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Gillette Walks Into Your Office…

I just recently read Chris Anderson’s excellent (and widely-cited) piece on the evolution of free business models. A lot has been said about the different analyses made in the article (which I imagine will be the foundation for his next book), but I want to take up the anecdote that he tells to set up the story.

Of course, the notion of “give away the razor, sell the blades” is business school 101 today, but at the time it was incredibly novel. Coming into the age of mass production the notion of goods being cheap enough to be disposable was, I suspect in the minds of many businesspeople of the day, quite crazy. Of course, it set up the idea of decreasing marginal cost leading to today’s essentially zero marginal cost businesses deployed online.

But let’s stick with Gillette for a minute. I want to deconstruct a little of the story Anderson tells. The story begins with Gillette shaving with a straight razor that is too dull to be sharpened, and coming up with the idea of disposable metal strips (blades) instead. And then we get this, which doesn’t receive a lot of attention:

“A few years of metallurgy experimentation later, the disposable-blade safety razor was born.”

Come up with idea. Spend a few (3? 4?) years developing it. Ok…

“But it didn’t take off immediately… Over the next two decades, he tried every marketing gimmick he could think of.”

Two decades of “experimentation”. It’s implied, although not stated explicitly, that during this period the company’s sales did not grow exponentially, but rather gradually worked its way up to what become very high volumes.

What’s interesting to me about this is what would happen with this business today. We don’t have to make it about razor blades, but some other innovation in a moribund market. If King Gillette went out to raise money, could he do it? From seed stage to production was several years. The company “moved sideways” for two decades.

Three years ago Gillette was bought for $57 billion. I wonder, though, would the company get the same shot today, or would the lack of immediate payoff to financial backers eliminate that possibility?

How relevant is TheFunded?

It’s been a long time since I’ve posted here, but I was thinking earlier this morning about VC transparency and some of the mechanisms that have emerged to allow greater insight into the fund raising process. One of the more interesting to emerge last year was TheFunded, which purports to be the entrepreneur’s greatest source of founder-generated information and comparative reviews of different venture firms. It’s an interesting premise – take an inherently opaque and one-off universe of information, aggregate it, only let in those who are aligned with the reviewers, and close some of the gaps in founder understanding. Collective bargaining by entrepreneurs.

A couple of problems, all of which have been pointed out: As is often the case with review sites, those motivated to post are usually those who have had either very good (“they funded my company!”) or very bad (“the turned me down … bastards!”) experiences, leading to some concern about the quality of the data in the system. In addition, some funds have turned around and begun to incent founders to enter data into the system that may be of a biased nature. But nonetheless an interesting idea.

Here’s what I noticed, though, as I was poking around the (public portion of the) site this morning: People don’t really seem to be using it. I’ve worked at two funds over the past couple of years as I’ve finished my MBA at Columbia, RRE Ventures and Updata Partners. Both are well-received on the site, but in both cases the most recent data is months old. RRE’s most recent review was December 19 of last year (two and a half months is a long time in this world). Updata’s last review was October 11 of last year (four and a half months, well… yeah). Both funds are actively investing and have met with dozens, if not hundreds of companies over the intervening time period.

So the question becomes, are founders ignoring the site because once they are already far along enough in the process to be of value as posters, they no longer see the value proposition it offers, or for other reasons? Either way, it was supposed to revolutionize the venture world, and to date, I don’t see that happening. In fact, I think the VCs may have beaten them to the punch.

I’d want to go private too.

Just watched the markets go down between 3% and 4% today, in response to “concern about a possible slowdown”. This is newsworthy, insofar as it’s the largest single-day move in a recent memory, but those who pay attention to investing are probably of one mind that day-to-day moves are not to be closely watched.

That being said, it got me thinking about the recent (cyclical) trend toward private equity and buyouts. I plan to write about this topic at greater length in the future for those who are unclear exactly what private equity is and how it operates, but for today’s purposes I’m going to abstract away from that discussion and just say that the effect of a buyout is to take a company off the public markets and reorient it toward a private ownership structure.

Imagine I’m a company CEO. My company is doing well, growing my business, operating efficiently growing net income at a good clip. Then some reports come out that indicate a “possible slowdown” and all of a sudden my stock (which is high beta as I run a small company) is off 5.5%. Why? Did the market’s collective few of my company’s cash flows just change dramatically over night? Not likely. Yet now I have to spend significant time talking to investors, answering questions about why my stock is down, and generally doing things other than running my business.

Is it any shock CEOs are eager to go private?

This is Video is Worth Four Minutes

This was posted a few weeks ago by a professor of cultural anthropology. It’s a creative, somewhat dramatic way of thinking about the web and our use of it. Take a look.

Aiming for the Middle

If you’re reading a blog (probably via RSS) about tech entrepreneurship, you probably know all about Twitter. You probably have used NetVibes or MyBlogLog or have a heavily personalized Google Reader. You install FireFox extensions and maybe write Monkey Wrench scripts to tweak your gmail settings or other parts of your web experience. The people who comment on the blogs you read know about all this stuff too, so sometimes it seems like everyone does.

They really don’t though. My girlfriend is smart and sophisticated. She uses the web in a way that is integrated in her everyday life. She has multiple email addresses, plans events and trips online and does a lot of other business on the web. But you know what? She’s never heard of any of that stuff in the first paragraph. Her friends here in New York haven’t either. Their boyfriends and husbands? Nah. Truth is, most of my classmates at Columbia Business School have never heard of any of this stuff.

The point of all of this is that I’ve been thinking about a lot of the web startups I read about – companies launching at DEMO and on the TechCrunch Forums and elsewhere. I try to keep in mind that while my girlfriend (and my younger brother, my friends from law school, etc…) are all consistent users of the internet, this new wave hasn’t touched them at all. But the companies that manage to get this big part of the internet-connected bell curve are the ones that are going to have really big success. It’s worth it to spend time really thinking about what the 50th percentile of the web population wants and what they are willing and able to use.

Problems with Patents

The internet has really exposed some flaws in the patent system (and has just generally overloaded it). The theory behind patents (and intellectual property generally) is pretty sound: Offer the inventors of technology a window of exclusivity so that they are propertly incented to innovate. If no such protection is offered, an inventor will incur all the R&D costs associated with the creation of something new, only to see it copied within months or years by a firm that didn’t have to make such an investment. The new firm has lower fixed costs and puts the innovator out of business. This discourages invention that that is bad.

As is often the case, a well-intentioned (and mostly functional) idea can be perverted, and sadly we’re seeing a lot of that with regard to internet companies and technologies. Whether it’s the result of a genuine paradigm shift in the cost of R&D associated with the decreasing development cost of software or whether it’s simply that the staff at the Patent and Trademark Office doesn’t totally understand the nature of interaction on the internet, there are plenty of examples of patents being granted for “technologies” or processes that don’t appear to be nearly novel enough (or difficult enough) to merit protection as described above.

A story on today’s TechDirt reminded me yet again of this problem.  Apparently some shady company in Texas is claiming to have “invented the MP3 player”, and is suing Apple, Sandisk, Samsung and anyone else who makes such players. Mp3 is an audio codec designed to produce compressed files for playback. Even if this “company” (apparently no one has heard of it and its offices are a law office) actually did build the first MP3 player, should this be patentable? If there are book publishers out there publishing and binding books, should I really be able to patent a bookshelf? At some level, isn’t a use obvious enough that the PTO can lay off granting patents about it?

There are people working on solutions to this problem, and none too soon. The patent system was designed to protect innovation, not stifle it.

The Need for “Network Effects”

If you pay attention to the blogosphere you probably hear about a dozen or more new, potentially useful websites every week. The low cost of entry, the presence of increasingly sophisticated tools and the emerging ubiquity of the web have led hundreds of entrepreneurs to create sites, web applications, mashups, plug-ins and widgets that do all manner of things to make your life interesting.

And that’s great for us as users of the web. The problem for entrepreneurs is that if you come out with something shiny, how do you keep fickle users from migrating to the newer, shinier thing that comes out a month or a year after yours?

There are a few decent answers to this question. The old-fashioned answer is intellectual property (typically patents when you’re talking about technology), which can keep anyone from competing with you, but realistically most entrepreneurs bootstrapping their idea for a social media site aren’t going to file patents (nor would they receive them).

The answer that most “Web 2.0″ companies (a phrase I dislike, but rarely successfully avoid using) come up with is network effects (whether they use that phrase or not). Network effects refer to products (in this case web sites or apps) that get better the more people use them. While a lot of the stickiness of sites with strong networks is associated with the “new web”, probably the best example of all is Ebay. A good team of developers could recreate Ebay in a week or two, but competing with Ebay would be virtually impossible. Ebay has millions of users, EbayClone has zero, and there is significant pain for consumers switching away from a site with enormous activity to one with none. So even if EbayClone had a better interface or other advantages, their ability to compete with Ebay would be pretty low.

LinkedIn is another great example of successful deployment of network effects. What they’re doing isn’t rocket science – it’s basically an online rolodex-builder. But with about nine million users, others that try to compete with them have a high wall to clear before they’ll be successful. If I convince a hundred of my business contacts to connect to me on LinkedIn, it’s going to be a huge pain in the ass to switch to another one and reconnect with all of them. The network gives LinkedIn a barrier to entry even though they have no IP protection and their technology is not novel.

This was recently brought to my attention with New York subway system mashups. For over a year I’ve used This Subway Map to figure out which trains most easily get me where I’m going. But then This One was released and I switched overnight. Why? Gypsy Maps gives me directions – which train to which train from Point A to Point B. Do I really need this feature? Not really – I can look at the subway map and figure it out. But there’s no switching cost for me. No pain associated with ditching OnNYTurf’s map and moving to Gypsymaps, so the slight incremental improvement is enough to induce me to switch.

All of which is a long way of saying, think hard about how you keep your customers. If you are building a site that has no IP and low barriers to entry (cheap to replicate, simple features), you need to figure out some way to keep your customers on your site when something shinier comes along. That could be a social element (their friends are on your site), a personalization element or some kind of hosted data advantage. It could be something else, but you need to have some kind of friction associated with leaving. If you have users, someone out there is trying to take them away as you read this.

New website for entrepreneurs

A few feeds I read recently pointed me to a new site called Startupping. I just checked it out and it’s an interesting foray into a very specific kind of online community, namely one focused on startups. If the site fulfils its vision, it’ll be a place to swap ideas, meet like-minded people, connect with resources and get feedback on your startup. I’ll be checking in regularly over there to see how it evolves.

Thinking About Music

I’m a big music fan. As painful as it is to admit, I got my first CD player twenty years ago and have been collecting music ever since. Piles of cases gave way to towers gave way to binders, then bigger binders. In about 2003 I had a big enough hard drive to rip them all into MP3 format, where they still live (except when I want them to sound really good, then I have to bring out the old uncompressed audio).

Lately, though, I’ve been thinking a lot about music, and the different approaches companies are taking to bring music into the digital age. Some might think this question is self-evident, as we’ve been living in the next generation of music with our iPods and the iTunes Music Store and so on, but ultimately I don’t think that’s really the future. I’ve been looking at a few novel approaches companies are taking to getting us good music.

Perhaps a little old-school (if you’re a tech person) are Pandora and Last.fm, but no discussion of alternative delivery would be complete without them. Both of these offer a customized stream of music based on your preferences. Both have a nifty flash or ajaxy window that allows you to communicate with the service. Pandora uses a fairly black-box mechanism known as the “music genome project”, which purports to have mapped out specific characteristics across different songs, so that when you tell it you like certain songs (or artists) it can cross-reference those characteristics with others in its database. Very cool, although personally I find that it tends to go off in strange directions sometimes (if I tell it I like one song that might be considered to have a slight country influence, it will immediately bombard me with country, which I generally don’t listen to).

Last.fm adds a whole social networking element to the process, which is moderately interesting to me, but which I suspect a ton of people like. Mostly, I just think last.fm does a great job of picking music I like. I downloaded their automatic “scrobbler” application, but frankly it doesn’t seem to produce a whole lof of results. Mostly I think it helps them build their database, which doesn’t bother me too much, as I benefit from that.

Looking a little lower-tech, I recently discovered Lala.com and think this is quite excellent. Back in the day (and occasionally today) I bought CDs from half.com. Back in the day there were a lot cheaper, by and large, especially for obscure artists. I get the sense that these days the majority of listings on half.com are the inventory of record stores, and that’s driven prices up on most items. That’s fine – supply and demand and all that. Lala takes a different approach – you trade your existing CDs to someone else and pay them a $1 gatekeeper charge. They have Netflix-style packaging and a ton of users. I’m definitely going to start doing this with the CDs that I don’t think I need to hear in crystal detail on the $20,000 hi-fi rig I keep telling myself I’ll own some day.

Saving the coolest for last, I’ve been recommending Amie Street to everyone I know. This is an idea I really wish I’d had, and apparently the founders are college students (doesn’t that seem to always be the case?). Talk about supply and demand, the Amie Street approach is that artists put their music on the site, and people pay for the tracks based on their popularity. The more people love a given track, the more it costs (up to the iTunes price, no higher). This is just a fantastic idea. Why should my favorite song in the whole world cost the same as some back track I’ve never heard? Plus is there any better rating system than what people chose to pay more money to get? Love it.

There are a bunch of other companies taking interesting approaches to music delivery, but this is long enough. If you have sites you like, comment.