Facebook has decided to shut off MessageMe – presumably to protect Messenger product – Apple has taken a different approach. While MessageMe could be seen as being competitive with iMessage, Apple has recognized that it’s great product and been supportive from Day 1. Far from trying to bury it, de-feature it or hide it, Apple has promoted it. They know that great ecosystems thrive on great products.

This morning I was catching up with one of my partners about this. I told him that it reminded me of discussions I was a part of while I was at Yahoo! about Yahoo! Mail. As far back as 2005, there was a core group of people who wanted to open Mail APIs and allow free IMAP (or even POP) access to alternate email clients. There were more people who felt that opening the email APIs would damage growth and use in the core Mail product. Build a moat, protect the castle. Depending on the day of thee week, the weather, the amount of coffee I drank, etc., my perspective shifted. In retrospect, it’s clear that there was one right decision.

While we were building a moat, Google made a different choice. They built a bridge to their user community and allowed anyone to IMAP their Gmail account.

The rest is history.

start-ups, technology, venture capital

We’ve Reached Peak Emoticon

Some quick observations of people, technology, communication and expression.

Observation 1. Our computer screens are no longer black. Our typeface is no longer green. When the Macintosh was introduced in 1984 that changed. We discovered the word font for the first time. We made art with a mouse and MacPaint. Consumers became creators.

Image

Observation 2. People have always looked to technology to help them communicate. In 1994, Radiolinja launched the first commercial SMS service. And a year later, they worked with Telecom Finland to offer interoperability so that their customers could send messages to one another no matter who was their service provider.

Observation 3. Despite these decades old advances, SMS largely looks like it did when it launched. Yes, we can send pictures and video through MMS but when we want to express ourselves, we still use emoticons. In the US, more than 155B SMS messages are sent every year and the best we can do is ASCII art emoticons. :-/

Observation 4a and 4b. (Metcalfe’s Law) Any next generation system which would allow for richer communication would have to be instantly cross-platform. The same way that SMS was useless when consumers could only communicate with people who used the same service provider, it would be useless if they could only communicate with people on the same device. Any next generation system which would allow for richer communication would have to instantly have many users.

Last spring, when I met with Arjun Sethi to learn about his new product MessageMe, we talked about everything above. It was easy to agree with him on the first three points. The challenge was how to overcome Metcalfe’s Law. Arjun replied by telling me about his background – he previously built one of the extraordinarily viral Lolapps. He then told me about his product plan – he wouldn’t launch until he was on iOS and Android. Then he let me install an alpha version of MessageMe on my phone. I was instantly hooked – as was the whole team at First Round. We could easily send doodles, videos, voice messages or (my favorite) pictures with snarky scribbles on them.

I’m proud to say that since First Round made our investment in MessageMe last spring, my emoticon abuse has fallen – I’m sending doodles and videos instead of ASCII winks. The first release is now generally available on iOS and Android. Get it today and together we can move past peak emoticon.

start-ups

Fire Power and Artillery

There are two oft said, contrasting adages in early stage investing. Both of them may be true.

The first adage is “The only thing that matters is the people.” Start-ups are malleable forms, especially in their earliest days. The product plan is immediately dated as soon as it is drafted. The first user tests will do nothing, if not show how far off the mark a company’s original assumptions were. The product and direction of any start-up is bound to change. The constant is the people. If you invest in the right people, they will know how to continually revisit, reshape and adapt their original vision to build a great company – even if it ultimately is very different from the one they originally set out to build. These people are heat seeking missiles.

The second adage is “Bet on the racetrack, not the horse.” In other words, find a large, fast growing market and you are bound to have a good outcome. If the team is just mostly right about the product, the product will at least be good enough to build a business around it. The rising tide of a new and growing market will create value. The market will have a greater impact on the outcome of the business than the individuals behind it.

There’s an obvious tension between these two viewpoints. More often than not, I find myself leaning towards the people part of the equation. The primary thing that matters is people. The best people find great markets in which to build products and companies. This is what unifies the two opposing adages.

If you could find a team that included Facebook’s first Partner Engineer, someone who has carried the beeper for Google.com, and a stud Google engineer coming off of his first start-up exit, you’d know that they were working on something big. And that’s why I’m so excited to welcome Artillery to the First Round portfolio. Ankur Pansari, Mark Logan and Ian Langworth are turning every browser into a game console. If you have followed Valve, you know about the power of simple discovery. If you have followed Nexon (remember the EA rumors?), you know about the power of free to play. The team at Artillery is working to to combine simple discovery and free to play with instant play. A game console in every browser.

Artillery is a big idea. I’m not surprised that a team with so much fire power is working on it.

business, internet, start-ups, technology, venture capital

The Convenience Gap

Not long ago I dismantled our home audio system. It was barely a year old. My wife and I would open our media cabinet, turn it on, scroll through the list of artists on our AppleTV, sit back and be enraptured by it’s gorgeous sound. Unfortunately, our set-up wasn’t baby-proof, so as our son began to crawl it had to go. The Day the Music Died. We wound up replacing our stereo with a modest Sonos table top system and the funniest thing happened. We are now listening to more music than ever before. The convenience of the Sonos was a revelation.

Here at First Round Capital, we’ve always seen a lot of business plans for consumer facing Internet services. Back in 2007, my partner, Josh Kopelman declared “the toughest part of a new venture [is] getting your users to pay you anything at all.” This is “The Penny Gap.” Don’t assume a product priced near free will net conversions near that of a free product. Ask people to touch their wallet, and their interest in your product falls off dramatically.

Recently, we’ve seen more companies comfortable with the idea of asking users to pull out their wallet. This is no surprise as commerce as continued to move online and into apps. If the Penny Gap is the biggest challenge a company faces, getting users to meaningfully engage with a product is close behind. We’ve been lucky enough to meet with many founders who are creating beautiful products with rich, high fidelity designs. And while beautiful products can be engaging, they are not definitionally so. For every interaction required of a user there will likely be a fall-off in engagement.

Convenience, not beauty , not finely tuned control, drives engagement. There’s plenty of evidence of this in everyday living. The vast majority of drivers (sadly) choose automatic transmissions for their cars trading less control, worse performance and poorer mileage for convenience. Most of us have abandoned vinyl & CDs for MP3s & streaming services trading sonic depth & quality for the convenience of having our music with us all the time.

Every product manager needs to work through the calculus of engagement. The effort required for a customer to engage with a product, has to be lower than than the value they drive from it. If engagement is low, there are two possible solutions: either provide more value or lower the level of effort demanded by the product. The former may have a negative impact on the economics of a business (i.e., margin pressure for retail businesses). The latter option enhances both the business and product (i.e, profit opportunity).

Within the FRC portfolio, there are some examples of companies which have focused on convenience to drive their businesses. Retail businesses like Fab & One Kings Lane have done well by curating their catalogues and making them accessible both online and on mobile devices. Uber & Hotel Tonight have both significantly reduced the time & number of steps required to book a car service or hotel room. Threadflip’s White Glove Service makes selling secondhand fashion online as easy as calling for a FedEx pickup.

As I meet with founders, I’m now finding that I’m less likely to ask what their company will allow users to do and more likely to ask what their product empower users to no longer do. Convenience is the ultimate feature.

internet, technology, venture capital

Changes and An Innovative Constant

This spring marks another anniversary of my time with First Round Capital. These milestones have always been an occasion for me to look back and reflect. In doing so, one thing was clear: the first half of 2008 was the beginning of a tectonic shift. Back then, Facebook Beacon was feeling some growing pains, you could “fan” companies, and Facebook Connect did not exist. The iPhone 3G had not been launched. The iOS SDK was in it’s infancy. The App Store hadn’t been turned on. The original iPad was still two years away. If you focused only on the then current capabilities and uses of these products (or suffered from financial calamity myopia), it was difficult to imagine the landscape that would shortly emerge.

Today, there is the Facebook Open Graph, “Likes” are the attention currency, and Facebook is the de facto online identity. Every company has an iOS plan. Some businesses are built entirely on mobile users. Companies like Path, Uber, Square, Task Rabbit, Hotel Tonight, Flurry and so many others were difficult to conceive of in Spring 2008. Back then, it was easy to think of BazaarVoice as a nice, little reviews company rather than one of the earliest social commerce companies. Today it trades on the Nasdaq.

As these changes were taking root, Phin Barnes and I joined First Round as Principals. The team had just raised their first institutional fund. There was an office outside Philadelphia and a small space in San Francisco. Our Platform effort was led by a single summer intern. Folks in the industry thought our smallish $135m fund was “cute.” We had never held Office Hours nor had we released a holiday video. Super Angels were still just the domain of Christmas pageants.

Things look different now. We have national offices in San Francisco, New York and Philadelphia. Our Platform Team is now 6 people. We’ve raised some more capital. We’ve danced, sung, showered and auto-tuned. We’ve been called Super Angels. And today, Phin and I are now joining Josh, Howard, Chris and Rob as Partners.

Amidst the changes and growth at First Round, it is a constant that I find most innovative. We remain solely focused on building the world’s best seed fund and working with the greatest Founders. We seek people who build their business for the long-term, as we do with our firm. We challenge ourselves to innovate and rethink the ways in which we can assist Founders. We’re passionate about starting companies and think of our ourselves as entrepreneurs. We are a start-up. We just happen to be a fund too.

I still pinch myself everyday that I get to do what I do with the people I do it with, colleagues, founders and co-investors alike. Congratulations to Phin. Thank you Josh, Howard, Chris and Rob. I’m thrilled to be working with you and our community of Founders for years to come.

internet, start-ups, technology, venture capital

A Short Big Data Story

A quick story to share. Some time back, the First Round team was having some difficulty getting our email delivered. Our messages weren’t winding up in Junk folders, they weren’t showing up at all. So, I reached out to former colleagues who were now with the major webmail brands. I wanted to know whether or not we had somehow been blacklisted. I also connected with our service provider and ran through our set-up with them. On all fronts, things seemed to check out. Except our messages were hitting the floor. No fail notifications. Nothing. Was this some sort of VC email karma? For the better part of a week, we had no idea whether or not our messages were being received. We turned into those guys, who send emails and immediately follow-up with a phone call, “Did you get my message?”

Luckily, this was right around the time I met with Patrick Peterson. Pat has a long history in email. He was one of the earliest people at IronPort and later, after the company was acquired, became one of 13 Cisco Fellows. Before Pat could even begin his pitch, I had begun pleading with him for some free advice about our email predicament. It turned out, that was all the pitch he needed.

Email is an opportunity for big data. Think of the information each message contains. To, From, Subject, Time, IP address, DKIM, SPF, server data, the message itself. And now multiply that by the volume of messages sent every second. Pat recognized that this data could be used to protect not just consumers, but brands too.With Pat’s help, and the help of billions of email messages, we were able to identify and shut down a spammer who had hijacked our domain.

Today, we’re thrilled to announce that after that, First Round went back to business as usual and along with Alloy Ventures, Battery Ventures and Greylock Partners, invested in Pat and his company, Agari.

liftopia_logo_full-color_web
skiing, start-ups, technology

A Chairlift in the Woods

If a chairlift spins in the woods but nobody is around to ride it, does it make a sound? Does it turn a profit? Does it make a skier happy?

There are few multi-billion dollar industries that have yet to harness the power of the Internet. At First Round, we thought car services was one of them and we were lucky enough to seed Uber. We later saw that the hospitality industry was ready to embrace the mobile web and we were thrilled to invest in HotelTonight. We think the ski industry will be the next massive market to embrace the Internet. We’re thrilled to be investing in Liftopia along with Chris SaccaDave Morin, and Erik Blachford,.

Even as a lifelong skier, I’ve taken the business of skiing for granted. It wasn’t until I met with Liftopia’s Founders, Evan Reece and Ron Schneidermann, that I wrapped my head around the scale of the industry. It’s massive. In the US alone, lift ticket sales are $2.6B annually. Lessons and rentals are another $1B. Ancillary on mountain spend is yet another $1.6B. In the US alone, that’s $5.2B before lodging, transportation, soft goods or hard goods. The Japanese market is roughly the same size. Europe is larger still.

And yet, ask a skier about the last time they used the Internet to plan a ski trip and they’ll most likely give you a quizzical stare. They’ll probably tell you that they were able to book their airfare and lodging online but purchased their lift tickets in person. Think about it. You pick a resort you want to visit. You book your flight online. You book your lodging online. But the the core elements of your trip – your lift tickets, lessons and rentals – you wait in line to purchase these after you arrive. Or, maybe if you’re savvy, you buy discounted tickets at a convenience store near the mountain. This is insane.

Step back and wonder what the world would be like if the other aspects of your vacation were handled in the same way. A walk-up airfare? Walk-up lodging? Airlines and hotels provide customers with better rates in exchange for a commitment from consumers that they will spend. This results in better demand forecasting for the service providers and better pricing for consumers. Liftopia lets ski resorts do the same and the results are powerful. Liftopia customers ski more days, spend more money on mountain, and explore more resorts. So if you’re daydreaming of a trip to a place like Mammoth, Sun Valley, Park City, Deer Valley, The Canyons, Kirkwood, Alpine Meadows, Killington, Stowe, Mount Snow, Keystone, Snowbird or just about any mountain in the US, check out Liftopia. You’ll save time, money and have more fun.

Every chairlift should be heard, profitable and generating smiles.

start-ups, venture capital

Tap Tap Tap Tap

Tap. Tap. Tap. Tap.  That’s not Morse Code. That’s the sound of great product design.

That’s also the sound a registered user makes when booking a hotel with HotelTonight. All the sound a user makes. Four taps and done. Try doing the same with Orbitz. 60+ taps. Priceline? 70+ taps. Travelocity? 80+ taps. Hotels.com? 100+ taps.

The reason that HotelTonight could create such an improved user experience is that unlike the other online travel companies, Founder & CEO Sam Shank, built it from the ground up for a mobile world. Mobile products work best when they are designed “mobile first.” Compare an iPhone with your computer. The screen is smaller. The keyboard is worse. The Internet connection is slower. For mobile experiences, this means that each pixel matters more, every inputs needs to simpler and anything which slows the experience needs to be eliminated. Every step, every delay has the potential to become a user offramp.

When these design needs are combined with a big market, the stakes become enormous. $50B worth of hotels booked online annually. A significant portion of this amount is rapidly shifting from desktop browsers to mobile browsers / apps. Every extra tap, every extra input, every extra second, creates a window for a user to walk through and away from a booking. HotelTonight solves this in brilliant, award-winning fashion.

So, it’s not surprising that as soon as the First Round team met with Sam and saw HotelTonight, we immediately wanted to invest. Today, along with Battery Ventures and Accel Partners, we’re thrilled to be part of a the company’s $3.25 Series A financing. First Round has had some good luck with some of our other “mobile first” investments, like Uber and Path. We’re excited to help HotelTonight continue the trend.

start-ups, technology, venture capital

Storenvy: The Retailer’s Gutenberg

It’s pretty exciting to announce a new retail investment on the same day Amazon.com, announces it’s first $10B quarter. It’s a nice marker for how much online retail has evolved and how much further it has to go, so I wanted to share some thoughts on why First Round Capital is thrilled to be part of the syndicate investing $1.5M in Storenvy.

For the first 550 years after Gutenberg invented the printing press, it remained pretty difficult for individuals to publish and share their ideas. Writing and editorial remained in the province of broadcasting corporations, family newspaper dynasties and book publishers. Of course, the Internet changed that. Blogging services like WordPress, SixApart and Tumblr made it simple and free for anyone to share their ideas with the world and to build a personal brand.

As much as commerce has evolved in the past few years, it hasn’t kept pace with the forces which shaped modern publishing. Twenty years ago, if you wanted to open a store, it meant you had to rent a physical space and apply for business permits down at city hall. There was a significant expense and to seeing whether or not a retail idea would be welcomed into the world. The experience was daunting. In the mid-1990’s, Amazon launched and opened the world to e-commerce. In the early part of this millenium, platforms like Magento have made building an online retail presence easier, but my no means easy. Ebay and Etsy have been available as lower cost alternatives, but the experience was still analogous to taking out a classifieds ad. The UX didn’t belong to the person doing the selling. The retailer had as much control over their brand as they did over the font in their newspaper ads.

Storenvy changes this. It brings the blogging revolution to retail. FREE branded online stores for everyone. A sense of community for the buyers and the sellers. An easy way for merchants to sell on Facebook. Much the way GigaOm and TechCrunch operate on wordpress.com, Storenvy will have it’s share of larger merchants like indie record lable, Lil’ Chief Records. But, what gets me most excited is that now anyone can be a retail entrepreneur. In fact, the t-shirt to appearing on the left of this post, well, it hasn’t been produced yet. Amore Apparel, the Storenvy merchant behind the design can test some designs and see which ones generate the most interest. Even the smallest retailer can test the appeal of their product before committing to inventory. Retail has never been more democratized.

We’re thrilled to be working with founders Jon & Janette Crawford, Spark Capital, Kleiner Perkins and Charles River Ventures. We know with terrific advisers like Jeffrey, David and Willo, there will be lots of gorgeous (and funnel effective) stores blooming.

BTW, if you’re as excited by this as we are, you should know that Storenvy is looking for a few good hires.

economics, start-ups

Jobs (not Steve) and Structural Underinvestment

In this week’s New Yorker, James Surowicki has a new post on the state of the economy and employment levels. Before completely dissembling the argument that the US is seeing a tectonic structural loss of jobs, he does a nice job of setting up the straw man:

Why have new jobs been so hard to come by? One view blames cyclical economic factors: at times when everyone is cautious about spending, companies are slow to expand capacity and take on more workers. But another, more skeptical account has emerged, which argues that a big part of the problem is a mismatch between the jobs that are available and the skills that people have. According to this view, many of the jobs that existed before the recession (in home building, for example) are gone for good, and the people who held those jobs don’t have the skills needed to work in other fields. A big chunk of current unemployment, the argument goes, is therefore structural, not cyclical: resurgent demand won’t make it go away.

Hook, line and sinker. Whether in the Bay Area, New York, Philly or anywhere else First Round has investments, 2010 was more challenging than 2009 when it became more challenging to recruit candidates to new roles within our portfolio. Contrary to the broader economy, in the seed capital world there were too few people chasing too many jobs. My favorite anecdotal Bay Area economic indicator (rising commute times on 101), seemed to represent this as well.

Read More