entrepreneurship

When you are drinking at a bar or eating in a restaurant, what’s great service? What makes you loyal to a particular place? Is it not when they know who you are, what you like, and can therefore provide a level of service and intimacy that other places can’t match?

Why then is online, targeted advertising so different? Why do people get up-in-arms about companies getting to know you better, so they can show you ads you might actually like more?

That is probably what Mark Zuckerberg is thinking when he reacted to a comment Tim Cook once made:

When an online service is free, you’re not the customer. You’re the product.

And then Mark Zuckerberg in a recent Time Magazine article:

“A frustration I have,” Zuckerberg says, before a PR handler can change the subject, “is that a lot of people increasingly seem to equate an advertising business model with somehow being out of alignment with your customers. I think it’s the most ridiculous concept. What, you think because you’re paying Apple that you’re somehow in alignment with them? If you were in alignment with them, then they’d make their products a lot cheaper!”

I have to side with Zuckerberg here.

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One way to make e-commerce work is to sell high margin products online — ideally, products that are necessarily high margin in the brick and mortar world to account for distribution costs. Therefore, going online cuts out the middlemen and you can profit even while selling for less. Proven examples include eyeglasses, cosmetics, baby products, and so on.

Re/code has a fascinating story on another example: Harry’s, for razor blades. What makes Harry’s so interesting is that the company raised $197 million on a $350 million valuation on basically zero revenue (they have sales, but at a level insignificant relative to the size of investment).

In short, investors are investing solely on the basis of potential.

Re/code is painting this as yet another example of technology’s growing bubble. But let’s dive deeper — far from a being sign of investor irrationality, this transaction might actually make rational sense.

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There’s a great story on Wired about how several accomplished entrepreneurs are doing “start-up factories,” which really just means experimenting with ideas until something hits. Kevin Rose of Digg fame, for example, has a goal of creating one new app every three months. If the app doesn’t take off, he moves on to the next one. If it does, he doubles down on it.

This was in fact the same model that my co-founder and I started with, and feecha was our first product. feecha did see some traction early, so we doubled down. The second iteration unfortunately was a disaster — it took nearly a year to launch and it was too confusing — but that’s a post-mortem for another day. We’re already working on our next thing.

After three years of the start-up factory model, I’ve come to the conclusion that it only works for “known” entrepreneurs. I.e., entrepreneurs with a large following and friends in the media. When they make something, there’s enough initial curiosity that a sufficient number of people will try it. There will always be data to judge the product by.

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Except this time, that co-founder might actually have a case. Valley Wag is reporting that Douglas Warstler is suing Yik Yak’s two co-founders for excluding him out of Yik Yak. The basic story is that the three started a company with 1/3 ownership each that created and launched Yik Yak.

(Yik Yak is a location-based, anonymous chat app popular in schools. My start-up’s app, feecha, actually started out as something similar, so the fact that Yik Yak is more successful is a testament to the importance of execution. But that’s a story for another day.)

Two of Yik Yak’s co-founders graduated from university and moved to a different city while Warstler had a year left that he intended to complete. The two co-founders didn’t want a long distance, part-time situation and tried to buy him out. Warstler refused. And so the other two co-founders transferred Yik Yak to a new company and didn’t give Warstler any shares.

That’s what happened in a nutshell.

Typically, when these kinds of stories appear, my bias is with the remaining co-founders who actually built the business (e.g. Facebook, Snapchat). In this case however, my sympathies are with Warstler if what’s alleged is actually true.

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I had dinner with a friend a few months ago. He is the head of a 500-person company, and he was telling me how he wished there was an off-the-shelf mobile app they can use as an internal directory for his company, given the company was at a size where not everyone knew everyone. So that he could walk into a meeting and his phone would tell him who everyone is, what they do and how he can reach them later.

I told him Yammer was probably that product. He had never heard of Yammer. A few weeks later I followed up to see whether he had installed Yammer and he said no, he was too busy to get around to it.

The Financial Times is now reporting that Facebook is testing a Facebook at Work product. Or, basically, another Yammer; a closed social network for companies. The reason why I think it can work is the reason my friend hasn’t heard of Yammer — everyone knows Facebook and is already on it.

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There’s a fascinating article on Reuters on the state of Google Glass — in summary, that entrepreneurs, companies and investors are abandoning the platform because there is no market yet. I read it with mixed feelings.

In my entrepreneurship class at Stanford, my lecturer Andy Rachleff pointed out that being first to market is not a demonstrative advantage — rather, it’s first to product-market fit that’s critical. Google was not the first in search, but the first with the right search product. Once it built its lead, it was impossible for competitors to catch up.

So when Google opened up its Google Glass program, why did so many developers flock to it? I can’t recall a unicorn-level company ever winning because it was first to a technology platform. In mobile, Instagram and even Whatsapp had many predecessors. Uber was not invented at the start of mobile’s lifecycle; only later. I can’t think of a company that succeeded because it was simply there earlier than others.

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As Stratechery pointed out, it’s conventional wisdom that Xiaomi is an Internet services company. That selling smartphones at break-even prices is merely a gateway for selling profitable services. Except this might all just be a marketing ploy, because Xiaomi does make money from hardware, and quite a lot of it.

As much as 92% of Xiaomi’s 3.46 billion yuan profit (or $566 million US dollars) is from hardware. That’s profit, not revenue.

Let’s start with how Xiaomi’s CEO, Lei Jun, describes the company:

We’re actually an Internet company. We’ve already got a business in mobile phone hardware and we want to add to that an Internet platform. We can earn money from that, once it’s established. People just don’t get it. The mobile phone itself is only the carrier. Microsoft used to sell Windows in a box with a CD in it. Does that make Microsoft a paper box company? The box and the CD are only the carrier. If people don’t understand this, they can’t understand [Xiaomi].

Wouldn’t Microsoft be a paper box company if paper boxes actually generated 92% of its profit? If people cared more about the paper box than whatever’s inside?

An Internet company might be what Lei Jun wants Xiaomi to be one day, but right now it’s squarely a smartphone company.

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