January 11, 2012

72) Fab.com

危 wēi  danger

Jason Goldberg and Bradford Shellhammer founded a gay social networking site called Fabulis a couple of years ago, I was lucky enough to meet Jason as he was thinking it through. Within 3 months of launch the site had attracted 50,000 members, only to plateau 9 months later at 130,000 members, with only 30,000 active.  Facing this slowing of demand the team took the brave decision to go back to the drawing board, believing that they wouldn’t be able to iterate their way to a business model. Their one glimmer of hope was that a flash sale feature they had added to the site, a “Gay Deal of The Day,” had achieved some success – they had sold over $40k worth of product within 20 days of it being launched.  That  ‘feature’ became Fab.com and 3 months after its launch it was profitable with 600,000 members and six-figure sales days.

The potential was clear and Goldberg decided to raise a significant funding round last October in order to meet it.  However, he worried that fundraising would divert his management team’s time and attention away from running the business at a critical time (their first holiday season).  Instead of potentially losing focus and perhaps failing at raising the capital perhaps they should simply slow their growth?

机 jī opportunity

Instead, Goldberg decided to proceed with fundraising and saw the process itself as a design opportunity.  While redesigning the process Goldberg put off VCs that approached him with the message: “Thanks so much for your interest. Sorry, but we’re really heads-down right now running the business. Will circle back to you when we’re ready to have a serious chat about fundraising in the near future.”  He had learnt from experience that there was little value in spending time talking through his business until he was ready to raise.

Once he was ready he created a shortlist of VCs that added the specific value he was looking for: the ability to write a large cheque, recent success with ‘hot’ startups and experience scaling e-commerce businesses.

The team then approached its shortlist, giving each a login to the Fab.com metrics dashboard before agreeing to meet.  This open approach is wildly different from most funding processes I have seen in the past (in which teams go through rounds of meetings before metrics are discussed in detail), yet rightly VCs look at metrics closely. By providing full access to the data Goldberg sent a clear message to potential investors; “here we are, here’s the data, we’ve got nothing to hide, take a look and decide for yourself if you want to pursue investing in Fab.”

In the end, Fab.com had the choice of multiple firms that wanted to invest, ultimately choosing to take $40m from Andreessen Horowitz.  The process had worked well because they were able to pick the partner they wanted to work with while avoiding disruptions to their operations…

How About…

  • Looking out for features or aspects of your offer that are gaining traction even if it isn’t as a whole?
  • Avoiding wasting time talking to financiers before you’re ready to finance, you’ll have to go through the same process in due course anyway?
  • Being proactive rather than reactive in looking for funding partners?
  • Making your metrics available to funders before meeting them, ensuring they understand the business and traction in advance?

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sources: Forbes, Betashop

March 24, 2011

69) Zynga – is its Facebook dependency good or bad?

危 wēi  danger

More and more often startups are built with a total dependency on a third party, for example on external platforms such as Facebook, Twitter, Google Apps or iTunes.  The allure of access to a sales channel, rich data and potential customers is obvious but surely that dependency creates huge risk?  What if the external platform changes its approach or decides to develop its own version of the startup?  What if the platform decides that it will no longer support third-parts apps as Twitter did last week.   Zynga, the social gaming company, is an interesting example – it has been valued at over $10bn – surely this is crazy given its complete dependency on Facebook?

机 jī opportunity

I was inspired a few weeks by an article on Techcrunch.  The article categorizes dependencies as symbiotic or parasitic.  Parasitic dependencies are problematic, increasing the chance of the third party taking a hostile approach but symbiotic dependencies, in which both parties derive a benefit, pose less of a risk.

By this definition I think Zynga’s dependency on Facebook remains symbiotic.  Facebook has benefitted because games such as Farmville enrichen the Facebook’s user’s experience – currently over half of FB users play Zynga games, increasing their average time on site considerably.  In addition, Facebook Credits are integrated into all Zynga games (for which Facebook takes a cut of 30%) and the company is reportedly the largest advertiser on Facebook, spending millions a year to drive new installs.

In return, Zynga has benefitted by leveraging the rapidly growing FB community, successfully harnessing FB tools such as user news feeds to promote game updates.  It’s hard to imagine that Zynga would have grown its user base for CityVille within a week of launch to over 3 million at the end of last year without FB.  Given this symbiotic dependency, Facebook’s growth rate and estimates of it making $630m this year, Zynga’s valuation seems more reasonable.

It is also worth pointing out that none of this has stopped Zynga building a Plan-B, if only to improve its negotiating power with FB.  For example it began requiring email addresses from users (enabling it to contact them outside FB) and buying mobile application companies – including Newtoy (creator of Words With Friends and Chess With Friends) last year and New York developer Area/Code last month.

In the case of Twitter it seems ruthless for them to close down so many apps, after all those 3rd party clients helped create behaviors that now make Twitter so valuable: @ mentions, direct messages, re-Tweets and so on (none of which were Twitter’s idea originally).  But, those app’s were effectively in direct competition with Twitter, placing their own advertising and pulling users away from Twitters own platform – a parasitic dependency.  Twitter’s rationale as outlined in this developer forum explains this and the message is clear – if you’re going to develop apps make them symbiotic…

How About…

  • Considering who your business might be dependent upon?
  • If you do have dependencies can you make them symbiotic rather than parasitic?
  • And how can you plan for the worst?

—

October 11, 2010

62) diaspora* and Kickstarter

危 wēi  danger

Four students at New York University’s Courant Institute of Mathematical Sciences listened to a lecture on cloud computing and privacy and began to worry about relinquishing ownership of their data to Facebook and other social networks.  They believed that they should retain all of their personal data, after all once you give up control initially you effectively lose the option to regain control over it permanently.   The students believed that they could build a distributed social networking service to overcome this which they called diaspora*. Users would set up their own server (or “seed”) to host content; seeds would then interact to share status updates, photographs and other social data.  The team wanted to test whether anyone else shared its concerns and to raise $10k seed capital to build the product.  Surely the inexperienced team would struggle to get the idea off the ground without giving up huge amounts of equity?  And how would they test demand more broadly than just in their close social groups?

机 jī opportunity

Instead of testing the idea with potential users in face to face discussions and tapping into angel funding the team decided to place a request for funding on Kickstarter, a platform that enables crowd-funding of creative projects.  The team set their goal at $10k, recorded a video outlining why the project was important to them and explained what donors would receive in exchange for any backing.  For example, those that pledged $25 or more would receive “a CD, note, a bunch of cool diaspora stickers, and an awesome diaspora t-shirt!”.  As with all Kickstarter projects no equity was offered in exchange for funding (conveniently reducing the need for financial regulation of the Kickstarter platform) and the project had to be fully funded before its time expired or no money changes hands. diaspora* was fully funded within 12 days and within a few weeks the team had received pledges of over $200,000 from over 6500 backers.

Here’s the Kickstarter widget for the Diaspora project:

The team had proven that their product had appeal and had raised 20 times the capital they had aimed for without giving up a single percent of equity. diaspora* is now in build: a developer preview was released on the 15 September 2010 and a consumer alpha is planned for October 2010.

This approach is developing into a business model itself – just look at American Idol or X-Factor (read more in my article here).

How About…

  • Crowd-funding new ideas – testing demand and perhaps eliminating the need to give up equity?

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