Could Facebook Charge Money?

I've been pondering our venture's pricing strategy lately, and it's sparked all kinds of thoughts about the free web 2.0 world. At a time when companies that serve free web apps, like Facebook, are having trouble monetizing (and having their valuations lowered as a result), one of the questions that they are surely asking themselves is whether they could move to some kind of subscription model to create new revenue streams and increased profitability. Before discounting this idea completely with arguments of Koppelman's 'penny-gap' theory and low switching costs between social networking services, let us consider the fundamental idea behind pricing and ask ourselves what price facebook could charge in exchange for their services, if anything.

Price is a direct reflection of value. The more something adds value to a customer's life, the more he is willing to pay for it. Therefore the first question is what value does Facebook add to my daily life?

The ComScore results in march suggested that on average people spend a total of 20 minutes EACH DAY on the service. It is a tool for organizing our social lives, networking, chatting, organizing photos and, increasingly, a platform for sharing information; a center for all things Web 2.0 that has driven internet use through the roof. Then we should have no doubt that Facebook adds considerable value to our lives. The question then is how does that translate to a price?

Though it may be a gross oversimplification, the price point would be the one we'd be willing to pay just before switching to a rival service. While some might argue that switching costs are negligible, Facebook has a number of competitive advantages that make these costs substantial. These include the network effect, unwillingness to manage multiple profiles, loyalty, inability to transfer all photos and profile, etc. So then let's imagine that Facebook were to implement a policy that either forced us to pay 1 cent per month or to watch an additional advertisement to receive 12 cents in revenue over the course of the year per customer. That means that with 100+ million users, they increase revenue by over a million dollars each month!

Now let's ask ourselves, is that 'charge' that facebook imposes on its customer in exchange for a very useful service likely to drive people away? Probably not. What the ideal price point would be will require a lot of research but it does leave us wondering why they wouldn't consider implementing a comparable policy to boost their revenues and valuation. What amazes me even more is the fact that they haven't created less invasive premium-service based revenue stream, such as bringing SmugMug type functionality to the photo app, which would certainly generate even more substantial revenues than charging subscription fees.

All signs are now pointing to targeted advertisements not being an optimal revenue source for web 2.0 tech. With companies like Facebook issuing equity valued at hundreds of millions of dollars, investors should really be pushing to develop the business in order to maximize shareholder value. Whether they would is another story, but from the logic described above I believe that they could make a strong case to do so.

3 Grievances on the VC Industry

The VC conference that I attended earlier this week gave me a very different view of venture capital. I was expecting to hear a lot more from the fund managers regarding their investing strategies. There were a few things that really got to me, and made me wonder whether some of the people in the room actually knew what they were talking about. Here is a list of grievance that I have regarding the VC industry:

1. No Real Investment Strategy. Quite a few VCs in the room were asked the question "What kind of companies do you normally fund?" The answer that a lot of them gave was that they were looking for 'anything and everything', as long as they were 'disruptive technologies.' Now, there are A LOT of VC-backed companies out there that do not even mildly look disruptive. Flash video technology was disruptive- it affected the movie and music industries and created a revolution in personal expression in the internet sphere. The IPhone is being disruptive- Apple single-handedly changed the idea of what a phone should be and is on the way to beating RIM and other competitors into the ground. A social network twist that allows you to share musical ideas is NOT going to disrupt anything! Yet VCs keep putting money into these start-ups, which in turn fuels more non-disruptive start-ups to emerge (no wonder there is too much money chasing too few good deals!) This shows that either a) they don't have an investment strategy or b) they are not following their investment strategy. This conclusion got me thinking and I arrived at my second grievance.
2. They are essentially gambling. If you set out at the start to get a success rate of 10-20% something is seriously wrong. If your investment strategy is to make picks and get that low a rate I equate it to gambling (even a random toss of the die gives you a 16% chance of success.) Now, I understand that the model has been proven to work, people have made money, etc. etc. Yet I can't help but wonder how anyone could possibly think that this current model is the right one to use going forward. Just because this has been the typical result historically doesn't justify it being a future goal. This thought led me to yet another realization and, indeed, another grievance.
3. Misalignment of interests. The objective of the fund is to make money in x years (typically 6). This time constraint and the large funds that are raised forces VCs to make investments no matter what to make sure they get a large return for their investors (even if they haven't come across the next disruptive wonder) I believe that this is a misalignment of interests, as VCs are pushed to use their money unwisely, resulting in the ridiculous 1/10 success rate. Again, this system just doesn't seem right.
   

Now let's get back to the infamous complaint of there being 'too much money chasing too few good deals'. The first reaction that I had to this statement was that not enough innovation must be happening- after all, given the billions of dollars out thee one would expect innovation to increase. Yet in retrospect I wonder whether this excess money is playing some role in stifling innovation by encouraging people to create moderate innovations in an effort to make a quick buck. If this is true, it suggests that VCs are actually doing damage to themselves because of the aforementioned grievances. Then what are some possible solutions to these problems?

1. Give VCs less money. If they have less cash they will have to make every dollar count. No more of this 1/10 success rate business. Investment strategies will have to be clearly defined and followed to the letter. With this much scrutiny, entrepreneurs will be pushed to create true breakthroughs
2. Make VCs set higher targets... if VCs attain higher success rates because they are no longer swimming in cash then losses should go down and expected returns should go up. This means that LPs should demand higher returns on their capital and push the VC partners to invest their money better.
   

No VC at the conference really addressed these questions completely (admittedly, I only confronted 2 people on the topic) so I'd be interested in hearing peoples' thoughts on this.

Volunteer Groups- a Test of Your Management Skill

In this post I will discuss some thoughts on good management (which I think of as the ability of a person to motivate others to work productively to achieve desired outcomes), as well as an exercise to develop strong management skills

In business, problems of motivation can be overcome to a significant extent by monetary compensation; people who get more burdensome tasks with longer hours can be convinced to stay and do the work by way of larger compensation packages. If the boss drops the ball, employees aren't all that concerned about it, as long as they get their paychecks in the foreseeable future. Bonuses, overtime pay and stock options can be used to get people to give it their all and make sure the work is done. While I agree that these compensation schemes have been proven over time to be very effective, I contend that they can become somewhat of a crutch for managers and that they fall outside the realm of good management. This is because these schemes fail to address intrinsic motivations (a person’s internal desires for accomplishing the goal for the sake of it) and fail to make people work to their full potential. With this crutch it is difficult to say that one’s management skills are tested fully in the corporate environment.

Successful Volunteer Groups, however, are unable to rely on financial compensation to motivate people to offer their time and effort. Given the lack of extrinsic motivators in these groups, a very interesting question we must ask is: how do leaders in these organizations leverage intrinsic motivations to achieve organizational success? I believe that answering this question is the key to understanding what good management is. I'll quote my good friend Stu Stein on why I believe that this is so- "if you can motivate people to work for your cause for free, imagine what you could get them to do when you start paying them."

Some close friends in Volunteer Groups and I have spent much time discussing our HR issues and have found that certain practices have stood out as good management practices in volunteer groups, all addressing team members' intrinsic motivations:

1. Hiring/accepting people with strong intrinsic motivations. These motivations may be different for each person but the importance is that they WANT to help achieve something that the organization values because they believe in it.
2. Relate to people on the team on a personal and professional level. A key to understanding intrinsic motivations is to better know the person and how they work/think. This information is critical when the time comes to align interests. Socialization within the organization is a great way to create a culture through which managers can learn about people on their team.
3. Set the Vision, Mission and Values. Though these are overlooked in ordinary businesses (and not taken seriously by anyone who’s taken a management class that makes a mockery of this concept), this is crucial when it comes to intrinsic motivations. Each person has a different desire that they prioritize but if the team agrees to a common set of VMMs, the priorities will set themselves.
4. Make sure each person feels valued. You can’t compensate them with bonuses so you need to reward achievement and effort by recognizing it.
5. Flat structures. Utilize peoples’ intrinsic motivations to allow them to innovate- let them be the drivers of their own projects.

As you can see, the complexities of Volunteer Groups and the issues that their managers face make them an ideal ground to develop practical management experience. It is especially a good experience for aspiring entrepreneurs, who often don't have the resources to use money as a motivator for people to work for them.

The Power of Mobile

This year I was lucky enough to find my way into a presentation given by Andrew Weinrich at the Wharton School, thanks to the guidance of a brilliant VC named Baris Aksoy. Weinrich is one of the pioneers of social networking, having co-founded Six Degrees in the mid-nineties. He was giving a lecture on the power of the mobile phone as an enabling technology and its potential applications by talking about his latest tech venture MeetMoi.

For the longest time I’d been trying to figure out why there was such hype about moving social media to the mobile platform. The presentation proved to be very enlightening in this respect. MeetMoi is a dating service, much like eharmony.com and chemistry.com, but with a twist. The idea is that they can use your mobile phone to determine where you and all of your matches are at any time, and alert you when you are within an X mile radius of each other. It also gives you the freedom to change your service preferences at any time, so you can activate the service on the way home from the office or when you’re out at a bar with friends and deactivate it while at work or asleep.

Now I won’t go into some of the clear issues that are associated with the service itself (people in the room thought of all kinds of situations where this idea could get you into trouble as the user) but it definitely highlights the potential of mobile: the power to not only match your interests with a cataloged set of services but to also match you geographically. Say you’re looking for a new apartment; there’s a good chance that you walk by half a dozen great apartments on the way to work each day without knowing it. Imagine that a service knows of this and sends you a message saying (“Apartment 411, 12 Barclay’s Street, $3500 a month, resident accepting inquiries now) on your way to the red line in downtown New York- now there’s an interesting start up that I would love to be a part of.