How to Evaluate Your Startup Idea Part 2.0: User Acquisition

Posted in Startup with tags , , , on March 14, 2012 by themaroon

In my first post in this series I listed a number of criteria I use to evaluate startup ideas. The very first was user acquisition. It and the second one (revenue model) are closely related and, I think, are the easiest way to at least disqualify an idea upfront.

This post is not meant to be a primer on user acquisition, but rather a description of a few of the most common methods employed by startups. Here are the best I can think of (and if I’m missing any, please let me know). This is going to be a long one so I’ll divide it in two.

Word of Mouth

Everybody knows and loves this ages-old method. It has a couple benefits. It’s free. It’s high value.

The problem with it is that it’s really hard to get, and really slow to grow. People are inundated with so many products and sales pitches every day that making one stand out enough to get a huge chunk of traffic via word of mouth is next to impossible.

You’ve probably got a better chance of winning the lottery than you do growing your startup largely by word of mouth. The last startup that got big that seemingly relied on it is Google, and that’s been how long ago now? In internet years it might as well have been the stone ages. Not to mention they used business development, which I’ll get to in a bit here, quite successfully as well with a well-timed Yahoo! deal.

Virality

Virality is word of mouth’s more technologically advanced cousin. Instead of relying on someone to like your product enough to tell someone about it, give them an incentive to post it on Facebook or send it in an email. The incentive can be monetary (like Groupon or Fab.com) or some digital good (like Farmville) or simply social karma (like Pinterest). It can even just be making the product itself more useful, like when Facebook asks you to give them your Gmail credentials and invite your contacts.

It’s called virality because startups measure it much the way epidemiologists measure the spread of an infectious disease. If each person who uses it gets one other person using it per month you’ll grow exponentially. The great thing about virality (as relates to startups rather than Ebola) is that when it works it can be a massive source of free traffic. It is also highly measurable and something you can work constantly to improve.

Virality is hard to make happen, but unlike word of mouth it’s something you can engineer to a large degree in a lot of products. You can’t bolt it on after the fact, so don’t expect to take your relatively non-social project, tack on Facebook connect, and become the next Pinterest. Your product has to be highly compelling if used in a group, yet virtually worthless (just good enough to overcome the chicken and egg problem in the start) if used in isolation for virality to be your sole source of traffic. If you can imagine using the product without your friends doing so as well, you’re probably going to need to supplement with or focus on other channels.

Organic Search Traffic

This pretty much means ranking in Google results. Google is tough to game, and there’s a cottage industry built around it with a lot of misinformation and snake oil involved. 99% of people who call themselves SEO experts are full of shit. The other 1% can improve your chances, but not by a lot (though even a little helps).

If you’re going this route, expect to play a cat and mouse game with Google. You might win for a time, but every now and then they’ll roll out something like their Panda update and you’ll just be out of business.

Google calls them “organic” results because they want them to be natural, not engineered. They want it to be high quality content that people link to of their own accord, not something that gamed the system by formatting their URLs well or paying bloggers to link to them.

Like virality though, if this method works it can be a huge source of traffic, and that traffic can be extremely high quality. Like word of mouth, though, it’s the sort of thing I wouldn’t be comfortable relying on. It’s tough to make happen and even when you do, you’re dependent on the largesse of a third party who, at any time, could change their rules and leave you stranded.

Search and Interest-Based Advertising

This is probably the channel I have the most experience with and, in my experience at least, is probably where most startups will end up getting the bulk of their traffic. It is, I would say, the most reliable channel. Someone will always be willing to sell you traffic. Users will always be clicking ads. This acquisition channel can work for startups that monetize through almost any form other than advertising.

It’s still not easy though. The whole idea behind advertising is you spend $x to buy a user, and you make $y off of them. If y>x you make money.

It does have a few drawbacks though. For one, the ads are typically sold via an auction system. To get any substantial traffic, you’re going to have to be near the top for the keywords you’re targeting, which means you’re going to have to monetize as well as (or, preferably, better than) the top few competitors.

You’re also going to be limited by the number of people searching for a keyword. If what you’re doing is very niche, you’re going to have to do a lot of legwork to find the targeting you need to make ads work for you.

Also, there are so many options that it’s almost daunting. Even just Google alone, which will likely be the bulk of your spend, has so many ad products (and such a poor interface for purchasing and managing them) that it will make your head hurt. You have to have a pretty high spend (for a startup anyway) before you can get an inside contact to help you out, though once you do Google’s ad sales and management team is pretty efficient.

Once you figure out how to buy potential users cheaply and scalably, which can range from very easy to very difficult depending on your market, you’re going to have to spend time optimizing your sales funnel to get your RPU up so you can bid competitively.

Overall this channel is a lot of work, but if you’re willing to do it, it’s probably the most reliable and is my personal favorite. It’s highly measurable, and those metrics are well-understood, well-publicized, and easy to implement with some of the better metrics tools out there. It’s the most deterministic, and the one you’ll feel most comfortable building a business around of those I’ve mentioned so far.

It does have the same drawback as organic search results of being dependent on third parties (usually Google) but in this case you’re at least paying them. If your product works you might be paying them millions of dollars a year. They’re a lot less likely to decide you’re a scumbag as a result (though it has happened) so it’s at least a little more comfortable. And if you’re somehow building around a second-rate ad platform (Facebook, Microsoft, or really anything other than Google) it’s almost guaranteed not to.

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How to Evaluate Your Startup Idea Part 1: The Basics

Posted in Startup with tags , , on March 1, 2012 by themaroon

I’m sort of what you’d call an idea guy. I have probably thought of an average of one new startup/product idea every day for at least 6 or 7 years. I’ve even implemented a few of them, and a couple of the ones I did have even worked. A few have failed too, which is just as important a learning experience as the ones that worked. I’ll get into every single one of those in detail in a future series of posts, because why the hell not?

But this post is about ideas. I’m going to give you my thought process on evaluating startup ideas in its current state of evolution. This might sound idiotic to me in a year, or to you now, but if I had to start another business right now, here’s how I’d evaluate it. Note that I’m speaking largely in terms of software businesses here, though some of it certainly applies to offline ones.

Typically I’ll keep a new idea (assuming it passes the initial “is this retarded?” test) in the back of my mind for a day or two, thinking about it with spare cycles, checking on the web to see what in its genre currently exists. After a couple days if it still seems worthwhile, I’ll write it down. Of the ideas I think of, I’d say the breakdown from conception to two days later falls like this:

Group 1 (90%): WTF was I thinking? Immediate deletion from my brain cells.

Group 2 (9%): Not bad but needs more work. Think about it and research for a day or two, maybe write it down.

Group 3 (0.9%): Gold, man. Solid gold.

Group 4 (0.1%): I know I’ll regret it for the rest of my life if I don’t do this.

I don’t have a formal process for moving an idea from Group 1 to Group 2, that just happens naturally. Group 2 to Group 3 usually comes from a little writing down of ideas, researching on the web, talking to others, etc. Those are the easy ones.

The process for evaluating the ideas in Group 3 is the important one and what I’ll focus on in this series of articles. When I’m debating a promotion to group 4, I evaluate an idea for potential in these categories (no particular order).

1. User Acquisition

Anyone who has been in the startup game long enough has probably had the experience of building something they thought was awesome that got no users. We’ve also all seen inferior products win a market due to better user acquisition strategy. Does Idea X have a plan for getting eyeballs?

2. Revenue Model

There are a few basic ways a site can make money. How clear and compelling is the revenue model for Idea X?

3. Competition

What’s already out there. If nothing, why not? If there’s already a play in the space, how is Idea X going to be better? (The nice thing is being significantly better in just one of the above categories can make for a winning product.)

4. Technical Difficulty

What are we building here? Is it hard to get to a launchable minimum viable product (MVP)? Is it hard to scale? Is it both? Am I inventing something nobody else is even remotely close to or can I leverage a lot of existing code?

5. Non-developer costs

For this idea to even prove itself, do I need salesmen? A PR/ad budget? Some expensive software or equipment? How design-heavy is it, i.e. can I get a tolerable-looking prototype using Bootstrap to validate the market, or do I need to hire one or more designers right off the bat?

6. Total Addressable Market (TAM)

What’s the size of the market? If the answer to #3 was no competitors, you’re probably just guessing. If you’re building an online shoe store it’s pretty easy to find out.

7. Funding

What does it cost to bring to market, and can I get that? If it’s a low amount, can I bootstrap it? If it’s a high amount, is it in a sector that’s easy to get funding right now like mobile or big data?

So those are the things I look at when evaluating a new idea. I’ll get into them in-depth in the next few parts. In the meantime, please leave a comment and tell me what I’m missing.

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2012 Best Picture Nominees, part 1

Posted in Movies with tags , , , , , , on February 21, 2012 by themaroon

Every year I try to watch all of the movies nominated for Best Picture before the Oscars. I’ve caught every one but Hugo so far this year (damn you for not leaking!) so I might have to get to the theater in the next few days.

Anyway, I’ll give you my thoughts, in no particular order. Remember, I’m a movie fan, which means I hate at least 95% of movies. Your mileage may vary.

Moneyball (7/10)

Moneyball wasn’t, by any means, a bad movie. It’s a faithful adaptation of Michael Lewis’s recount of Billy Beane’s introduction of sabermetrics to the world of professional baseball. If you read the book (and you should) you know what you’re getting.

The acting was pretty good. The storytelling was pretty good. Everything about the movie was pretty good.

But nothing was great. I don’t feel this movie was at all Best Picture-worthy. It was just kind of there. I won’t say I want my 2 hours back, but I also could have missed it, but then I’ve read the book.

Midnight In Paris (8.5/10)

I love Woody Allen, and this is Woody at his finest. Midnight in Paris fell somewhere in between Woody Allen’s more serious films (think Match Point) and his comedies. It’s a serious film, but a light-hearted, whimsical often funny one. It reminds me most of Purple Rose of Cairo.

I’m generally not a big Owen Wilson fan because he pretty much plays the same schmucky, good-hearted, down-on-his-luck guy in every movie, and he reprises that role here. But it works well in Midnight.

If you like Woody, you’ll like this, and if you don’t (and you’re crazy) you won’t).

The Tree of Life (5/10)

This might have been my least favorite of the nominees. Admittedly, I’m not a Terrence Malick fan. I realize a lot of critics like it because it at least tried to do something original. It did, and I gave it five points just for that. Still though, I think it failed. It’s the sort of movie that makes movie buffs feel like they’re supposed to like it, but not actually like it.

It has a non-linear narrative, but unlike Magnolia or Pulp Fiction I don’t feel it added to the movie. It just ended up a disjointed rambling piece of nonsense, even worse than The Thin Red Line. At least The Thin Red Line didn’t have random dinosaurs.

Overall it was pretentious but insubstantial. It wasn’t enjoyable, it wasn’t meaningful. It was original, but not good. I won’t say it was the worst movie I’ve seen this year (that honor goes to Drive, and if you say you liked that I will punch you) but it was bad.

The Help (8/10)

I actually didn’t think I was going to like The Help. A civil rights movie has just so much room to become a feel-good cliché. It’s a hard topic to cover from a unique angle.

They kind of pulled it off though. Three actresses got nominated for it, and I think Emma Stone may have gotten robbed.

Is it worthy of Best Picture? I don’t know. Maybe not because even though it avoids being too cliché, it’s still far from original. But it was enjoyable and well worth watching.

War Horse (6/10)

This is another movie I didn’t expect to like because I don’t like Spielberg and I don’t like horses. It didn’t really surprise me, though it wasn’t as bad as it could have been. It’s just kind of boring and uninspired.

It probably deserves an award for cinematography. Maybe also sound editing or some other such category that nobody outside of Los Angeles even knows exists. But Best Picture? No way.

How to Kill Piracy

Posted in tech with tags , , on February 7, 2012 by themaroon

Ever since the SOPA/PIPA drama it seems like I see five articles a day with a title like that these days. They always read something like this one. They’re some tech pundits talking down to Hollywood execs, who they see as stupid, evil, and out of touch.

I’m not sure when software developers got such an ego, but I think it’s not very self-serving. If anything it’s harmful. It’s also humorous because it shows just how dangerous being so insulated from reality can be.

One thing I like to do when someone is behaving differently than I would expect them to is to ask myself why. There are really only ever three reasons. I’m assuming, for the sake of argument here, that I am intelligent and that what I expect them to do isn’t just what I want them to do, but rather what I honestly think would be in their own best interest.

Reason #1: They’re stupid.

If they’re stupid, that’s all the explanation you need. Stupid people are basically random number generators. You can predict and manipulate them to some extent, but you really can’t understand them in anything but the most academic sense. They do what is in their perceived best interest, just like anyone else. Their perception is just warped.

This is one of the reasons to which tech pundits often attribute Hollywood not just giving Netflix rights to every movie at whatever price they want. It comes from the ivory tower mentality. It’s easy, when you’re in software, and all of your friends are in software, to assume that you’ve got some sort of monopoly on high IQs.

It is, however, quite simply not true. In the interest of full disclosure, my company, Blue Frog Gaming, has a working relationship with NBC Universal which owns Universal Pictures one of the six major studios. The guys I know work for Syfy, so they’re not really “movie studio execs”. I have met a couple though, and I’ve also talked to a lot of people (even in the tech industry) who have, and there’s one thing I’m sure of, which is that they aren’t stupid. Just like most high-ranking executives in any big business, they’re very smart people.

You just don’t get to high enough up in a multi-billion dollar corporation to make decisions about whether or not to license your content without being pretty smart. The people that most of the pundits are railing against are, quite frankly, smarter than the pundits. They went out and got MBAs from prestigious colleges, and while we can all argue about the value of such, I think we can agree that Harvard and Yale don’t hand them out to stupid people. WordPress isn’t as picky about who they give accounts to.

Reason #2: I Know Something They Don’t.

Ask yourself this, when it comes to digital movie distribution, what do you really know? The tech industry loves to tell them things like “scarcity is a shitty business model” but is it? I mean can you prove that, with numbers, or is that just your hunch? It’s been working for De Beers for over 130 years.

I define anything you “know” to be something you would bet your entire net worth against a cheeseburger for. I’d bet everything I have that 2+2 is 4 if the other side of the wager was Five Guys, because it’s an easy, free, tasty meal. Would you make that same wager about Hollywood seeing an overall increase in revenues by licensing all of their movies to Netflix at whatever trivial rate Netflix must pay them to be able to make a profit by charging $10/ household? If so I’ve got a cheeseburger with your name on it.

It strikes me as quite possible that a world in which some users pirate movies, and others pay $5 or $6 to stream them through their cable companies, and some pay $10-15 a head to see them in a theater might actually be a better one for film companies than one in which some users just pirate and some pay Netflix $10/month.

We in the tech industry, despite a lot of training to the opposite, still manage on almost a daily basis to confuse anecdotes for data. The AVC article I pointed out is a good one. Sure, maybe you just watched some TV and went to bed because the movie you wanted to watch was in theaters and not on demand in your home. But theater goers spend $10+ a pop while a whole family can stream a movie via VOD for $5 or via Netflix for something less than $1. Even for just a couple, scarcity only has to encourage me to go to the theater one time in 5 for Hollywood to break even.

Which leads me to the last and final reason…

Reason #3: They Know Something I Don’t.

The fact that techies are so unable to even consider that this might be the case is really hurting us. We keep telling Hollywood that they’re stupid and they just don’t get it, but they have a lot more data than us.

Things that I don’t know include, but are not limited to:

1. How much Netflix pays movie studios for access to their library.

2. How much VOD pays movie studios.

3. How much they make off of physical media rentals (ie. video rental stores, Redbox, Netflix’s mail service, etc.)

4. How much people would pay for a streaming Netflix-like service that actually has good movie selection. Let’s say every new release. (And whether or not they’re quietly building such a thing as we speak.)

5. How many people would subscribe at what price point.

6. How much piracy is really hurting them (ie. how many people who pirated a movie would have paid for it in some way). I suspect they overestimate this, but I also suspect tech pundits underestimate.

7. Why people think Betty White is so funny. She just says unfunny stuff and people laugh because they’re old. Not relevant to this post in any way, but seriously. She’s like a modern-day Robin Williams, except she isn’t even motivated enough to come up with silly voices.

Numbers 1 through 3 alone are necessary to make an informed decision about whether building a Netflix-like digital distribution system would lead to an increase in revenues. I doubt anyone knows the answer on 4, 5, and 6, but I’d be willing to bet they’re somewhere between what tech pundits and the RIAA claim.

The question I’m forced to ask myself though, is whether or there there could exist a set of numbers for 1-6 that make the industry’s current tactic (maintain the status quo while throwing legal dollars at fighting piracy) more profitable than licensing all of their content to Netflix? It seems at least quite possible, when you consider that the price of a movie ticket has to be at least 20x what they get from a Netflix view.

As I said before, Hollywood execs aren’t stupid, and they have a multi-billion dollar industry to protect, so they probably aren’t lazy either. I’d bet they’ve done their homework. My feeling is that Hollywood very much has these variables in mind. They know the answers to the first three questions and all of the tech pundits railing about how they “just don’t get it” don’t. I’d be willing to bet they’ve done market research on the next three, though I don’t feel like anyone can truly know 4-6 until someone builds such a thing. As for Betty White, I guess we’ll never know.

So rather than excoriating them for being dumb or out of touch, perhaps there is a way to build a service that alleviates their concerns. Given that Netflix costs $10/household, while movies are $10-$15 per person and VOD $5-$6, it’s not surprising that Hollywood is reluctant to cannibalize itself.

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Lobbying

Posted in Politics, tech with tags , on January 24, 2012 by themaroon

SOPA is dead, and the tech industry is still not quite elated. They shouldn’t be either, because the root cause hasn’t been addressed. We can say with a high degree of certainty that Congress will be more careful introducing bills that tamper with the internet, but they have many ways of avoiding debate.  They’ll shove something just like it in the back of some anti-terror bill at the last minute and the President will have to sign it.

This is one of the few bad things about bi-partisanship. When something like the need to stop piracy is widely accepted by both parties (SOPA had broad support on both sides of the aisle) and there is campaign funding at stake, they can turn a lobbyist’s email into a law faster than you can blink.

What we in the tech industry really need to fix is lobbying, and to do that we must first fix our worldview. We subscribe to the romantic notion of a meritocratic market.  We shouldn’t. It’s an ideal, but we don’t live in a world of ideals. We live in a world in which politicians make the rules of the game.

Paul Graham, in Y Combinator’s latest request for startup, says of Hollywood:

SOPA brought it to our attention that Hollywood is dying. They must be dying if they’re resorting to such tactics. If movies and TV were growing rapidly, that growth would take up all their attention. When a striker is fouled in the penalty area, he doesn’t stop as long as he still has control of the ball; it’s only when he’s beaten that he turns to appeal to the ref.

This way of looking at it is why SOPA existed in the first place. To mature industries like Hollywood lobbying isn’t an area of focus, it’s a basic business function. This is equivalent to saying “Google must be dying because they have accountants. If they were good at making money they wouldn’t stop to count it.”

Mature industries have lobbyists just like they do janitors, it’s simply something they view as a cost of doing business. I believe the software companies will get there soon.

But fixing the problem (which I’m not optimistic about) is another thing entirely, and no one industry can do this. The root cause is our system of campaign financing. Congressmen accept money from industries because they believe (probably falsely) that money helps keep them in office.

I’ll avoid getting political here because I could rant about campaign finance reform for pages, but the upshot for the tech industry is they need to either fix the game, by lobbying to end lobbying, or learn to play it better by lobbying to uphold their rights. Either way it shouldn’t (and I think in the very near future won’t) be viewed as anything other than a basic business function.

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Tech Lobbying

Posted in tech on January 17, 2012 by themaroon

A user wrote a comment I thought was worthy of a reply here:

“Argue that it was written word-for-word by lobbyists and endorsed by the politicians they pay.”

While entertainment and drug companies are certainly pushing hard for this bill to go through, you can bet anything that tech giants like Google and Facebook are lobbying right back at them from the other end, for the obvious monetary reasons. You think those companies are any less seedy and willing to pay off a politician or two?

The fact is that SOPA was introduced to prevent crime. The only legitimate argument against it (which is why I don’t support the bill) is that it will fail spectacularly in preventing what it is intended to do. But I think the intentions of the bill are good and if there was some way to alter it to make it more effective I would support it.

I wouldn’t argue that tech companies are morally superior to drug or media ones for sure. But I would definitely argue that we’ve seen time and again that they are very, very poor at playing the political game.

I think that’s largely due to youth. There haven’t been companies making large amounts of money from the internet for very long. They partially just haven’t figured it out yet. The movie studios have had a century to learn how to abuse our political system. Give Google and Facebook some time.

It’s also due to an undeserved notion of meritocracy. The best service should win, we all feel, not the one best at playing the game.

I think we’ll see a stronger, concerted lobbying arm for Silicon Valley in the not too distant future. That should at least keep ridiculous bills like SOPA from ever becoming a threat.

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How Not to Argue Against SOPA

Posted in Politics, Startup, tech, The Internets with tags , on January 13, 2012 by themaroon

I’m still utterly horrified by the SOPA hysteria I mentioned earlier, especially since it’s coming from people who know better. Today’s post on GigaOm about Tim O’Reilly is a good case in point. (And before I go any further, let me state this clearly so it can’t be misconstrued, I’m not arguing in favor of SOPA and PIPA. I think they’re idiotic. I’m arguing in favor of combatting them with rationality rather than hysteria and bad logic.)

O’Reilly makes two points, both of which are simply wrong. The first is…

“Piracy is not a significant problem… Once the market matures, the pirates go away. They always do. Legitimate markets work better than pirate markets.”

This is a common fallacy I see over and over. “The movie companies fought VHS,” you’ll hear, “and it ended up being an enormous source of wealth for them.” True. But that doesn’t mean digital content distribution will.

There’s a standard disclaimer in every mutual fund prospectus that says “past performance is not indicative of future results”. It’s entirely possible (and in fact I believe it to be true) that digital distribution is such a fundamental shift in the nature of piracy that you can’t assume it will simply all pan out OK the way it always has in the past.

In the VHS days to pirate a movie I had to have someone who had two VCRs rent a movie, buy a blank VHS tape, and spend 2 hours copying it for me. The barrier to getting that done is not insubstantial when you consider that every single instance of piracy requires that. It’s not scalable.

Via digital distribution I just have to have someone not delete the torrent. It’s effortlessly scalable to millions of people. It’s not significantly less work to pirate it for anyone involved than it is to purchase it legally, and it is significantly less cost.

Sure, if you’re making books that teach people programming languages, they might be willing to pay. I think its fair to say that the music industry’s results have shown that it just doesn’t work the same way for music.

The second is the notion that SOPA/PIPA will somehow be bad for US-based startups. That would seem to be the case if you didn’t actually read them. The laws clearly apply only to foreign companies. If anything, it will be an unfair advantage for startups here. Rhapsody can perhaps simply get Spotify shut down for infringement (remember, there’s no burden of proof).

O’Reilly says that “If SOPA goes through, it could very well force certain innovative companies to go offshore.” I think the exact opposite is true. Foreign companies will come here to be protected by the DMCA.

And the worst argument of all (and O’Reilly didn’t pull this card) is the slippery slope. This is one of the most insidious logical fallacies around, because at least ad hominems don’t even attempt to masquerade as rational thought. This is the same as saying “if we allow gay people to marry pretty soon it’ll be legal to marry your dog”. It’s been used since time immemorial to argue against every single advance in civil liberties.

A government can’t simply not pass a law just because future laws might overreach. We didn’t need to slide down any slopes to get the PATRIOT Act, and whether or not SOPA passes will have no bearing whatsoever on censorship of legitimate free speech in the future.

So there you have it. If you want to argue against SOPA, there are plenty of good reasons. For one, it won’t stop digital piracy at all. I think it will severely curtail illegal sales of counterfeit goods and prescription medicines, but getting illegal music will just involve editing your hosts file or, more likely, getting a program that does it for you. 

Argue that the lack of any burden of proof makes it absurd in any scenario. Argue that it’s a violation of trade treaties, since it’s clearly showing preferential treatment to U.S.-based businesses. Argue that it was written word-for-word by lobbyists and endorsed by the politicians they pay.

There are so many reasons to dislike these acts that we don’t need to make up more.

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