Sourcerer Makes it into Wharton VIP!

The venture that I've been developing with my partner Atish was recently admitted into the Wharton Venture Initiation Program. We're extremely grateful for the opportunity and are looking forward to joining this entrepreneurial community.

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.

Follow-Up to Yesterday's "Solve Your Own Problems..." Post

I got an email this morning from a close friend of mine, Anthony Orlando, who made the following comment in relation to yesterday's post, where I argued the importance of solving problems that you've experienced in your own life when starting a business:

"...what if you're not an expert on anything, i.e. you don't have a problem of
your own to solve?"

The question goes to the the heart of the point I was trying to make, since this is what so many young entrepreneurs with limited professional experience ask themeselves. While it's true that you might not have the professional experience to cater to enterprises, you have plenty of experience as a consumer to cater towards consumers like yourself.

Everyone is a consumer, so there's no excuse to say that you don't have expertise in anything. For example, if you spend 3 nights a week going to restaurants and night clubs, you start to get some idea of what makes a good menu or entertainment venue. If you go to coffee shops a few times a week, you begin to develop some expertise in what people are looking for in terms of atmosphere, music, service quality and product offering. If you like to explore new bands, but have trouble locating these emerging groups in your local Virgin Megastore, you start to gain some idea of a need that exists for people looking to explore new music based on their current preferences. The list goes on and on. As a consumer there's a pretty big chance that you have some sort of consumption pattern that makes you knowledgable in some areas, and it's these areas you want to focus on (if you'll notice by the way, I'm positive you can think of someone who has made money off each of the ideas I've listed above in the last 12 months.)

Of course the difficulty of innovating towards consumers like yourself is that consumers are innovating all the time. Our lives in the new millenium are so comfortable thanks to technology and e-commerce that we don't even have to get off our lazy backsides to purchase bread and milk (it's all delivered to your house! and if you don't like it, free return shipping!) But that does not change the fact that there's always room for improvement, and that there's always a pain point somewhere (it's human nature to never be satisfied!)

I find it highly unlikely that anyone 'doesn't have any problems' anywhere in their lives (if this is the case, my recommendation is not to bother reading this blog and starting a business, but rather taking it easy on a beach somewhere.) The trick is being persistent and always keeping your eyes open for a potential need. This means that you don't get much time to just shut down and lie down in the sun without analyzing the hell out of everything, but hey, that's the life you choose as an entrepreneur.

And if you really are living a life where you can't find a single need as a consumer... start changing your lifestyle to open you up to some new experiences; you're bound to find something somewhere out there. Just make sure you live it before you act on it.

Solve Your Own Problems, Not Someone Else's

Creating value is all about solving a problem. Solving a problem means understanding the problem itself in every dimension (missing even one dimension can render the product/service that you develop utterly useless). The only true way to understand a problem fully is to experience it. That pretty much explains why some of the most successful businesses in the world stem from the entrepreneurs solving a pain point that they experienced and knew inside out. Bankers identified opportunities in banking services/software, people having trouble working remotely developed collaboration software and college kids having trouble organizing their social lives built social networking.

One of the biggest issues I've faced over the past 6-7 months has been coming up with a great idea. Ordinary people find this difficult enough but it's infinitely harder for a young person who has such limited work and life experience and whose problems really are between the three realms of social life, student life and and consumer life. The result is often that young entrepreneurs try to learn about others' problems in the hope of solving them for a premium. Yet my recent experiences have shown that this is extremely difficult, since you keep learning some new information down the road which forces you to reevaluate everything. Uncertainty is always higher than you'd like and there's a part of the story that you know you're always missing.

So what's my takeaway here? Stick to solving your own problems. Don't try to build a business catering to outdoor sports enthusiasts if you've never been camping once, just because you see some untapped niche. If you think the opportunity is that huge, get a partner who IS an outdoor enthusiast so that you at least have some way of understanding what clients are telling you. In other words, stick to what you (or someone on your team) know. It'll take longer to find a great idea but pay off in the long run.

Angry Employees (Updated)

“A happy worker is a productive worker”; every company with a half decent HR department knows that’s true. An unhappy employee can be dangerous, not only because his productivity stalls but also because he can diffuse his dissatisfaction into the work environment and turn others against the company as well. Yet there is another area of your business in which an unhappy employee is even more dangerous; word of mouth marketing. People tend to put twice as much trust in the word-of-mouth of an employee that trashes the business than a peer who recounts a bad experience. This is because of two reasons; firstly, we always consider the possibility that our peers’ bad experience is a one in a hundred occurrence, whereas the employee gives us a survey of the history of the company’s service quality. Secondly, we assume that a company has to be pretty bad if its employees are putting their livelihood at risk by scaring away potential clients.

I was reminded of this fact last week when I was on a boat trip on the Aegean. The anchor broke and our captain, unable to get the proper guy to fix it since the owner of the business told him to go cheap, made us stay in the same spot for an entire day. The cook took the opportunity to trash the captain and the owner of the business, telling us about ‘the great boat’s he’s worked on before’. Suffice it to say, this really gave us a strong bias throughout the rest of our trip to everything that went wrong, and we were already talking about using one of the boats the cook was talking about next year. If this happens to every tour group that gets on board, I can’t imagine the business prospering. So what’s the bottom line: keep your employees happy, there’s more at stake than productivity!

UPDATE: A friend of mine who was on the boat with me shared some interesting information ysterday; apparently the cook did not stop at trashing the tour company but went so far as to give the contact numbers to other tour companies later that evening (I, of course, was asleep when this happened). FYI

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.

My Two Favorite Web Generators

Over the past couple weeks of looking around the blogosphere, watching videos and talking to entrepreneurs I came across two great website that I wanted to share:

1. The Dot-o-mator: I published a post a while back about the importance of naming your company early on. After not having followed my own advice for the past two weeks (and after suffering one of the pitfalls I'd predicted at a VC conference) I decided to get it over with. Enter the Dot-o-mator. This is a fantastic web-app that helps you generate a list of names and then automatically check for domain name availability. The programmer let's you specify the prefix/suffix and then lets you merge this with prefixes/suffixes from selected categories. So for example, if you are creating a sports website an want a 'Tech' name, you get results like soccercast, soccerfeed, soccerwire, etc. etc. etc. The author did a great job in thinking up all of the popular suffixes that are out there and then categorizing them. A lot of fun, very easy, give it a shot.
2. Dilbert Mission Statement Generator: I get the feeling that I'm one of the few people in the world who hadn't seen this before, but in case there are more of me out there this is a must-see web app. Guy Kawasaki referred to this as a way to 'save $25,000', making fun of how inane corporate mission statements are. I think it's really clever and amusing. Enjoy.