“High share premium is not the basis of a high valuation but the outcome of valid business decisions. This new whitepaper by our iSPIRT policy experts highlights how share premia is a consequence of valid business decisions, why 56(2)(viib) is only for unaccounted funds and measures to prevent valid companies from being aggrieved by it”
On August 1st Uber agreed to hand over its Chinese operations to Didi, in return for a 17.7% stake in the combined company’s equity and $1 billion Didi investment in Uber. Uber, though, will get only 5.9% of the voting rights in the new entity. Investors in Uber China, including Baidu, a big Chinese Internet firm, will get a 2.3% stake. Uber CEO Kalanick will serve on Didi’s board, and Wei, Didi’s boss, will join Uber’s board.
So why did Uber blink, particularly in a market that Kalanick hailed its biggest market globally just a year ago. It was arranging 1 million + rides per day in China, larger than the rest of the world excluding US. Within nine months after launching in Chengdu, Uber had 479 times the trips it had in New York after the same amount of time. Indeed the Uber’s three most popular cities – Guangzhou, Hangzhou, and Chengdu – were all in China.
Is the deal in the right direction? How does the deal impact private car services in other parts of the world? Comments and answers to questions are welcome.
A disclaimer: the data on private companies is difficult to come by. The data used in this post has been triangulated from different credible sources and in some place an intelligent guess based on the writer’s experiences.
Uber in China
Uber entered China in Feb 2014, with a soft launch in Shanghai and two other cities under the name Youbu – meaning “excellent step forward” in Chinese. A formal launch happened in Beijing in July 2014. Then, there were roughly 1.05 million taxis in China growing 2.5% per annum. But demand outstripped supply by a big factor. By varying accounts Uber had gained between 10% and 35% market share in private car services by July 2016, burning over $2 billion in the process.
Didi and Kuaidi were two taxi-hailing app companies promoted in 2012. They were backed two Chinese Internet titans, namely Alibaba and Tencent respectively. At time of Uber entry, they respectively owned 55% and 45% of smart-phone based taxi hailing market. All through to 2014, these two acquired smaller apps and engaged in promotion wars that cost collectively over $1bn.
Their investors decided to merge the two services in February 2015 to conserve cash and take on an aggressive Uber. All through 2015, Didi Kuaidi market share in private car services remained steady at around 80%. Their share in taxi hailing was 99%.
Uber started small with offering UberBlack (high price private-car services) in Shanghai (the highest GDP city in China). By Oct 2014, it introduced People’s Uber a non-profit service where customer only paid minimal amount towards gas and tolls. This was a good way to get more Chinese consumers on the Uber app, in the hope that they will eventually start using its paid options. Over time they added rest of the products – UberX, UberXL and UberExec. They also added three special products – Tesla, Green Uber and Xiaoyou (two seater electronic car). Uber focused only on cities with population of 2 million or more. There were 250 such cities in China of which Uber reached 55 in July 2016.
Didi and Kuaidi started with taxi-hailing service in 2012. Unlike Uber’s matchmaking, their app asked users to enter pick-up and destination location and time. The request reached all drivers logged in and they fought for the order. The quickest response secured the order. The users could enter a tip during peak times to encourage drivers to take the order. In July 2014, Kuaidi launched Chauffer One to target online chauffer market. Didi integrated their app with WeChat payment in Jan 2014 helping it gain popularity among WeChat users (the most used mobile chat app in China). After the Feb 2015 merger, the combined Didi offered host of services beyond taxi hailing. These included – private car service, car-pooling, shuttle van and bus-hailing services. Its other product innovations included – matchmaking of drivers and passengers based on shared interests (fruitful journeys), deal with LinkedIn to let people join up their accounts on the two networks, tie up with several car companies including Mercedes and Audi to let passengers book test drives (Over 5 million customers have since taken test drives) and a special service for passengers with disabilities. Didi also started helping the high performing drivers get loans to buy new cars with its tie up with China Merchants Bank (CMB). These drivers otherwise had no credit history to approach a bank.
In short, Didi has been miles ahead of Uber on product innovation
Didi-Kuaidi started with taxi hailing, not chauffeur-driven / private car service, which helped it win over grumpy taxi drivers and local politicians. Uber faced taxi-drivers protest in several cities and twice their offices were raided by police in this connection. Significantly, anti-private car services protests were seen as anti-Uber while such services were also being offered by Didi-Kuaidi!
Didi gained extra points by being the first to integrate with WeChat Payment, an offering from its main backer and investor – Tencent. Uber followed suit but their WeChat link was often broken for no obvious reason.
Didi started investing in and building technology alliances with Uber enemies in other geographies to better fight Uber. Didi investments included – Ola cabs in India ($30mn – guestimate), Lyft Inc., in US ($100mn) and Grab Taxi in South East Asia ($350mn).
At the time of this writing, according to Bloomberg, Didi and SoftBank have almost clinched a deal to pour a further US$600 million into Singapore-headquartered Grab. Both companies are existing investors in Grab, as well as Indian counterpart Ola.
Growth and ambition
In July 2016, Didi offered taxi-rides in 400 cities and private car services like Ubers’ in 200 cities. Its taxi hailing service was arranging more than 4 million trips a day through its pool of 1.35 million drivers. Its private car service was doing over 1.5 million trips a day. In 2015, Didi arranged a total of 1.4 billion rides in China, more than Uber has done worldwide in its history. At the same time, Uber offered private car services in 55 cities planning to reach 120 cities by September 2016. A leaked Uber memo in the summer of 2015 revealed Uber arranging 1 million rides a day.
By multiple accounts, Uber probably had between 10% – 35% share of private car services business. Didi had 65% – 80% market share in this segment plus 99% share in taxi and bus hailing services.
This race was clearly marked with the scale of ambition and the speed of execution. Consider this for example – In December 2015, Uber was present in 21 cities planning to reach 120 cities (population over 2mn) in Sep 2016. At the same time Didi was present in 259 cities and was planning to reach 400 cities by February 2016 alone! Indeed at the time of merger, Didi was active in 400 cities while Uber was only in 55 cities. Didi had expanded at a furious pace and that meant stupendous flawless execution. And this execution was backed by a grand vision – “penetrate into all regions of China targeting 30 million trips daily over 10 million cars registered on its platform.
Both Uber and Didi were flush with funds to fight to win in this market. Didi had raised a total of $9.82bn from investors like Tencent, Alibaba, China’s sovereign wealth fund, CIC and notably $1bn from Apple. Uber had globally raised $11.46bn but its China operation that was a separate entity, had locally raised only about $3bn from Baidu and others.
As part of the deal, Didi is also investing $1 billion in Uber. Now Uber also has investment in these three taxi-hailing companies by virtue of its 17.7% stake in Didi. What does it mean for the taxi-hailing business in US, India and South East Asia?
Both the companies had burnt cash to attract more drivers and riders on their platform. So far Uber had matched Didi in the spend. But Didi had an advantage in the long run – it’s opponent had to balance its funds across several countries where it was fighting for share. It was perhaps unwise on Uber’s part to ignore their other territories in favour of China alone. Also, Uber was eyeing an IPO at this time and needed to clean their balance sheet.
- Has Uber made the right decision by selling off its China ops? It still has a 17.7% share in Didi! Why?
- Is private car services / taxi hailing a winner-takes-all business?
- With the cross holdings between Didi & Uber, Didi and Ola, Lyft & Grab what is the likely steady state scenario? What is the future of Ola, Lyft and Grab Taxi? Do you think in the end only Uber and Didi will remain through out the world?
- How does it augur for India e-commerce titans fight? Does Uber-Didi merger strategy will playout here too in form of a deal between Flipkart & Snapdeal or Amazon and either of the two Indian e-commerce brands? Isn’t that beneficial for investors instead of endlessly draining out cash?
- What are your lessons from this story?
Note: Before I begin, I would like to clarify the difference between market potential and revenue estimate. I have often seen entrepreneurs use the two terms interchangeably.
Market Potential is about estimating the size of the overall market opportunity. It is a sum total of the potential revenues of all players who are addressing that opportunity, if all the potential customers were to buy. I.e. If you were selling ‘affordable’ golf kits for first-time golfers, then you could estimate market potential as follows (all numbers are indicative for illustration and do not represent actual market) :
- There are about 20 millon golfers across the top 10 golfing markets in the world. Additionally, about 100,000 new people take up golf every year across the top 10 golfing markets in the world.
- About 25% of these find the cost of golf kits expensive. If you take this as the addressable market at USD 400 a kit for 5 million buyers, we are addressing a USD 2 bn market opportunity, even if you look at only those who find the price of current golf kits too high.
- Additionally, the ‘high-quality at lower price’ value proposition is likely to attract regular and casual golfers too i.e. 20 million golfers. This opens up a USD 8 billion market among existing golfers. And that’s a market growing at 15% pa.
- However, given that most people who want to play golf do not take it up because the current kits cost upwards of USD 1500, we believe that a USD 400 kit will explode the market and we would be able to encourage 10 times the number of people to start playing golf. I.e. by redefining the price-point, we can create an additional market potential worth over USD 500 mn.
- i.e. with an ‘affordable and high-quality golf kit’, we will be playing into a market that’s roughly USD 8 – 10 billion in the top 10 golfing markets of the world.
Revenue estimate is about how much of this market potential do you plan to target. Here’s how you could think about it:
- We intend to launch this product in Japan, the world’s largest and fastest-growing golfing market. There are 3 million active golfers in Japan and over 50,000 new golfers are added every year.
- We believe that with an affordable golf kit, we could double the size of the golf market in Japan.
- In year one, we intend to attract 5000 customers, going to 20,000 customers in year 2 and selling to 100,000 new and existing golfers in year 3. These will be in the top 5 golfing markets in Japan. In year 4, we intend to take the concept to US and Europe, with a target to sell over 500,000 kits in year 4, across all markets we are present in.
- Thus, our revenue estimate (at current prices) is USD 2 mn in year 1, USD 8 mn in year 2, USD 40 mn in year 3 and USD 200mn in year 4. (In comparison, the leading golf kits brand is doing USD 2 bn in revenues currently)
Estimating the size of the market, and then predicting how much revenue the startup can achieve and at what growth rate is indeed a tricky exercise. But going wrong on this could either kill your company, or if in a rare case you have underestimated your revenues, you may end up raising more capital than necessary and thus diluting more equity at an early stage of the venture.
It is therefore very, very critical that entrepreneurs focus on working and reworking on the market size and revenue potential based on sound assumptions and with minute detailing.
Many startups make the mistake of taking broad brush reports from large consulting or research firms, and estimate the size of their market on the basis of those reports. Often we hear entrepreneurs mention “According to Gartner, healthcare is a $80Bn industry with a 23% growth rate”. Now, while this could be broadly true, for an investor, and even for the startup, these figures have little relevance. Here’s why…
In most market segments, the investors would be broadly aware of the scale potential. At a startup stage, investors will most likely invite a startup for a meeting only after they have assessed that the concept does address a large market. Hence, stating the obvious, especially in segments that are very obviously large does not add any value. E.g. For a startup in the education sector, highlighting in minute details the number of schools, number of students and growth rate in India is wasting precious time in the first meeting with investors. Assume that investors who are meeting a startup in the education space know the potential of the opportunities in the domain.
Investors don’t get any comfort from market estimated from industry research data. They want entrepreneurs to build up their estimates based on their insights and conviction – on how their concept will alter the dynamics of the market they wish to operate in.
How then do you estimate the market potential? Simply by being specific about your segment and making some assumptions on the specific segments and the revenues per customer/consumer. E.g. If your concept is about premium home tuition, instead of saying education in India is a $18 Bn market, it will be prudent to state “With over 250,000 students in the top 10 cities in schools with fees above INR 10,000 a month, at INR 2500 per student, the market potential is roughly over– per annum. At an all-India level, the same translates to a market potential of well over Cr.”
Some Points To Consider When Estimating Market Potential
- Clearly define what problem you are solving… and for whom – this will give you a good idea of the number of customers with that problem in the geographies that you plan to be available in.
- Estimate the practical reach e.g. while there may be a 100,000 people in your target audience spread across 50 cities, you may want to take the top 5 or top 10 cities and see how many people you have within your target audience. This of course gives you the total market potential, if 100% of potential customers were to buy.
- Now, apply some filters i.e. ability to pay, ability to reach via media, etc. E.g. while there may be 60,000 potential customers in the top 10 cities you identified, and you may be planning to use a combination of media, if the total reach of these media vehicles is 50%, the total potential of the market is really 30,000 customers.
You could also apply some price filters to test the elasticity of the demand in comparison to price. I.e. work up alternate scenarios to reflect the increase / decrease in demand in case the price were to be moved up or down; and then evaluate which scenario makes a better business case. [Note: For different situations you may have very different parameters for a good business case. In some cases, rapidly acquiring customers, even if margins are lower, would be a key criteria (often relevant in categories; it is important to achieve scale to be relevant – e.g. e-commerce – lock in potential customers on whom profitability can be increased later)].
Now, if the product is of a repeat purchase nature, you would need to make some assumptions on the number of times the customers would buy the product / service in a year. In doing this, it is critical to map the reality or in case of new product categories, to do some qualitative and/or qualitative research to validate your assumptions on the number of repeat purchases within a year.
All the above will need to be worked and reworked at different levels of assumptions often to arrive at what seems like a practical market estimation.
I am a big fan of Joel On Software blog & FogCreek Software.
Yesterday Joel announced that, Trello, their visual Project Management product, is now an independent venture funded entity, spun off FogCreek Software. One of the comments in HackerNews caught my attention and got me thinking about an issue — how do you decide if your product idea needs external funding or not?.
“I am no longer a Fog Creek employee (I left to join an education startup a bit ago), so this is not an official opinion, but anyway: Joel wants Trello to grow a lot faster than Fog Creek could bootstrap it. In my personal opinion, a big reason why Copilot and Kiln never quite made it was that we didn’t have the developer resources to dominate the market when we were in a good position to do so. Because we insisted on bootstrapping, we necessarily had very small teams, meaning that competitors, who were willing to go into debt to have larger teams, were able to come from behind and surpass us in both marketing and features. In other words, while both products are successful and profitable, they likely could’ve been a lot more successful and profitable if Fog Creek had thrown a lot more resources onto them back at the beginning.”
How do you decide if you should bootstrap to profitability or raise funds at the beginning?
There is always an ongoing debate of raising venture funds vs. bootstrapping your way to profitability and sustained growth.
There is 37signals and Zoho school of thought to bootstrap your way to success. And then there is SalesForce at the other extreme. There is no generalized right or wrong answer to this question and very often you find startups challenging these norms.
There are a few aspects like competitive landscape, market trends and the adoption curve of product itself, that can guide you to make this decision. So, what are those?
Bootstrapped model: If you are in an established (read commoditized) market with lots of competitors it makes sense to build your way to profitability by bootstrapping. If you are building yet another Mailchimp competitor, solving “bulk emailing” for a niche ignored by them, and solving it elegantly while building your way to profitability may be the best approach.
Venture funded model: If you are in a new market with lots of business model or technology innovation happening around it, you should try to build / grow as fast as you can. At Chargebee, we are in this category with a fast changing Subscription business model that is disrupting the way you think about customers & sales, and creating new growth opportunities across sectors.
In the case of applications like CRM, you always evaluate something like SalesForce though you may like a Close.io or a Pipedrive. And you tend to hear opposing voices within your team, advising you to choose an established solution because “it can scale”. By scale, they mean feature richness, integrations, small aspects of product features that makes every day life easy — the benefits of being in market for years & having fixed nagging issues for customers (ex: SalesForce automatically creates follow-up tasks based on rules. It is a simple thing, but I have repeatedly seen this being a reason for sales managers to choose this because it is important for them).
Though you can get funded as a new player in the CRM space, it takes years to challenge the established player unless you are complimented by market forces. Ex: Cloud + Behavioral Analytics + Inside Sales could be a game changer & could leave SalesForce behind. Let me explain. If behavioral analytics becomes the key to doing sales in SaaS (like it is now), established products like SalesForce can be challenged by players like Intercom that provides a totally different dimension to doing online sales and they can dominate that market. Everybody else in CRM space, playing by established rules is trying to play catch with the leader and not disrupting in a big way. This is one category.
Another category is one in which the market leaders are not well established, yet. The market itself is being defined by new way of doing things, across several verticals and products are still maturing. The early mover is even probably at a disadvantage making mistakes along the way, building & rebuilding stuff while lots of new players are emerging building better solutions (this is the space we believe we operate in with Subscriptions).
The comment in HackerNews resonates well here with the second category explained above — the opportunity probably missed by Kiln & Copilot, when they could have totally dominated the market. Github totally dominates the market. Kiln probably missed the bus by not moving fast with Git & SaaS model. If they had deep pockets, they could have been the market leader taking on Github.
And they sensed the opportunity early with StackExchange and now Trello, and have spun them off into separate entities off FogCreek, so they can thrive on their own.
Both these models work and there are always exceptions (isn’t that exactly why we startups exist, to buck the trend?). Choose whichever suits your style. But if you are in second bucket, we should be aware that competitors may take the market further away from you, if you don’t do justice to your startup with right resources at the right stage.
As a think tank, iSPIRT has been constantly thinking, exploring and encouraging numerous models of software product business, all in parallel. This process leads us to gather three distinct categories of inputs that can then be crystalized and shared with the larger ecosystem – practitioner experiences, market trends and industry strengths. Since all the three factors evolve, the class of opportunities becomes different over a period of time and the analysis needs to be repeated. The current document reflects the best of our understanding as of today.
iSPIRT is very appreciative of the efforts of entrepreneurs who pursue individual market opportunities and their will to succeed. Unlike a market analysis report by an Analyst firm, this document does not aid entrepreneurs to pick a particular opportunity or support an investment thesis, as it deals with mainly the macro-level factors. We believe that an articulation of the market reality (a blend of practitioner experiences, market trends and industry strengths) would provide insight to industry observers and policy makers as to how the Software Products Industry is working and why.
Here is a small outline that helps in understanding this document.
First section starts by clarifying segmentation of the market on internationally accepted lines. Two major impact areas are then analyzed – SaaS business model (pay as you go, for software) and Services industry (large population familiar with issues and delivery of services to enterprise customers, particularly, larger ones). Finally a picture of market opportunities across segments is derived from the above trends and other tailwind factors from an India perspective.
Premise: Wealth creation by humans happens in 2 forms, by making “something desirable” or by helping the maker sell it. Everything else is a support function that brings efficiency to these 2 activities. The Web being a communication medium can only help sell something, which happens through some form of lead generation. One might argue that SaaS tools are “desirable” products on the web but the way to see it is that web or the Internet only acts as a distribution medium for the actual product.
There are 3 dimensions or criteria for evaluating a web business.
- How far is it from the “something desirable”?
- How exhaustive or selective the target audience is?
- Is it single power centered or distributed?
1. Distance from Product: Transaction – Information – Network
The representation above will help you visualize the value chain. The transaction layer is the closest to the product and has most control over the chain – in terms of pricing, availability, purchase experience. Though, this is also the most commoditized layer since most factors are internally controllable.
The information layer helps you discover a product and decide about the purchase. The Network layer helps you connect with the information. The outer most layer has little control in terms of purchase but it is the most defensible layer for a web business.
- Value in this chain is created when you push a user inwards from an outer layer. Every change in layer is a lead generated. User moving from one destination to another in the same layer leads to more confusion and is a sign of feature gap.
- Facebook and Google Search* are network layer that generates traffic for information sites, like FindYogi, TripAdvisor etc., which in turn generates leads for transaction layer.
- Most web businesses are generally an overlap of two of these layers. An effective use of these network with information – like Quora or Twitter is powerful. Tripadvisor is probably the best example of marrying the info+network layer. Ecommerce companies are making a decent attempt at marrying transaction with information so that they can influence the value chain better. MakeMyTrip, Cleartrip already enable transactions; with ratings/reviews they are covering the information layer as well. Since there is nothing like review/rating in flight booking, this business is getting commoditized and the players are looking to move to lesser standardized products like selling hotels, holiday packages.
- Sticking to transaction layer only will make you no better than a payment gateway, which has been commoditized. The fulfillment part in the transaction layer is mostly offline. PayZippy from FlipKart and PayUMoney are making small steps to capture the network layer along. PayPal is a great example of transaction+network layer execution.
- The success of each layer depends on what bait you can fetch from the inner layer to entice the user and push her inwards for more. A good basic bait does not generally generate revenue but helps you keep your destination alive. A promoted bait generates revenue for you.
- Any layer is useless by itself. You have to do a lot of seeding from inner layer initially and develop relations with your adjacent layers to grow (through SEO, Affiliates, SMM, Content marketing, Ads). Networks by itself are not useful unless it has information. The information layer by itself is not useful if it does not push you to a transaction and the transaction layer triggers the end fulfillment.
*Google search is essentially driven by what human networks are referring to, the search result page is an organized way of showing the information. An overlap of network with information layer.
2. How exhaustive or selective the target audience is: Bundling – Unbundling
The bundling-unbundling theory has been well highlighted by Benedict Evans through his examples of Craigslist and Linkedin. Most web business are trying to solve the same problems in more efficient ways. The eCommerce, travel, social networking and classifieds industries have existed for long on the web, yet every day we hear of companies trying to disrupt these spaces.
For any new business the easiest way to get a foothold in a saturated market is by unbundling a very specific feature for a very specific audience and doing it better than the large established players. As the market grows and your business matures, you add more features and start bundling everything in your industry. The cycle continues. The unbundling-bundling evolution will never cease.
Unbundling can be done based on geography, user demography, product category or a particular feature. Whatsapp is a great example of unbundling of chat from social network and only for your phonebook contacts. Ixigo started as price comparison for flights, then bundled all forms of travel comparison and is now bundling reviews, all this while focusing on a single geography and single industry of travel decisions.
In eCommerce in India, unbundling has failed big time. Most vertical commerce players haven’t survived. The basic reason for this might be the fact that when unbundling based on product category, a major component of fixed costs remains same. Since the game is about scale, the economics does not work out if you try execute a single category better than the market leader. Have we seen any vertical ecommerce player adding more value than FlipKart/Amazon/Myntra and not survived? Zivame has done a focused execution and seems to be surviving.
The parameter you choose to unbundle on is very important. A lot of times unbundling can only get you noticed, you have bundle up to justify economics and user behavior.
Paytm is taking a bold step of unbundling based on user interface. Paytm’s marketplace is available only on mobile app. We will have to wait to see how it pans out.
Good part of unbundling is that it lets you keep a smaller audience 100% happy and grow there on, rather than keeping a larger audience partially happy. As Paul Graham says, “it’s easier to expand user-wise than satisfaction-wise”. The way to evaluate the scalability of business is to see how easily can more geography, user, target product be bundled up.
Unbundling lets you get deep into a vertical, the way FlipKart did with books. Though, there is an issue of market positioning when you later try to bundle more target products. MakeMyTrip faced this challenge trying to re-position from a flight booking site to a holiday booking site. You could mean different things to different users but one user is going to remember you for just one thing – you have a choice of how broad or narrow you want that to be. TripAdvisor, as a company, is focused on travel decision making but it maintains 17 websites, each solving a different travel need with minor overlap, to avoid any dilution in individual value proposition.
Examples of successful unbundling that might happen in India –
- While some players, like FindYogi, are trying to crack the buying decision problem, Roposo is taking a crack only at the influencing female fashion.
- There is Holidify that is trying to crack only the first step of travel planning – “where to go”.
- Jaypore is taking a crack at only high end fashion ecommerce and doing quite well.
- Zomato was good at unbundling restaurant search from horizontal local search. There is LoyalOye that is unbundling only event venues search.
3. Is it single power centered or distributed – Pipe vs. Platform
A pipe type web business is one in which the atomic unit of value is created by a single source, or the business under-writes the original source. Example – Ecommerce stores, Blogs. This gives you great control over quality and can usually work at all scale.
A platform is when business opens up to let a larger set of audience create value. Example – Marketplaces. This gives you lesser control over quality but is more capital efficient at scale.
The differentiator is more around how the value is created and not how it is consumed. Both Pipe and Platform have their pros/cons.
When you look at scale in a web business, converting from pipe to platform can give you a great leverage in the market. A lot of businesses change their proposition when looking to scale, though a good move from Pipe to Platform is when the end value delivered and the target audience remains unchanged or expands. What you do as a business internally will change tremendously but that should not affect the end product delivered.
- The move by FlipKart from Ecommerce to Marketplace is a good example. Though the company is yet to adopt to a pure play marketplace but the slow transition is making sure the end value is intact. If you look internally the company is now doing less of trading and more of technology.
- At small scale, FakingNews is a good example of converting Pipe to semi-Platform when they launched my.fakingnews.com – a UGC based satire news destination. Same target audience, same value proposition but more value creators. “Semi-platform” because the decision making around what gets published is highly moderated by editor. A full-fledged platform is more like 9gag, where everything gets published but only the best gets surfaced.
You create ‘entrepreneurs’ by distributing powers, that means more rewards in the whole system as a function of higher risk taking capability. Platform also enables decentralization of power/decision making, thereby creating lesser bottlenecks and higher efficiency.
What does the traditional world of manufacturing have in common with the way networked platforms work? How can a basic understanding of factory design help us change the way we think about designing internet platforms, marketplaces and social networks?
I’ve written previously about the distinction between pipes and platforms. If you haven’t already read it, you must definitely check it out. It lays out many of the basic principles that underlie the strategies I discuss on this blog.
The fundamental shift, I believe, the world has seen, is the move from linearity to networks. Putting 3D printers and other recent maker movement trends aside, factory-based manufacturing has traditionally remained the same. And that’s what I refer to as Pipes, as captured by the graphic below:
Pipes are characterized by the firm as the producer and a linear flow of value.
In contrast, Platform Thinking allows for users as co-producers. Value doesn’t flow linearly from a firm to the consumer. Producers and consumers are connected with each other over a network. The platform’s role, unlike a Pipe’s, isn’t production. The platform connects producers and consumers over a network and provides them the tools to interact with each other. It then uses data to match them with each other.
Business Design for Fifth Grades
Let’s look at business design at a very high level. At a fairly abstract, stratospheric level, the goal of business is the creation of value and the capture of some part of it to generate a profit.
If we get back to Pipe Thinking, and take the example of manufacturing, value is created in a factory or on an assembly-line.
The factory’s goal is value creation.
The factory does this by setting up a set of value creating actions that add value on to the product.
There is an end-to-end process that is responsible for value creation.
But here’s the most important, yet obvious, bit. There is a unit of production and consumption which moves through these processes AND gathers the value that is added to it by the factory. Finally, in the hands of the consumer, this unit delivers value to the consumer.
We call it the product, the object that is manufactured in a plant. It’s the car running through Toyota’s assembly line or toothpaste tube getting filled out at Colgate-Palmolive.
This object is the basic unit of production and consumption in the industrial world.
So if we think of it, the design of a manufacturing plant goes about in the following manner:
- Start with the object you’re creating; the product.
- Lay out the steps required to create it (value-creating actions)
- Design the process that encapsulates this flow of action
- Design the factory (and organization) that can execute this process.
The factory design enables the process.
The process design enables value creation.
But all of this starts by first looking at the unit that is being created, determining what value needs to be created on it and designing the entire business in a way to facilitate that value creation.
It doesn’t work the other way round. You don’t start with building a factory and an organization and then deciding how you structure the process. Any change in the organization or factory infrastructure is started by a change in the process which is started by a change in the need for value creation (often because of customer feedback owing to which you tweak the product).
So all this sounds great, you say! You just told us a bunch of obvious things using some fancy words. Where are we going with this?
I believe the fundamentals of business never change whether you’re in an agrarian economy, an industrial economy or an information economy. Let’s use what we already know from the above and figure how this applies to platforms.
Business design, as we just noted, doesn’t start with the factory, it starts with the unit that is produced. Unfortunately, in the design of a lot of networked platforms, we see the design process start from the factory i.e. the website or the app. That, instead, should be the last step in the design phase.
Let’s take a step back and get back to the Pipe:
Now, let’s watch it change when we talk about Platforms:
There are two key changes that happen as we move from pipes to platforms.
- The value creation shifts from inside the Pipe to outside the Platform.
- The producer role shifts from inside the Pipe to outside the Platform
These are the two fundamental shifts captured in all the talk about Open Innovation. And these are the two fundamental shifts we need to be aware of while designing platforms.
(Note: The platform can be the producer in many cases but most platforms will allow for external production in some way or the other.)
So let’s go about the job of designing platforms.
1) THE SEED
As in the case of Pipes, let’s start with the unit that is produced or consumed. This is the most interesting part. When we think of platforms or any form of internet businesses, we rarely think of what is being produced or consumed, we think of it in terms of a website or an app, or some other physical/visual manifestation. In actuality, since we’re talking about information businesses, the unit being produced and/or consumed should be content/information.
What is YouTube? A website? An app? A platform for the hosting (production) and viewing (consumption) of videos?
Kickstarter? A platform for the hosting (production) and backing (consumption) of projects!
Twitter? A platform for the creation (production) and consumption of tweets!
Etsy? A platform for selling (production) and buying (consumption) actual physical products leveraging information about them (listings)!
Uber? A platform for booking a car leveraging information (car availability) to match producers (taxi drivers) with consumers (taxi seekers)!
Irrespective of the actual exchange being physical or digital, the unit that powers the matchmaking of producer with consumers (on the platform) is an information unit.
Start with the unit! If you’re designing the Twitter for X, look at what the Tweet for X looks like.
If there is one thing that’s central to Platform Thinking, it’s this. Large platforms look clunky, you don’t know where to start. Start with the unit that is being produced or consumed – I like to call this the Seed – build out from there. More on this in one of my subsequent posts.
Start with the Seed!
2) THE INTERACTION
Great! So we started with the unit. What’s next?
In the case of Pipes, one moves from the unit to the process that adds value to the unit all through.
There’s one interesting difference between Pipes and Platforms though. Consumers don’t typically add value in real-time to this unit. They just consume. On platforms, consumers may add value as well. A creator may take a picture on Flickr but consumers may tag it. A creator may upload a video on Youtube but consumer votes determine how often it gets consumed. There are various ways in which consumers add value.
So what’s the counterpart of the process in Pipes? A set of actions involved in the creation and consumption of value?
I like to think of this as the Interaction. Every Platform has at least one Interaction.
Creator uploads video, Consumer watches it, votes upon it. This is the primary interaction of YouTube.
Creator starts a project, Consumer consumes it, backs it etc. The primary interaction on Kickstarter.
The interaction is essentially a set of actions required for the creation and consumption of Seeds on the Platform. (This is an incomplete view but I’ll get further into it in a subsequent post, to avoid detracting from the main point.)
Note that a platform may have multiple seeds and multiple interactions but there will specifically be one that is core to the value proposition of the platform. YouTube is not a place where you go to create and consume comments, it’s a place to create and consume videos. In most cases, the primary seed and interaction are fairly obvious. In subsequent posts, we’ll look at a few cases where these are not.
3) THE PLATFORM
Finally, we come to the platform. Once you know the seed and design the interaction as a set of actions, platform design is a lot simpler.
You’re just creating a network and an infrastructure that enables this interaction.
Well, there’s a lot more depth there but for the purposes of this article (remember, we addressed this to fifth graders somewhere up there), the key point here is that platform design should start with the seed, flesh out the interaction and then design the platform as a consequence. Not the other way round.
Even with platform design, one must distinguish between the system and the interfaces. YouTube is a complex system but has many different interfaces/functionalities for creators, viewers, brands, advertisers, media houses etc. on different channels like web and mobile.
The design of the interfaces should be true to the design of the system. And that is achieved when one starts by focusing on the seed and the interactions it enables.
I’m going to be digging into this in detail over the next 2-3 months to lay out a detailed framework for designing and running networked platforms. I’d love to hear your thoughts first up, whether you agree or disagree.
THREE KEY PRINCIPLES
Let’s quickly recap the three key principles of platform design:
1) Platform design should start with defining the value that is created or consumed, the Seed.
2) The Seed should lead to the actions that enable the creation and consumption of that value.
3) Only in the last step should one go about designing the system and interfaces that enable those actions.
There is a fourth key element missing here, the role of data. I will be covering that in future posts. For this post, in particular, I wanted to focus on the contrast between pipes and platforms. The role that data plays on a platform is very unique to a networked world.
It’s been a late start to the year but I’ve spent the last three weeks bringing a lot of my thinking on platforms together in an effort to start creating a structure around it. I’m getting that stared with this post.
Everything old is new again! Hopefully, the magic lies in using the old to interpret the new!
This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship
Marketplaces are difficult businesses to get off the ground. A marketplace without buyers cannot attract sellers and vice versa. In fact, the infamy of this proverbial chicken and egg problem detracts entrepreneurs from the challenges that a marketplace presents after it has successfully gained adoption and is successfully matching buyers with sellers. After all, marketplaces for products, like Ebay and Etsy seem to have it all working for them once they gain adoption.
Why the EBay of Remote Services Behaves Differently
Services marketplaces, however, present a unique challenge. Most services marketplaces cannot facilitate a transaction before the buyer and seller agree on the terms of the service. Also, actual exchange of money often follows the delivery of the service and the delivery of the service requires the buyer and seller to directly interact with each other. Connecting buyers and sellers directly before facilitating the transaction cut weakens a marketplace’s ability to capture value. The party that is charged is naturally motivated to abandon the platform and conduct the transaction off-platform.
Marketplaces that fail to capture the transaction often resort to a lead generation, paid placement or subscription-based revenue model. The classifieds model has traditionally worked on paid placement. Dating websites and B2B marketplaces work on a subscription-based model while several financial comparison engines work on a lead generation model. However, lead generation models are attractive only at very high levels of activity and subscription-based revenue models make the chicken and egg problem worse than it already is. If your monetization model involves extracting a cut from the buyer-seller transaction, you need to figure out a way to own the transaction.
Solving the buyer Decision-Making Problem
Services marketplaces like Fiverr, Groupon and Airbnb try to solve this problem by preventing the users from directly connecting before the actual transaction. These marketplaces typically try to provide all the information that a buyer needs to make a transaction decision. Groupon features services from sellers that are largely standardized. While less standardized, Airbnb and Fiverr try to provide enough information for the buyers to make a decision without having to contact the seller.
Additionally, some marketplaces charge the buyer ahead of the transaction and remit money to the service provider after the provision of services, thus providing some insurance to the buyer, encouraging her to transact.
The Two-Pronged Challenge of Professional Services Marketplaces
Unfortunately, the above strategies fail with professional services marketplaces for two reasons.
First, it is much easier to take the transaction off-platform in the case of marketplaces connecting professionals. Freelancer marketplaces like Elance or expert marketplaces like Clarity are particularly prone to off-platform transactions for two reasons:
a) Clients need to know information about service providers before making a transaction decision
b) Once the end users know each other, they can potentially connect directly on LinkedIn or other networks, thus avoiding the platform cut
Second, professional services marketplaces require discussions, exchanges and workflow management during the provision of services before the actual charge can be levied. As a result, charging the buyer ahead of the transaction is all the more complicated.
So how do professional services marketplaces own and retain the transaction?
To own the transaction, professional services marketplaces need to think like SAAS businesses!
This may sound counter-intuitive. After all, a marketplace’s goal is to connect the two sides, complete the transaction and get out of the way, isn’t it?
Clarity’s early success illustrates that a marketplace’s role may be a lot more than just connecting buyers to sellers. Clarity connects advice seekers with experts. Traditionally, such marketplaces would connect the two sides, charge a lead generation fee and allow them to transact off-platform. Clarity provides additional call management and invoicing capabilities that serve to capture the transaction on the platform. Since the call management software manages per-minute billing, advice seekers have the option to opt out of a call that isn’t proving too useful. For the experts, the integrated payments and invoicing provides additional value. There is enough value for both sides to prevent them from leaving the platform to avoid the cut.
Clarity is one of many examples of platforms which are using workflow management solutions to capture the transaction. Services marketplaces like Elance focus on providing work-tracking and billing solutions that provide value to both sides and capture the transaction on-platform.
When marketplaces behave like SAAS businesses, the following design principles are commonly observed:
1. The SAAS workflow tools should create additional value for both sides, not just for one. This prevents either side from abandoning the platform for the transaction.
2. The SAAS tools should remove frictions in the interaction.
3. The interaction management tools should feedback into some form of on-platform reputation. Reputation is an added source of value that ensures stickiness to the platform. Clarity calls are followed by a request for rating the other side. Over time, the rating increases discoverability of an expert on the platform and acts as social proof for further callers.
The Added Benefit of Engagement and Stickiness
Workflow and interaction management tools also help make the platform more sticky. The traditional marketplace model has a very transactional use case. There is no need for a user to return often to such a marketplace. Users turn up only when they’re looking for something specific. With workflow management tools, the post-matching interactions are also captured on the platform, which encourages users to return often and to actively use the platform.
Secondly, a marketplace is only as good as the liquidity of available suppliers. As a result, there is no real need for a buyer to stick to a particular marketplace, transaction after transaction, especially if two or more competing marketplaces have similar liquidity and choice. Workflow management solutions help create stickiness because the requirement of on boarding on and learning new workflow management tools acts as a greater barrier to switch and can potentially keep users loyal to a particular marketplace.
The SaaS-First Marketplace
In recent times, we have been seeing the model flipped. Businesses are now building SAAS workflow solutions first to get entrenched among the demand side and then opening out the marketplace, to get suppliers in. An invoicing service spreads out to become a B2B order management platform. A payroll software provider expands to append a marketplace that can bring in freelancers which are then managed using the same payroll software. This also solves the chicken and egg problem by staging the launch of the marketplace.
In general, if you run a marketplace that requires services to be exchanged remotely, provisioning workflow management solutions to facilitate this exchange is a great way to own the transaction and create greater engagement and stickiness for users.
Owning the transaction is the key success factor for a marketplace. Tweet
SAAS tools for workflow management help retain the transaction on a marketplace. Tweet
The new durable marketplace model: Start with a SAAS business, open up one side to create a marketplace. Tweet
This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship
If 2012 saw a lot of buzz in India about Jugaad thanks to the Radjou/Prabhu/Ahuja bestseller, I am really hoping that 2013 will restore the balance towards systematic innovation. Indian companies need systematic innovation more than they realize because their challenges are different from the ones that multinationals face.
Why are Indian Companies afraid of Systematic Innovation?
Among Indian entrepreneurs, even in large business houses, the fear of systematic innovation is that it will hamper them from being opportunistic, and prevent them from being agile and quick. They point to multinationals who lose out to nimble local competitors, such as a Nokia being eclipsed by a Samsung.
But I wonder whether it’s fair to attribute the travails of large multinationals to their systematic innovation processes. It’s well known that as companies become large, they tend to become more focused on predictability and efficiency than on disruption or innovation. They tend to get more obsessed with “what analysts will say” than what is right for their company. And, they tend to get more bogged down by the “dominant logic” of what made them successful in the past rather than what will help them succeed in the future.
There are several recent examples that corroborate these observations: Nokia had developed touch screen phones well before the Apple iPad made them the “next big thing.” Kodak, which recently filed for bankruptcy, was one of the pioneers of digital photography technology but allowed other companies to take over that space. These examples suggest that risk aversion and “prediction disability” (and not systematic innovation processes!) prevented these otherwise iconic companies from capitalizing on their innovations.
Once you go even slightly higher up the technology ladder, systematic innovation becomes inevitable for success. Consider any of the companies that I wrote about in the last year – 3M, possibly the most innovative company of all times; IBM, still a powerhouse of innovation with more than 6,500 US patents granted in calendar 2012; or Cisco, one of the first multinationals to create a world class product end-to-end from India. Or Indian companies like Titan, whose disciplined efforts to build innovation capabilities ground up from the shopfloor have resulted in huge savings of time and precious metals; and Eureka Forbes, whose efforts to commercialize the best technologies in water purification have resulted in Amrit, a process that tackles even bio-organisms. None of these companies could have achieved even a fraction of these results without following systematic approaches to innovation.
I believe that systematic innovation has got a bad press because it has been confused with the dynamics of decision-making in large organizations. A clearer understanding of what systematic innovation is, and what it’s not, should establish why embracing systematic innovation will help rather than hinder innovation.
What Systematic Innovation Is…
An approach to innovation that enhances the number of ideas being generated and considered so as to improve the odds of innovation success. [Research shows that it often takes more than 300 ideas to result in one successful product.]
Greater, structured connections with users/customers and other stakeholders to help align innovation with market needs. [Remember my article on why the Tata Ace was much more successful than the Tata Nano?]
A focus on experimentation and testing to check out assumptions, refine and reinforce ideas, and make innovations more robust and scalable.[Remember the motto of IDEO, the leading design firm: “Enlightened trial & error succeeds over the planning of the lone genius.” With enhanced user aspirations, the “integrity” of any innovation as reflected in the experience of the user is essential to innovation success. Innovation is much more than ideation, it is about execution to provide sustained benefits to users/customers. When a company like Apple puts an inadequately tested map utility on its latest iPhone, or Tata Motors fails to address safety issues adequately in pre-launch testing as appeared to happen with the Nano, an otherwise high potential innovation loses its sheen. As does an e-commerce site when it doesn’t support all browsers!]
Leveraging the power of many rather than depending on the intelligence of the few. [Open source software development has demonstrated the power of harnessing the wider community in product development. Open source methods are now being extended to challenging domains such as drug development. And companies like P&G and Eureka Forbes have shown that open innovation can be a source of unusual ideas.]
And What its not…
Systematic innovation does not necessarily mean huge investments in R&D. In fact, studies have repeatedly shown that the most effective innovators are not those who spend the most on R&D. As consulting firm Booz showed in their 2006 innovation report, effective innovators excel at processes like ideation, project selection, and commercialization, all part of the systematic innovation process!
Systematic innovation does not mean doing basic research or trying to pioneer new technologies. Firms like Titan Industries have shown that systematic innovation works very effectively even with improvements in traditional jewellery manufacturing processes.
Systematic innovation does not necessarily mean long drawn innovation cycles. Effective innovators find low-cost and quick ways of experimenting that help them test ideas and assumptions rapidly. They try to do what A.G. Lafley calls “Doing the last experiment first” – test the assumptions that will have a critical bearing on innovation success or failure early so as to avoid going down tracks that lead to nowhere.
2013: The Year of Systematic Innovation?
Indian companies need to embrace systematic innovation so as to capitalize on their innate abilities of intuition and market sensing. Vinay Dabholkar and I hope that 2013 will be the year for systematic innovation in India. May systematic innovation go viral! Our own contribution towards this will be released soon – watch this space for more details!
For any products company, product support is a given, and part of the products business fabric. However, almost all Enterprise Products Companies end-up offering the professional services beyond basic product support. These services could range from simplistic implementation support, to integration, to solutions-building, to architectural consulting, to IT advisory support. The decision to perform professional services could be driven by customer-demand, or by the intrinsic need of the product being sold, or even driven by the business strategy itself to generate peripheral revenue.
It’s important to understand where the boundaries lie, and what goal does a certain type of professional services serve. The decision to commit to a particular type of professional services needs to be driven by a conscious thought process. This is important because the time & resources required to build various skills & operating models for serving the various flavors, change dramatically from one to the other.
1. Product Support
This is the core to the products model and serves as just that – support to the main products revenue, and to ensure customer satisfaction. While the core strategy for any product should be to make it so good that it requires minimal support, there’s always a need for support – offline and real-time for the customers.
2. Implementation Services
An ideal product is ready-to-use off-the-shelf, however, in case of Enterprise products the need to configure & customize could wary. Most times, customers demand for an implementation service packaged in the license deal initially, in order to ensure success. Most times, products businesses have to employ this mechanism also to close sales cycle and to ensure a consistent source of post-sale revenue from such services, and also indirectly to ensure expansion of the product usage through consistent personnel presence on the customer premises.
3. Integration Services
This is where it starts going slightly further away from the core skills that the organization may possess organically. Integration with the existing IT systems and other products at the customer premises would require the skills & management practices beyond the core areas of the organization. An extra source of revenue is one of the temptations, but there are also scenarios where integration of the product is critical to the success of the product, making such services mandatory. This is especially true if the product interfaces are not built with open-standards, and require the integrators to know the details of how the product is built internally. The correct approach would be to build the product interfaces in a way that doesn’t force the business into such compromise to induct professional services for integration. There’s an indirect impact of diversion of core product resources to such integration projects unless such professional services are pursued by design, and resources built accordingly.
4. Solutions & Consulting Services
This is where the game gets strategic, and resources expensive. And the reasons to do this are not any more intrinsically important, but strategically targeted to higher value to the customers and hence, access to the larger pie of the wallet. However, this is easier said than done. Unless there’s enough scale & case in the existing business to allow the focus on such services, strategic, and by design, a business is better off focusing on building the core products business stronger by investing resources there. This makes sense for the products, which are more like Platforms that provide larger leverage than in a Point-solution product.
5. Advisory Services
This is important for the products that are targeted for larger ticket sizes and are built for Enterprise-wide deployments. The IT strategy alignment as well as the strategic positioning of the product becomes important, and it also requires much larger IT leadership level involvement. For Enterprise Platforms, or even for departmental level strategic investments, this approach to professional services can bear fruits. However, building it into a business line requires the core product business to be strong, ready for the leap.
While the Businesses can look at starting off with the lower scale of Professional Services and build up over time, the decision is very strategic and long term. Professional Services, while offering additional top-line, could actually be a resource-intensice and money-draining proposition if not built properly. The mindset that governs the professional services line of business is drastically different from the product side of business. The operational efficiency is paramount, & profitability can very quickly take a hit. Even more importantly, professional services are more intensely people-driven and the skill sets required to build and sustain this business over long term are not trivial. Look, think, and think hard, before you leap.
PS: There are other considerations on Professional Services that directly or indirectly impact the core product business. I will cover in those in the next post. Until then, hope this helps! 🙂
Here’s an interesting new term for entrepreneurs to be aware of – Commitment delivery percentage. I dont know for sure but I think in a year from now, most startups will start to follow this metric more seriously than others. Some investors are already claiming this metric to be the #1 indicator of future success of startups.
At the Microsoft Accelerator in Bangalore, there are 11 companies in our current batch (Sep to Dec). Every week I send our reports to all our mentors with the weekly commitments that startups have signed up for and how many of them have met their commitments.
Since startup discipline is something I am very passionate about, it goes without saying that I track everything at the accelerator.
Commitments fall into 2 buckets – product and customer. Overall we focus on 3 areas in the accelerator –Product development, Customer development and Revenue development, but initially revenue development is largely ignored since most folks are building MVP and getting early adopters.
Each of these 2 buckets of commitments is not something the startup comes up with alone in a vacuum. I typically discuss the commitments at our weekly all hands and it is a fairly public affair. While some teams try to lower the bar for their commitments, most are aggressive with what they commit to.
Product commitments are delivery of new set of features, versions or changes per a customer / early adopters requirement. Since many companies have mobile or web applications, most startups at the accelerator become customers of other startups so the feedback loop is quick and immediate.
Customer commitments are a combination of # downloads (if mobile app), or active users, engaged users or user feedback. Since I fundamentally believe that nothing’s possible without customer’s (who have a problem) at a startup, most companies have customer commitments from the first week. During the early days it was mostly meeting customers to get feedback and showing mockups, wireframes, etc.
The weekly report I send out to all mentors (currently over 70 folks) are to people who are committed to helping these startups and are engaged with them every week, either making introductions or reviewing progress and trying their product.
As with most reports, I can tell quickly who has read the report and who has not. On average 30 mentors (less than 50%) read the reports each week. They dont take more than 5 min to read and review.
Most of the investor mentors were reading the reports (of the 13 investor mentors, 8 were diligent and even asking questions every week to clarify certain points).
Over breakfast and a few lunch meetings I had a chance to get & give some feedback to some of our mentors. One question most people asked me was:
What % of commitments were being met and which companies were best at meeting commitments?
The answer is a surprising 70% of commitments were being met consistently and 63% of companies were consistently (with 1-2 exceptions per company max) exceeding their commitments on both product and customer traction.
Most seed-stage investors in India have a revenue requirement (not all, but most) so I was surprised they were the most aggressive in asking me questions about commitments. Seems to me, thanks to the early visibility, investors, were willing to make earlier bets, but needed some sense of the team’s performance.
What better way to judge performance than see the team making commitments weekly and delivering on them?
Investors have mentioned to me the in their experience the #1 indicator of a venture funded startups’ success is crisp execution and if they are going after a large market, then fantastic execution makes a good team great.
So how can we help more companies get on this instead of just Microsoft Accelerator companies?
We plan to release a version of our startup connection system (internally called The Borg) to all Indian companies by mid January 2013. With this solution all companies (who opt to do so) can make their commitments and report them to over 250 seed and early stage investors, mentors and advisers. And yes, its free to all startups.
The next experiment is to see in June of 2013 if the improved visibility into a startup’s execution increases the chances of funding for entrepreneurs. We are currently tracking that as well, and will be able to report in an automated fashion.
“It doesn’t matter how beautiful your theory (idea) is, it doesn’t matter how smart you are. If it doesn’t agree with experiment, it’s wrong” – Richard Feynman
Building a successful product startup is like trying to win a race driving a vehicle that has less than half its fuel tank filled, whose controls you don’t fully understand and moreover don’t know where the finish line is. What is known is the visibility of runway for next few meters and inspiration from stories of how many has won such race to gain riches.
While the analogy might look far-fetched but startups work under the circumstances of extreme uncertainty. They might herald around a great idea that they think will change the world there is many things that are unknown – the problem being solved, if their solution is the right one, they have the right team to make it happen and so on.
Risk is the common language that is used to describe and address the elements of uncertainty in life. There are few kinds of uncertainty that a startup has to eliminate as it goes forward on its road to success. Some of these risks are the following
Technology Risk – Can the startup build what it is planning to build with the current state of the art technology? In many cases this may not be a question but products that are at bleeding edge of technology has to evaluate this question. For technology entrepreneurs this is where the motivation for them to build the product would have first started and thus they start the journey here and spend their most of the time.
Product Risk – While the aspect of can build or not is one thing, the other element startup faces is what kind of feature to build first. What is must-have & nice to have feature.
Execution Risk – Is the startup staffed with right team to get things done. Are they able to pull off what they plan to do or are just paralyzed while coping with ever changing conditions on almost everything.
Customer Risk – Finally whether what the startup is building will be used by a set of users, if they will or somebody else will pay for the usage, recommend it to friends after they have used it.
Market Risk – This is aggregated customer risk, are there enough number of customers who will use, pay & recommend? Is there a viable way to reach to them, interact with them and also collect from them?
While startups address these risks an important law of life – “Resource are limited”
‘Time is limited’ – Startups would have setup or planned a certain time duration during which they wanted to try out their startup.
‘Money at disposal is limited’- Regardless of how financing is done (self or external) money is always in short supply
‘Energy is limited’ – Ask any entrepreneur who has been at it for couple of years and has not seen any breakthrough in progress, he would tell how jadedness and fatigue starts to set in.
‘Even a supporter’s patience is limited’ – In initial days many encourage to give support , after not seeing much tangible progress for a while there is degradation in their support in kind or even words.
Given that the resources are limited how startups approach addressing the risk matters.
99% of the time the following is how startups address risks
Many startups try to extend their resources by raising money. But that alone is not the resource that is limited. Moreover even after extension through infusion of money if startups can’t remove customer risk then the same fate applies.
A workable approach however could be trying to address elimination of customer risk first and also broaden it to market risk.
The most important thing for any product startup is to reach product/market fit .
By focusing on eliminating customer risk is the fastest way to reach there.
Few key principles of these are the following
- All statements are assumptions or guess
- All answer lie outside the building
- Change guesses into facts using experiment with customers
- Start by building uncomfortably small prototypes to test with customers.
- Run those experiment and measure on the metrics
- Incorporate learning into next experiment
- Move through the loop quickly
In 2006, folks at the company Odeo were brainstorming ideas for a new software product that they wanted to develop. They came up with the idea for “Twtr” for sending SMS-like messages to groups of people who may be interested in receiving it. Then they hit upon the word “Twitter” that stood for chirps from birds that also stood for “spreading inconsequential information”! That’s how Twitter was born! For a long time, Twitter was made a lot of fun of, with many people denigrating it for exactly the same thing – useless stuff for people who have too much time on their hands and not much to do!
Fast forward a few years! Try telling how “inconsequential” Twitter is to the thousands of people who sent huge numbers of tweets from Egypt trying to highlight atrocities committed by Mubarak’s people before he was overthrown!
As you read this article, Twitter is being used in Syria by both sides in the conflict to get news, pictures and other information about the conflict that is happening there to their own supporters worldwide, in real-time!
It is no longer inconsequential and has become a real-time, short, quick mechanism to get information, images out to those interested. If you have lots more information to convey than 140 characters you place them on sites and send the URLs out! Now you can send it to additional people by attaching tags!
Documentum was a document management company that was started in 1990 and grew solely as a US FDA drug approval document and workflow management company. They had their first version ready and found that pharmaceutical companies in the US were needing a system that centralized all drug approval documents, and provided document versioning when many folks, distributed geographically, needed to contribute and edit others’ edits.
Documentum was a FDA document management software for a long time before they penetrated other verticals and became a general document management software company!
Our own company started out as a Real-time Business Intelligence software company. When we showed our partically completed first version to some Business Process Outsourcing companies in Chennai just on a lark, they said that that was exactly what was needed to process their BPO SLA monitoring activities. So we became a BPO and Call Center Analytics company from a Real-Time Business Intelligence company!
From our next version, the software was dedicated to having the features that was tailored specifically for that purpose, and took a different course!
What are the lessons from all these examples?
If you are passionate about solving some problem, go ahead and implement something first. Show it around, gather users, have them use your product, and gather feedback. See where your sweet spots are – whose pain does it solve? Does it solve that pain immediately? Is the pain large enough for them to pay something in some way immediately (or monetization in case it is a consumer oriented software product like facebook or Twitter)?
If you get the same kind of positive feedback from some subset of your users consistently, you have found your sweet spot! Focus more on that market, be ready to pivot your direction towards that for a while forgetting all other markets! You can always come back to those other ones, once you are successful in that market.
Product startups may not be able to completely predict accurately who exactly might use their software and result in revenues for you in some way, right out of the gate! So get something out early, sign up users and get feedback and observe!
And be ready to pivot towards where you are finding your sweetspots! As a young startup it is very easy to get distracted and start going after all markets and all directions, but paradoxically the right strategy for rapid growth is always narrower focus! Focus in one area, one market, one group of users. Make it successful there, and then you can explore the other areas.
It is very easy to invest too much of your ego in your original direction and get stuck. This is especially a problem with technical founders. If your objective is just to do some hacking and have some technical fun, that may be OK. But if you want to build a successful business, you need to keep your ego in check and be ready to change direction nimbly, especially in the beginning.
Most organizations are built to solve customer / citizen’s problems or service customer needs, whether it is a non for profit or a small private business or a big enterprise. Some of them directly solve customer’s problem, some indirectly by enabling customer facing organizations through technology or raw materials. Technology role over the period of time has been changing from organizational efficiency improvement to business enabler with a remit of solving business problems and changing user behaviors.
We are living in a complex world in which we are increasingly getting dependent on technology for everyday things. This trend is irreversible. In 2009, at the IBM impact conference in Delhi, I 1st heard about Smart Planet initiative and the concept of System of Systems. In his Keynote Neeraj Chandra, doctor get’s previous history information about the patient at real time; doctor write the prescription and the medicine get’s delivered to the patient at his residence and so on. It’s a world where various systems from diverse set of organizations are working together seamlessly to provide a simplified experience to the citizen of this smart city. Smart Grid is another complex technology solution which is now a reality. Organizations are now taking initiatives in building technologies for Smart Buildings, Smart Rail, Smart Water and so on.
A few years back this article in NewYork Times “The Power of the Platform at Apple” caught my attention. This article interestingly defines platform as a combination of hardware, software & services and also shares insights on how companies like Apple, Google, Microsoft and others have been able to create a long term sustainable competitive differentiation for themselves. The author goes on to say that “Successful platforms aren’t confined to the technology industry. America’s interstate highway system, built by the government, could also be seen as platform. The more that people traveled it, the more opportunity it created for businesses and towns linked to its transportation network”. As technology is becoming pervasive, we will see more and more organizations investing in building platforms for multiple organizations to come together to solve citizen’s problems like the IBM Smart City, Khan Academy’s educational platforms and others.
Our world is changing at an incredible speed. Challenges such as globalization, pressure on driving efficiencies, power of the consumer, power of employees, changing world economy, individual’s dependency on technology, have driven the need for radical innovation in order to differentiate. Technology is changing faster than any other factors to a point where it is now challenging organizations current business models. Last week at Gartner’s Symposium the Keynote speakers Chris Howard, Partha Iyengar, Peter Sondergaard introduced audience to the nexus of converging forces – social, mobile, cloud and information and how it is and will continue to transform user behavior both within and outside of our organization to creating new challenges and business opportunities. Gartner’s 2012 Hype Cycle for Emerging Technologies chart includes many fast maturing disruptive technologies like Social Analytics, Cloud Computing, Big Data, Mobile Payment and others, leading to significant scenarios that enterprises and governments can leverage to deliver new value and experiences to customers and citizens. Every forces in the nexus has it’s unique challenges and it brings opportunities for businesses. For example internet penetration trend and social media adoption/consumptions patterns differs from geography to geography and demography.
Entrepreneurs will leverage these new set of forces and challenges to innovate and create new solutions, services and business models. There will be a flood of solutions based on one, two or all of the forces solving point problems, but the winner will be the one who will take a holistic approach to invest in creating the platform that will enable and help participate in the ecosystem created by various enterprises, governments, other institutions and the internet.
These are the times, when every third person that you meet in Technology world has an idea for an App. It could be every alternate person if you’re hanging out in geeky groups or among heavy Smartphone users.
The Industry trends suggest a phenomenal surge as well. According to Gartner, Mobile Apps Store downloads worldwide for the year 2012 will surpass 45.6 billion. Out of these, nearly 90% are free Apps, while out of the rest of 5 billion downloads majority (90% again) cost less than $3 per download. This trend has a strong growth curve for the next five years. (See Table 1. Mobile App Store Downloads, courtesy: Gartner)
Another report suggests that 78% of US mobile App Companies are small businesses (based on the Apple and Android App Stores based research). The typical apps that dominate this market are games, education, productivity, and business.
This comes as no surprise. There is a huge divide between the Enterprise Mobility (dominated by the Enterprise Architecture, existing platforms and mobility extensions to the platforms that ensure business continuity) and End-User (Consumer) Mobile Apps dominated by the App Stores supported Small and Mid-size App Development Companies. The barriers to entry in the Smart phone Apps Market seem pretty low with the supporting ecosystem from Apple, Amazon, Google, and Telecom carriers.
However, let’s get back to the fact that majority of these Apps “do not” generate direct revenue.
While the entry seems without barriers, there are multiple hurdles on the race track:
1. Developers need to focus on the User Experience. The smartphone apps pick-up is highly skewed toward Apps that offer a good user experience even for minimal functionality. After the initial success, the App makers end up adding functionality for sustained interest, but the User Experience tops. It’s difficult to focus on UX while still trying to do everything right at the underlying architecture level for long term.
2. Marketing is important. Getting the early eyeballs is key for the App developers. Any serious App needs an immediate initial take-off, and among the things that they need to do to make it happen is to market the App beforehand and to get the authoritative reviews in place.
3. Initial Take-off is just the first hurdle. App needs to be able to handle traffic bursts, it needs scale with increased traction, support virality & social connects inherently, and also build an effective User ecosystem. None of these may seem like the core functional features of the App, but are most critical for the broad-based success.
4. The Freemium model is very popular, but it can kill the business if the marginal costs are not sustainable. The paradox of the Free model is that unless the 10% paid users are able to pay for your 100% costs, every additional user takes you closer to the grave. With this come in two questions – how do you keep the infrastructural costs low, and how do you build additional revenue models around the app.
- IaaS can solve some of the infrastructural headache, but doesn’t provide you with the other functional layers that every App needs. You need to still build them. PaaS providers provide the scalable platform for building Apps, but you still need to build some of the functional features such as Gaming Rooms support, Messaging, User Authentication & authorization models, and so on. Mobile developers are still doing a lot of repetitive work across the smartphone Apps that can be consolidated into a framework.
- Supporting the additional revenue models require integration with external Ad-services, Payment systems and more importantly the bandwidth to deal with this even more fragmented set of agencies.
5. The End-point device platforms are fragmented and getting even more so. A typical model for App developers is to develop an Android App, iOS App or a Windows App and then support the other platforms as they go along. However, keeping up with these multiple platforms is only getting more and more difficult with the speed with which Apple, Microsoft, and Google keep rolling out the OS. There’s tremendous pressure to release the App within the 1-3 days window of the release of the underlying platform.
Hence, while there are millions of people developing smartphone Apps as we speak, there are only a fraction that get built at serious level, and even smaller fraction that gets built for sustainable business success.
And considering these hurdles, the arrival of the Backend-as-a-Service (BaaS) is a blessing for the App Developers. Forrster’s Michael Facemire refers to them as “The New Lightweight Middleware”. He goes ahead and lists out some of the basic tenets of what makes a Mobile Backend as a Service, but I see this list evolving as the vendors offer more and more functionality to the customers leading to en ecosystem.
And the term “ecosystem” is going to be the key. That’s because a successful mobile App doesn’t stop at the user starting the app, using the app, and leaving the app. A successful App creates an ecosystem for the viral growth, user engagement, social functionality, in-built broad-based connectivity for multi-user interactions, and more importantly the ability for cross-platform usage. In a Gaming scenario, the user interactions and the relevant immediate feedbacks are paramount. Most successful apps build an ecosystem. Instagram, 4Square, Pinterest are the common household examples today.
While Michael lists out the usual suspects in his post, most of them in the Silicon Valley, there is a very interesting player in Shephertz’s App42 platform, right here in India. The ecosystem approach that they have taken seems pretty much what may be required for serious app developers that need a robust backend provided as a service, so that they can focus on the app functionality, user experience, and more importantly the marketing aspects of the App.
Now why, still, aren’t more and more developers building even more serious mobile App products? Why shouldn’t they be? I think, they will!