The Syndicate

Where Angel Investors and Venture Capitalists Talk Early Stage Tech Startups

Roger Ver, Clay Collins and Paul Veradittakit The Future of Cryptocurrency Investing

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Panelists:

Roger Ver
Roger Ver, often dubbed Bitcoin Jesus is one of the earliest investors in and proponents of Bitcoin. He’s made hundreds of millions, if not billions off his investments and was also an early investor in bitcoin.com, blockchain.com, Zcash, BitPay and Kraken. He led a fork of Bitcoin, known as Bitcoin Cash to address scaling problems with Bitcoin’s infrastructure and Core team which created quite a stir.

Clay Collins
Clay Collins is one of the top internet marketers in the world. After leaving home at age 15 to start his first software company, Clay has gone on to cofound Leadpages and raise $38M. Clay is also the co-founder of Nomics, the API/analytics software for enterprise level crypto investors and runs the popular crypto podcast Flippening.

Paul Veradittakit
Paul Veradittakit is a Partner at Pantera Capital and focuses on the firm’s venture capital and hedge fund investments. Pantera Capital is the earliest and largest institutional investor in digital currencies and blockchain technologies, managing over $250M. Since joining in 2014, Paul has helped to launch the firm’s second venture fund and currency funds, executing over 30 investments. Paul also holds board seats, mentors a few accelerators, and advises startups. Prior to joining Pantera, Paul worked at Strive Capital as an Associate focusing on investments in the mobile space, including an early stage investment in App Annie.

 

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Blockchain vs The Big Four

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How Cryptocurrencies and Decentralization Affect Google, Amazon, Facebook and Apple

Originally posted on mattward.io.

In the eyes of “experts,” when it comes to blockchain, there is often no middle ground — it will either be boom or bust, nothing in between.

I for one have become a big proponent of blockchain technology, especially the crypto-economics used to jumpstart powerful network effects (more on this below).

The Cult-Like Religion of ICOs and End of Amazon?

But with so many opinions and noise floating around, I thought it would be beneficial to take a deep dive on the ramifications of blockchain technology as it relates to today’s top tech companies.

Will blockchain based alternatives unseat Google, Amazon, Facebook and Apple? After in-depth research into the business models, here is what I found…

A quick explanation

For those new to the space, blockchains are immutable (unchangeable), often trustless ledgers — creating digital scarcity and the possibly for much more. Due to their decentralized nature (run by a community vs a single entity) and their economic incentive models (tokens), they potentially represent a major threat to the status quo — at least that is what enthusiasts would have us believe (more on this later in article).

Basically this means that anything that was once done/stored on paper can now be accomplished and recorded on the blockchain, creating an infinite and unchangeable “paper” trail of ownership records, programmable contracts, financial information, personal data and much more.

And at least in theory, it would be owned by the users — something unheard of today.

The GAFA tech gods

As we enter 2018, we are entering into an era of unparalleled tech dominance. Companies like Google, Amazon, Facebook and Apple control more and more of our everyday lives — owning our data and everything around it. The inherent network effects and flywheels these companies built are unprecedented — both in their scope and ability to stave off competition.

In this connected world where things are constantly changing, I thought it could be beneficial to analyze/theorize blockchain based competitors to combat the tech giants of today — specifically to focus on what it would take to win.

Google

(For a in-depth analysis of Google’s core business model, strengths and weaknesses, future focuses and potential acquisitions, see this post)

The Big 4 – Part 2: The Future of Google – ThinkGrowth.org

Google is one of the most complicated companies today, with dozens of divisions and products that dominate our daily life.

We will skip most of these areas and instead focus on their primary business model — advertising.

1. Google Search

Google is the dominant search engine with over 77% of global searches going through Google (Source: NetMarketShare.com).

Despite the fact that 1.3B people (there are only 7.6B people globally) live behind China’s Firewall, Google still owns over ¾ of the search engine market. This dominance has fueled Google’s historic rise.

86.5% of Alphabet’s revenue comes from advertising, primarily search ads (Source: Statista).

2. Youtube

Youtube is the second largest search engine in the world, and easily the largest user generated video platform. Users upload an impossible 100 hours of content to Youtube every minute.

And Credit Suisse believes that in 2015, Youtube and Google Play accounted for ~15% of Google’s revenue (up from 4% in 2010), and forecasted to reach 24% by 2020.

Considering Google only paid $1.65B to acquire them in 2006, that is one hell of a deal.

3. AdSense — display advertising

The other piece of Google’s advertising supremacy is their partner network, AdSense. AdSense allows sites to monetize through Google’s advertising platform without worrying about the backend or finding advertisers. Instead Google handles everything and takes a between 32 and 49 percent of ad revenue generate (the rest going to publishers).

According to Investopedia, AdSense revenues accounted for $15.5B, ie 23% of Google’s total revenue in 2016.

Unfortunately advertising as a business focuses on eyeballs over quality, leading to much of the degradation and click baity titles of today. I don’t see the advertising model changing drastically anytime soon, meaning Google’s great success with AdSense is likely to continue (and grow).

How blockchain beats Google

Google’s business is all about eyeballs, attention and “supposed transparency.”

Their slogan of “don’t be evil” and mission to openly share information with the world are notably at odds.

This creates a scenario where Google’s platform is god and only those that play by his/her rules are allowed in the garden of Google.

But, crypto complicates things for Google.

Google’s dominance is primarily driven by the network effects of big data and AI combined with force of habit — a near perfect storm.

At the same time however, many in the tech community are worried about the role tech giants play in our lives, especially as it relates to selling our personal data.

And as we have seen, the tech community is taking some shots from politicians and users over their role in the recent US election.

1. Search

A blockchain based browser/search engine could solve the problem of misaligned incentives. I have started using DuckDuckGo (a privacy focused search engine) after my research for the book (The Big Four — How Today’s Tech Companies Monopolize the Future) revealed the extent of Google’s power and control over my life.

Rather than collecting my personal information to sell better ads, DuckDuckGo (DDG) only occasionally shows ads — and solely based on the actual search query. Imagine that.

NOTE: DuckDuckGo has only a 0.20% market share worldwide (Source — NetMarketShare)

DDG’s approach has major advantages for users, namely disintermediating value with personal data — but there are issues as well.

The reason Google is dominates is their data and AI expertise. They know us better than we know ourselves and are able to deliver better experiences as a result. It is the reason Antitrust action will almost never occur in the US — our definition of monopoly is based upon consumer price gouging and poor experiences — the opposite of what today’s top tech companies deliver.

You want the best results for you, and you want them now. Google delivers this.

A blockchain based search engine (BBSE) could theoretically win here. Combined with an identity coin like Citizen, a BBSE could use consumer data and preferences (without ever owning/controlling them) to display better, more personalized search results for users.

And if advertising was added, BBSE users would benefit as well, earning tokenized “commissions” in exchange for seeing the ads — removing the adversarial relationship that exists today.

Unfortunately I foresee this as being a long ways off. To change user behavior, you need a 5–10x better solut than the existing product. To get to the point where a BBSE which surpasses Google’s market share (currently 77–80%) will take years.

Most people too freely give up their data and information without reading the terms of service (myself included).

2. Video

Competing with Youtube presents many of the same challenges as tackling search. There is one major advantage however, the creators create the platform and value.

And because Youtube advertising isn’t effective for the vast majority of creators, this could be interesting.

“According to our analysis, the average CPM that can be expected from YouTube videos is between $0.50 and $5.00. That means that for every 1 million views of your videos, you can expect to make between $500 and $5,000.” — Monetize Pros

That is pretty horrible, especially considering podcast ads earns 5–20x higher CPMs (cost per 1000 impressions).

Because Youtube is so competitive and the ability to earn is limited, it makes logical sense that creators would cross-populate content. On a new blockchain based video platform (BBVP), there would be less competition and thus a greater percentage of attention.

If incentives were added for creators to create content and onboard audiences, the rewards suddenly get more interesting. The first mover advantages create inherent network effects and time urgency — bring over your subscribers before some other Youtuber does.

That said it would still take time, especially to bring sufficient eyeballs to make good money. But with strong enough token incentives and quality content, it seems safe to say that news would spread.

The question is how fast. Odds are a BBVP would take several years to mature. Youtube has over 100 hours of video uploaded every minute — that is a lot of evergreen, SEO rich content.

And because Google favors Youtube, it would be hard to steal search traffic.

NOTE: Steemit/Dtube is currently working on building a Youtube killer but has a long long way to go to create a credible threat. That said Steemit is one of the most active blockchain projects/cryptocurrencies with a market cap of $1.49B and processes over 1M transactions per day (820k/day as of July 2017) — things are happening!

3. Adsense

Advertising ruined the internet, and journalism. When the world switched from subscriptions to display ads, quality started to slide.

Today clickbait is king. More eyeballs and pageviews (hence those annoying freaking slideshows) has created a world where artificial attention is rewarded. We have seen the quality of journalism and content degrade — prioritizing provocative headlines, flashy thumbnails and accidentally promoting an asshole like Trump.

NOTE: Trump won because he created controversy, driving eyeballs (ie ad dollars) and thus rankings/ratings around the globe. Our disgust forced us to read and forced his image and message everywhere like an unescapable evil billboard.

A blockchain based publication model (BBPM) could in theory solve this. Medium does a decent job of illustrating the point (although not profitably), by allowing users to upvote/Clap for articles they enjoy (up to 50 Claps). A similar model could redistribute dollars to the sites and publications we appreciate most.

And there are companies/organizations trying to do just that, both with and without blockchains. This is a hard proposition though because the majority don’t understand the power/risk of personal information.

Most people are fine with “being the product” and profiting (receiving free content/access) for their contribution to the system.

In my opinion the one and only way a blockchain based answer to Adsense could succeed would be tokenized incentives for early adopters (users and publishers) to the system where Adsense ads had an if/then statement attached. If user is BBPM member, no ads. If not then display ads.

In order to participate in the BBPM, publishers could jointly collude to “monopolize” the market, creating a linearly sliding scale of advertising intrusiveness across all web properties to encourage laggards to convert (ie overtime sites across the internet become less and less usable and more and more ads/spammy until readers joined the BBPM)

That said, I don’t see a “mafia-like” approach like this being adopted or believe change can happen in under a generation (hard to go from free to paid and be okay with it).

Hopefully I kids help kill clickbait…

Amazon

The company Bezos built to sell books online is now arguably the most dominant and diversified company on earth, and the odds on favorite to crack the $1T market cap first.

This seems to be the consensus, at least among technologists. But the majority are often very wrong, so let’s dive deeper (see the article below for a more in-depth analysis of Amazon’s future).

The Big 4 — Part One: Amazon — The Company that Consumes the World

Understanding the empire

Amazon’s business is made up of five primary divisions: Amazon.com, AWS, Alexa, Whole Foods Market and Amazon Prime.

Each on its own would be an impressive business. Combined they create the world’s largest flywheel.

I don’t believe Alexa, Whole Foods or Amazon Prime have any risk of blockchain based disruption (at least in the foreseeable future). The nature of these business models isn’t easily decentralized.

And while decentralized AI/compute could be an interesting component to building an Alexa killer, I believe the bulk of the effort to be merging multiple technologies and disciplines (voice, AI, APIs, hardware) which seem highly unlikely in the foreseeable future

1. Amazon.com

Amazon’s is the most monopolistic and well positioned marketplace the Western world has ever seen. Last year they did $136B in revenue with double digit growth every year.

2017 estimates show a staggering 44% of US ecommerce occurred on Amazon.com (Source: Recode). And Amazon has been growing at least 13% YoY (year-over-year) for each of the last 5 years. It isn’t just a monopoly, it is accelerating.

But there is another layer to unpack — Amazon Basics, where Amazon analyzes 3rd party seller data and copies the best performing products.

Ultimately Amazon wants to replace ALL 3rd party sellers/products with Amazon Basics versions. Amazon wants to (and will) own the customer, and every ounce of margin that comes with it.

Marketplaces die when the creator becomes the competitor.

2. Amazon Web Services (AWS)

(NOTE: I think Amazon should spinout AWS before regulators start antitrust actions)

Amazon built AWS for their marketplace. They needed the ability to host images and information for Amazon.com and Bezos being Bezos, built the product in a modular fashion.

As AWS grew, Amazon constantly cut prices to crush competition, making AWS the easy choice.

“Your margin is my opportunity.” — Jeff Bezos

Today ~42% of the web is powered by AWS. That is more than double Microsoft, Google and IBM (combined). Yet given the easy to use system and affordable pricing, it makes sense.

And growth isn’t slowing, quite the opposite actually. AWS accounts for 10% of Amazon’s overall revenue, with $4.6B in Q3 of 2017 (up 42% over last year) and $1.2B in profit (up 36% over last year).

Source: GeekWire

Amazon owns the infrastructure the majority of the internet is built on, can decentralization change that?

How blockchain beats Amazon

I have my money on Amazon. They are the best positioned of the tech giants to own the future.

That said, blockchain can create challenges for Bezos’ beast, it depends how it is implemented, incentivized and evolves.

1. Ecommerce

While Amazon owns ecommerce today, there are many projects focused on building decentralized marketplaces.

Most miss the point though. The issue isn’t Amazon’s ~15%+ transaction fee, that is par for the course and the cost of doing business. And besides, consumers could care less how much sellers pay in fees, it doesn’t affect them.

(Plus 10% is a fraction of the 5–10x improvement needed to switch — it wouldn’t be meaningful enough for sellers to abandon Amazon entirely).

Yes, sellers care about fees, but what is more important is control. As referenced previously, Amazon sellers (like myself previously — more on my backstory here) play on Amazon’s playground.

You never knew if/when you will be uninvited — or Amazon could copy your product (Amazon Basics) and cut you out.

This creates a constant fear of suspension. If 80%+ of your business is on Amazon, what happens if you lose access?

A decentralized marketplace NEEDS to be built first and foremost by sellers. That is doable in my opinion.

Most sellers would do ANYTHING to control their company’s destiny. If that means promoting a blockchain based ecommerce platform (BBEP), you can bet your ass they would — even without tokenized incentives. Adding incentives further accelerates adoption among sellers.

But buyers is another story. Here tokenized “discounts” or “bonuses” could be used to lure buyers to the platform.

The challenge is that most sellers cannot easily access their customer base on Amazon. And to contact them and try to bring them off-Amazon can result in suspension.

Plus sellers wouldn’t want to send their own customers (ie from their standalone site or email list) to an unproven, competitive marketplace, unless it was as an affiliate for other products.

Here an Amazon Affiliates type program would be necessary (ie: I sell X and recommend Y related products to past customers on the BBEP, earning tokens for each signup/sale).

This could also be employed for heavily incentivized buyer-to-buyer and publisher-to-buyer referral programs to get customers “in-the-door.” If sufficient supply and trust was built, the platform would start to take off, with crypto-economics driving adoption. If the user experience is inferior however, this would take a lot of time.

Plus consider the options. If Amazon has 100x the product selection, why would consumers use a BBEP? You need better prices or a huge token incentivizes initially — or today’s massive “speculative-esque” belief in the business and team to drive token appreciation.

2. File storage & web services

To be honest, decentralized file storage seems like overkill for many applications. With dirt cheap cheap AWS/S3 file storage, you need a compelling case to justify relatively unproven blockchain based web services (BBWS).

Even the CIA (and 2000 other US government organizations) prefer AWS to their own systems — the security is superior and the price is unbeatable.

Currently the only use case that seems valuable is decentralized file storage for other decentralized apps and protocols. When full decentralization is necessary (or wanted), it makes sense to use a service like Sia or Storj.

But even then, it will take time to scale the eco-system, ie primary customer base. Without enough dApp traction, who will blockchain based storage systems (BBSS) serve? This creates a bit of a chicken-egg scenario…

Storj claims a fully decentralized storage system where users are able to buy/rent harddrive space autonomously will make that storages cost 10–100x cheaper than centralized solutions.

I am a bit skeptical. To store 1T of data on Storj today costs $15/mo plus additional bandwidth fees (for downloads). Google Drive is a flat $10 for that same Terrabyte (plus comes with all the additional functionality of Google Docs etc…)

Compared to AWS S3, Storj does better. While AWS/S3 is $0.023/GB/mo, Storj is only $0.015/GB/mo. But that is only a 34% improvement, well shy of the 5–10x improvement typically needed to switch products/service providers.

That said, some of the top VCs like Union Square Ventures, Sequoia Capital and Andressen Horowitz all invested in Filecoin so maybe I am totally wrong here.

A BBSS is the simplest blockchain model to understand. Users are easily incentivized to provide storage space and customers/enterprises can save a little money on storage.

But usually when an opportunity is obvious, it isn’t a great opportunity and becomes pretty competitive, so only time will tell…

Facebook

As of June 2017, Facebook hit an unprecedented 2B MAUs (monthly active users). That is nearly ⅓ of the population.

While there are several divisions within Facebook (thanks to a few successful acquisitions), Facebook is at its core a social media and communications company. We will focus on Facebook.com, Instagram and Whatsapp/Facebook Messenger as these are their three primary businesses and those most ripe for blockchain disruption.

(For a deeper dive into Facebook and the future of the company, see this longform breakdown and analysis)

The Big 4 – Part 3: The Future of Facebook – Zuckerberg’s Friends with Benefits

1. Facebook.com

Facebook has over 2B monthly active users — yet despite the massive market penetration, they are still growing 16% year-over-year. How is that possible?

Source: TechCrunch

This is due in large part to the brilliant leadership of Mark Zuckerberg where Facebook bet the farm on mobile — it worked. They were able to go from ~135M MAUs (mobile only) in early-mid 2012 to over 1.15B in Q4 of 2016.

The lionshare of growth has been mobile advertising — with mobile now accounting for 86% of their revenue — better than ANYONE expected.

Today digital advertising is a duopoly, with Google and Facebook attracting between 57–84% of global digital (outside of China) depending on source.(Source — FT.com, Recode).

Scarier still is the fact that the duopoly is taking >99% of new growth is digital ad spend (as of Q3 2016).

Source: Fortune

2. Instagram

Facebook acquired Instagram in 2012 for a $1B for a pre-revenue company with 30M users (formed only 2 years prior).

After waiting 3 years to monetize (to focus on growth), Instagram turned on ads and became a cash cow.

And with 100M new MAUs every 6 months, Instagram is exploding in popularity. Copying Snapchat Stories certainly helped (which Zuck was 100% happy to rip — pixel by pixel).

NOTE: Snap’s stock has dropped 50% since the ill timed (controversial and greedy) IPO.

Plus Instagram addresses a different market (millennials) and use case than the Facebook— building their advertising base even larger.

Source: eMarketer

3. Whatsapp and Facebook Messenger

NOTE: I refuse to consider Facebook messenger a messaging app as it is just the messaging feature of Facebook — thus messages from Facebook come through and grossly distort the usage numbers. Either way Whatsapp and Facebook Messenger are the two largest “messaging apps” worldwide.

Facebook bought Whatsapp in February of 2014 for a whopping $19B, which again seemed absurd.

But Facebook’s business has ALWAYS been built around attention, eyeballs and waiting to monetize. And if Instagram is any indication, they know what they are doing.

Stern Agee, the financial services company estimates Whatsapp could be generating close to $5B in revenue with over 2.3B users by 2023. I would go bigger.

Due to Whatsapp’s more private, intimate nature, it creates growth opportunities that an outward facing site like Facebook and to some extent Instagram cannot match. Essentially even if/as people become more reserved about social media, sharing and controlling their data, Whatsapp can still win — rigging the game in Facebook’s favor.

How blockchain beats Facebook

Of all the Big Four, blockchain poses the largest threat to Facebook. Facebook’s business is built upon attention, advertising and collecting user data.

A network out of Harvard originally built for college hookups is now worth $524B — and users never saw a dime. They see quite a few ads though.

1. Facebook.com

A decentralized version of Facebook seems obvious at this point. In a social ecosystem without a centralized party, algorithms can be optimized for user happiness, rather than engagement.

The biggest problem with Facebook (and Google) is that they are advertising based businesses. Facebook makes their money on impressions, making it more and more user hostile over time to drive ad revenues.

From a purely economic standpoint, this means Zuck wants users on Facebook as close to 24 hrs a day as humanly possible. Obviously this isn’t sustainable, and studies show social media usage (especially Facebook) have a net negative impacts on happiness. In the long term this is not sustainable for Facebook — the more you use Facebook, the worse you feel.

Russian election hacking and Jew hate based targeting aside, Facebook could have a serious problem on its hands if more and more users start to churn — which appears to be the case.

Why else would Facebook be actively trying to reduce user addiction?

Enter a blockchain based competitor…

The token incentive structure should be pretty straightforward. Like Airbnb’s refer a friend and you both get $10 credit, a blockchain based social network (BBSN) could rewards users with BBSN tokens for referrals, creating popular content, posting daily etc…

Tokens could represent virtual economies in the network (buying/selling stickers, access to certain bonuses, or even upvote/downvote micro payments) or they could be positioned as advertising prerequisites, where users could “sell” their attention or engagement to advertisers.

It seems highly likely a BBSN will pop up to compete with Facebook. The question is, will tokenized incentives be enough to overcome Facebook’s enormous network effect? I believe yes, but think it will take at least ½ a generation.

2. Instagram

Same as above, plus with the added bonus of influencers. Because Instagram is more focused on one-to-many communication, users that build followings could sell access tokens to advertisers looking to promote products in a more transparent and simple fashion.

Although outside of the target market here, I would give a blockchain based social photo site (BBSPS) a decent chance at gaining significant traction

3. Whatsapp

The odds of a blockchain based messaging app (BBMA) taking off are pretty slim. There are so many messaging apps, why build a blockchain based one? Most messaging apps are encrypted anyways so the trust and security level is relatively high.

The big challenge however is scale. As of July 2017, there were over 55B Whatsapp messages sent every day (Source — AndroidPolice).

Crypto kitties crashed Ethereum’s network, and that was only a few hundred thousand “transactions”.

But cryptocurrencies built on a centralized service is a different story.

The popular messaging app Kik just completed a successful ICO, raising $98M to build a “KIN” currency into their app. With 300M users as of May 2016, it is no surprise that Kik had to quickly switch off ethereum’s net to handle their volume.

Rumors are circulating that Facebook may be looking to (or starting to) implement Litecoin for p2p payments. This would be a landmark moment not just for Facebook but for cryptocurrency — bringing decentralized, non-governmental payments to the masses.

If this is the case, Facebook could set itself up as the dominant p2p payment system. Here is why.

The banking and financial services infrastructure is old, outdated and expensive. Even newer, leaner companies like Paypal charge $0.30 + 2.9% on every transaction they process. And Venmo is in the process of starting to charge as well.

And while these may seem tiny, especially compared to traditional banking, cryptocurrencies unlock a totally new dimension of money — one that approach 0% fees with no middlemen or hoops to jump through.

As we have seen, the peer-to-peer payments market is exploding, forecasted to reach $86B in 2018 in the US alone. And with global mobile payments expected to exceed $930B, this opportunity dwarfs the digital advertising space.

If Facebook goes big on implementing either an established cryptocurrency or creating FBcoin, they could own the messaging and p2p payments spaces.

Apple

Apple is the most valuable company and arguably the most beloved brand worldwide.

It is also a money printing machine to the tune of $215B in 2016. And that was a down year…

(Here’s the full scoop on Apple. Enjoy)

The Big 4 – Part 4: The Future of Apple – ThinkGrowth.org

The iPhone and iOS

The iPhone makes up the lionshare of Apple’s revenue, 69.4% of (Q1 2017).

And if we are being honest, the iPhone is the connection with consumers — the driver of iTunes, the App Store, AirPods, accessories… pretty much the whole shabang.

This creates potential potential problems going forward…

How blockchain beats Apple

Of all the tech giants, Apple is the least threatened by blockchain because ~80% of revenue comes from hardware.

That said, there could be issues with decentralized apps and token economies inside Apple’s closed ecosystem. The largest implications center around iOS and the App Store.

iOS + the App Store

Apple is the antithesis of decentralization. A future of dApps built on a decentralized blockchain could create a nightmare scenario for Apple.

The most obvious issue is monetization. How could Apple justify charging users to download freely distributed, open-source apps?

I don’t see that ending well. And the App Store is incredibly valuable for Apple, bringing in $8.6B per year.

It has also given iOS a big leg up on Android, bringing in 75% more revenue than Google Play despite difference in downloads.

Source: MacRumors

But in a blockchain based future that revenue probably goes away.

More importantly however, Apple isn’t friendly with outsiders — they love control. In an open-source world, would Apple become more developer and user-friendly? I do not know.

Given the fact that Apple slows down your old iPhone when they launch a new one seems to indicate they are milking the smartphone craze for all it is worth.

Consumer Hardware’s a Horrible Business Model, So Apple Slows Down Your iPhone
Hardware is hard. Consumer hardware is worse – so Apple screws customers to force upgrades, surprise surprise. Here’s…thinkgrowth.org

And up until recently, consumers were also lied to concerning the “upgradeability” of iPhone parts. No one knew iPhone batteries were interchangeable…

I cannot see a company so focused on secrecy adapting well to blockchain based applications and transparency. That said, Apple has better security than their Android counterparts which will be increasingly important as consumers store cryptographic assets directly on their mobile devices.

If Apple adapts, this could be a big win. If not, it could accelerate their undoing — especially because ALMOST everything depends on the iPhone ecosystem.

Closing thoughts

Blockchain technology is creating an interesting and ever changing world. While we have seen hundreds of ICOs promising everything under the sun, little has actually been accomplished or implemented to date. And though I am bullish on blockchain in the long run, I believe we are headed for a coming crypto winter where teams build, markets (and market caps) crash and only the strong survive.

Thinning the herd will benefit the community, forging stronger teams and bonds among blockchain devs and the ecosystem at large.

The big questions to be answered are timeline and scale. Crypto enthusiasts claim Bitcoin and blockchain are the best thing since sliced bread, but actions speak louder than words.

What are your thoughts? Which tech companies are you betting on and where do you see dApps, tokenization and blockchain based tech taking over the world?

Would love to hear predictions and educated guesses in the comments section below.

Which areas of the economy will be most impacted in the coming 5 years? 10 years?

Originally posted on mattward.io.

Want Results? Just Tell People What They Want to Hear

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Originally posted on mattward.io

There are two ways to interpret that: outrage and intrigue. The best headlines do both.

The world is a game of selling, especially in business. VCs sell money to founders, founders sell dreams to investors, businesses sell to clients, and on and on.

Everyone is constantly selling, but most people do this wrong. They think about themselves first and others second.

People are inherently self-centered, on both sides of the equation. Appealing to your own interests first is a surefire way to lose a prospect or potential investor.

Stop talking about yourself

The focus should be on the target. Consider dating? The guy that is always praising himself and dominating the conversation doesn’t get the girl. The beauty of any relationship (not just personal), is that it is two-sided.

The best give before they take. Being genuinely interested in someone else is rare these days. Taking time to listen and try to help is even more uncommon.

And the best founders, investors, advisors… the best people in EVERY field understand this. It isn’t about talking. It is about listening and acting.

Richard Branson does very little in his businesses. Instead he asks key employees how things are going and how he can help. Then rather than doing the work himself, he finds the one or two people perfectly suited to assist — he is a facilitator, and employees love him for it.

The best investors and CEOs do the same. They delegate power and help their team win, anyway they can. The spotlight isn’t important, the results are.

Just implementing that one change can have a dramatic impact on your life.

Headspace

Have you ever read Dale Carnegie’s How to Win Friends and Influence People? If not, you should (listen here)

To summarize this potent weapon,  the best way to get what you want is to position it as what other people want.

There is no better sales advice. Period.

This mindset alone will transform your interactions with people, especially in business. Think about their motivations. Think about their goals and desires.What drives this person?

In essence, this is first principle thinking applied to individuals.

Understanding VCs

An example: venture capitalists. What do VCs want? They want returns. They want big exits. They want liquidity.

But why do they want all that? Compensation of course. VCs are paid on a 2 and 20 model, earning 2% management fees per year plus 20% of the carry.

View at Medium.com

For VCs with large funds, management fees become incredibly meaningful. For micro-VCs, the majority of their cash comes as carry.

Immediately that reveals several important things:

  1. Most VCs want to increase fund size (to increase management fees)
  2. Smaller VCs are more incentivized to focus on success, and individual companies

But there are other incentives at play as well. In addition to reputation, which allows VCs to raise larger and larger funds and attract top startups, there is a major ego play as well.

This plays out both in terms of fund size, portfolio track record and fund ROIs.

But even some firms are semi-competitive with their other GPs. There can be an “I told you so” culture, both for the winners and the losers. And in a high stakes game of wealth and reputation, these things matter.

Some firms even compensate GPs based on the startups they source. This seems both smart and short-sighted. By incentivizing partners based on “their” startups, VCs are more likely to favor their “own portfolio” companies over those of other GPs.

Wouldn’t this create conflicts in allocating funding and resources…?

In a supposedly team sport, this can complicate things.

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Applying 1st principle thinking

Understanding an individual’s motivation is the best way to sell. Seeing things through the customer’s eyes allows founders to find the logic hooks that work and result in sales. And in a game like this, aligning incentivizes is always important.

This type of thinking can lead to radically new business models and transformational companies. This is the driving force behind the direct to consumer companies of today. Companies like Casper spotted issues in a existing market and by understanding the wants and desires of the customers, created a new, category defining company that is disrupting the common mattress manufacturers everywhere.

The Broken Business of Ecommerce and Why Your Startup Won’t Be The Next Casper

The Good and the bad

The ability to manipulate is both incredibly powerful and dangerous. And the ethics question is on display today (look to social media’s struggle on Capitol Hill).

Here is hard to judge however. What determines right and wrong when it comes to business?

McDonald’s convinced America that fast food and french fries were a fun family meal. Was that wrong? The consequences for the country’s healthcare is certainly an obvious issue. And as waistlines bulge and American’s eat themselves further and further into obesity, the problem becomes more and more prevalent.

But it is more complicated than that. Poorer families cannot afford healthy options. Few easy meals are cheaper than McDonalds. And when you’re struggling to put food on the table, anything is better than nothing right?

It gets harder when you consider shareholders. Since January 1970, McDonald’s stock price has soared over 113,700%. Yes, you read that number right. Over 1000x, an ROI most venture capitalists dream of

Source: MacroTrends.net, McDonald’s Historical Stock Price

McDonald’s has created wealth for many and employed millions, likely tens of millions. Their employee count today stands at ~375k people.

The company that brainwashed the burger into America certainly understood their customers, and took full advantage of this to build a worldwide, universally recognizable chain and brand.

Think different

What is the one thing every person grows up believing, even if they are afraid to acknowledge that belief?

I am special.

This is the last childhood dream to die. To our graves, we take with us the notion of us. There is only one me.

Apple understood and artfully crafted a marketing campaign around individuality. They appealed to a certain subset of the market, the creators and innovator — ie those most in touch with their inner child.

Perhaps without realizing or meaning to, Apple stumbled upon the driving force behind all of us, creatives especially. This sense of individual and difference drives Apple to this day (plus a healthy dose of wanting to be cool and sex appeal).

Ever notice how Apple fans always say “my iPhone”, “my Mac”, “my Airpods” etc… And non-Apple folks just say my phone, my laptop, my headphones…

That is no mistake.

The brand is the differentiation.

People buy the products to make them special, to make them different.

Because in the 80s, 90s and even 2000s, Apple was different. Apple users were early adopters, hipsters, trendy, cool… they were all the things the majority was not. That sense of individuality and rebellion drives the brand today.

Closing thoughts

I am not advocating lying anywhere in this article. Instead understand what individuals want to hear, and frame your product and pitch in terms of how it helps them reach their goals. Do this right and people will say

“Shut up and take my money”

Conversely, fail here and your business is likely to go bust… sales sell.

I considered including a sales and copywriting guide at the end of this post but opted not to. The art of copywriting can take pages and the concepts, while basic, often do best with examples. I will save this for a future post.

Would love to hear your thoughts on the article. I know many people preach these concepts, but how often do you actually think this through before sending an email?

It isn’t about you. It is 100% about the customer.

Originally posted on mattward.io

Facebook’s Mantra: “Join us or we will copy you” – Platforms, Marketplaces and Playing with Fires

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Originally posted on mattward.io

The internet has changed.

The world of the walled garden is here.

This creates interesting dynamics, problems and opportunities for startups. It is exciting, and terrifying. Let me explain.

My background is ecommerce and Amazon. In 2015 I invested ~$8k in product and managed to scale my “startup” to a 7 figure exit at the end of year one.

If you are scratching your heads, you should be. Building and flipping a business in a year is dumb. But my goal was just to make some quick cash selling products online, primarily via Amazon.

It worked. And through the process I built a top 3 Amazon podcast, met hundreds of FBAers (Amazon sellers), and helped 1000s build businesses on Amazon.

As I grew, I started to wisen up. What started as a personal challenge suddenly become scary. Let me explain.

Platforms are like distribution on steroids

Platforms and marketplaces like Amazon, Android and the App Store are unparalleled acquisition engines. Never before in the history of mankind could companies, let alone startups access this scale and breadth of consumer.

The world is literally there for taking.

Starting a hardware startup? Kickstarter can help.

Building an ecommerce app? Shopify’s add-on store speeds its up.

Not a developer but got a great idea? There are even UI and chatbot based platforms for creating apps.

The power and resources at founders’ fingertips are unprecedented.

And so is the speed at which startups scale. Zynga.org was a rocketship, riding on Facebook’s coattails. The social network grew and viralized distribution, allowing Marc Pincus gaming company to ~10x in under two years. 260M+ MAUs (monthly active users). That is unheard of in gaming, at least it was.

In the world of platforms, this is starting to become normalized. But there is a huge problem.

Platforms are great, until they aren’t

“Zynga, more than any other company, took advantage and built an incredible gaming business directly through the Facebook Graph API. Over time, Facebook began making changes to how developers could interact with specific data and just as quickly as Zynga grew, they fell — and fell far. There are many companies, big and small, that have suffered a similar demise. ”— Ben Schippers: TechCrunch

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And I knew of sellers who shutdown overnight, with no warning. Amazon’s a double-edged sword. All platforms and marketplaces are. When it is good, it is great. But playing on some else’s playground often ends in tears.

There are two ways this happens:

rules/algorithm changes
copy/paste competitors
Both kill startups.

The age of the algorithm

The first and most obvious example would be Google. Google indexed the world’s information and built the leading search browser, with 77–80% of worldwide searches. That makes Google powerful. SEO and organic search make and break businesses. And throughout their history, Google has done just that.

The infamous Panda updates broke the backs of many businesses. Imagine adding a wall around a local mall. The number of visitors drops drastically. Businesses collapse and the mall defaults on the mortgage.

Those are the metaphorical examples of a small algorithm change.

And they happen, even with the best of intentions. Google wanted to clean up search. They saw marketers manipulating results, creating backlinks and gaming the system to get more visitors.

So Google fights back, adding penalties for overly specific and frequent backlinks. These hurt many sites, not just the grey and black hat players. And entrepreneurs (and mom and pop sites) had NO warning and NO recourse.

Even Ebay lost 80% of it is organic search thanks to Google’s Panda 4.0 updates. This was 2014. This can happen to anyone.

But blacklisting is even worse

While losing ground in search is bad, disappearing entirely is game over. If you bet your business on a platform or marketplace, the powers that be can kick you off anytime, even accidentally.

Now you would think issues like these could be sorted out. Reasonable discussions usually work, right?

The problem with platforms is that most are too big to care.

Amazon could ban a $10M seller, and that is only 0.007% of its overall sales. That is chump change for Bezos. The same is true of Apple, Google, or Facebook. What % of their profit comes from your product?
When you are dealing with mega corporations, they don’t care and it is nearly impossible to get actual support — it is all automated or outsourced.

(Pro Tip: If you do find yourself in this situation, call customer service, not the business lines. Most platforms and marketplaces care WAY more about customer than sellers. I have pretended to be a customer just to get the right people on the phone — works much better.)

Control + V

Startups that threaten incumbents get punished. Facebook is the worst offender.

“It was common knowledge, even back then, that Facebook would just approach a company and say something to the effect of, ‘Join us or we will copy you,’” — Naveen Selvadurai — Foursquare Co-Founder

And look at Instagram ripping Snapchat Stories, pixel for pixel. Zuckerberg offered to buy Snap for $3B. Evan Spiegel said no. Anyone looked at Snap’s growth charts lately?

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And the examples go on and on and on.

Platforms are walled gardens of data. When building your product to leverage a platform, you are often handing away the most valuable part — the data. Facebook’s OpenGraph API let’s Facebook track features and user behavior. They see what works and follow suit.

And Amazon just uses 3rd party sellers to test products before creating Amazon Basics versions of the best sellers (for more on how Amazon is killing ecommerce, see this post).

Remember, no one has your back. As a startup, it is your job to realize most “partners” are looking to screw you. They use you and lose you once your value is dried up.

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Failure to plan is planning to fail

Keep this in mind:

Who are your serving?
How are you reaching them?
What are the choke points in your business?
Do you have any leverage?

Moats are the most important part of any business. Any startup without a moat is ultimately overrun. Without defensibility, you cannot protect yourself and build your business.

And there are many ways to build sustainable moats — the most common being: product, brand, IP, data, and network effects. Each add buffers to competition. But most do not work for the majority of startups. (For more on the 5 types of network effects and how to hack them, see this post.)

But platforms are powerful launching pads

The point of this article isn’t to discourage startups. It isn’t to avoid platforms either. The goal is to understand the game, their game and your end game.

How do you take advantage of platforms, and not the other way around?

There are lots of strategies — most involve stealing/acquiring customers from a platform.

An example: With Amazon there are hundreds of millions of buyers. You can build a massive business only ever serving Amazon. It is inherently risky though — all your eggs are in one basket.

And as an Amazon seller, I was constantly looking to bring buyers back to MY SITE, not Amazon. I built a Shopify store, added couponed inserts into product packaging and hoped buyers would bite. Some did.

(NOTE: This was TOTALLY against Amazon’s rules. I gambled and got lucky. It doesn’t always go so well. But with regard to risk, what choice did I have?)

And Amazon is a great way to get sales quickly. But I liken it to fast food — great in the short term but with long term consequences.

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Building back-up plans

Entrepreneurs need to think this through. What is your backup? How are you building towards that today?

For us it was Shopify and email. Acquiring emails let us remarket and upsell customers, increasing LTV (lifetime value of customer).

For you it will be different. For apps, push notifications are great. Proprietary data is even better. With content and social, it is all about emails, not followers.

Every medium has its metric.

The question to ask: if your channel disappeared overnight, what do you do? The answer needs to be acted on now. Diversification and growth is the name of the game.

When investors see omni-channel startups, red flags go up. One small change and everything is gone. For inherently risky startup investments, that is usually a non-starter.

There are so many things that can and will go wrong with a startup. Raising money is hard. Building a team is hard. Shipping and selling product is hard. It is a hard hard road. And fundraising is a constant risk-reward game. Every round is less risky, with success is becoming more and more likely — reflected in increasing valuations.

Prioritizing acquisition channels

The core problem comes down to acquiring customers. As a business, how do you do it? And better yet, where should you focus?

There are so many ways to acquire customers, each with strengths and weaknesses. And as an early stage startup, you cannot and should not try do everything.

The best strategy I have seen is a tiered approach. Focus on one channel, perfect that channel and ignore everything else. Once paid ads, SEO or XYZ platform is starting to drive real growth, scale that up.

As the team grows (typically with every round of funding) the focus should shift to diversification. Keep doing what is working but begin exploring new channels. Stick with what you know here. If you have completely exhausted FB ads, look at Google, Pinterest and Instagram ads. Many of the same skills will apply, allowing you to leverage learnings, breakeven and scale faster.

The same is true for social. Built a large, responsive Pinterest following? It is probably pretty doable to replicate on Instagram. See superb results blogging? Try converting top posts to standalone Youtube videos, infographics or SlideShare presentations — all of these amplify your assets.

I for one listed products on Ebay, Walmart and Jet.com to reduce dependence on Amazon. And to some extent it worked. At our peak, 15% of sales came via off Amazon channels.

At the same time the strategy was flawed. Rather than slowly expanding and optimizing for a channel, I sprayed and prayed. We got our products on all marketplaces quickly but didn’t have the resources or expertise to maximize the channel.

New acquisition techniques

In many situations, tangential expansion doesn’t apply. Once you have exhausted your skill set and channel, look to expand into inverse acquisition channels — ie channels with differing time and CAC requirements. For example: paid ads are almost expensive and instantaneous whereas SEO is basically free but incredibly slow.

If you can balance paid and free acquisition models, CAC slowly decreases — and the business becomes more sustainable.

And whereas paid traffic can be manufactured overnight, organic results take time. Layering these approaches allows the best of both worlds: early acquisition and testing while still building long term sustainability.

(Here are more acquisition strategies with in-depth looks at strengths and weaknesses of each, if you are interested.)

https://thesyndicate.vc/start-series-fundable-saas-business%e2%80%8a-%e2%80%8aa-15-page-guide-acquiring-customers-reducing-churn/

Back to the platforms

Building on platforms is like playing with fire. Startups however have to live off risk. Cash is king and companies ONLY die when they run out of money.

To both build towards profitability and hit metrics needed for follow on funding, startups should seriously consider leveraging platforms. Marketplaces make customers accessible by aggregating demand. They win as markets grow and can help startups take off with little rocket fuel.

But with any greedy, unpredictable partner, startups should always watch their back. This dance is known as The Art of War. Founders that play it well win big, but the majority fail. Between increased competition, external pressures and the threat of extinction, marketplaces should never be the end game.

Startups need sustainable, proprietary ways to acquire and retain customers. And it almost always comes back to business moats.

But we have danced around the topic enough. It is time to share your thoughts on the article and the future of platforms and marketplaces. If you were a startup founder, would you touch Facebook, Amazon, Apple, or Google? Any, All? Why or why not?

What do you think, is the risk worth the reward?

Originally posted on mattward.io

The Future of Security Tokens and ICO — Roundtable with Polymath, StartEngine and Corl

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Are you interested in the future of blockchain, cryptocurrency and token offerings?


Panelists:

Howard Marks

Howard Marks is the founder and co-chair of StartEngine, Los Angeles’ largest startup accelerator and more recently a top contender in the crowdfunding and cryptocurrency space.

He was the founder and CEO of Acclaim Games (now owned by Disney), and the co-Founder of Activision and Chairman of Activision Studios (1991–1997).

In 1991, Marks and a partner transformed ailing video game giant Activision into a $14B market cap video game industry leader.

Graeme Moore

Graeme Moore is an exec and VP of Marketing at Polymath, the company looking to disrupt the securities industry by giving businesses access to the blockchain, smart contracts and token creation technology. Prior to Polymath, Graeme was involved in the investment, asset management and business development space.

Sam Kawtharani

Sam Kawtharani is the co-Founder & CEO of Corl, the world’s first revenue-sharing token designed to support and participate in the growth of emerging companies. Corl is disrupting and democratizing startup/SMB funding, creating a faster, easier, cheaper source of non-dilutive growth capital for entrepreneurs while opening up access to a previously illiquid, hard to access asset class.

Sam has close to a decade of experience in the fintech, payments and marketplace lending space, from startup to all the way IPO. He most recently served as the Head of Product at IOU Financial, a leading fintech SMB marketplace lender where he helped originate over $500mm in loans across the United States & Canada.

Topics:

  • The state of ICO fundraising
  • The difference between security and utilities tokens (especially as it relates to regulators and the SEC)
  • Why Polymath, StartEngine and many others believe security tokens are the future
  • How Corl’s equity token offering works
  • The importance of investor accreditation
  • Rules to look out for when fundraising
  • And much much more

Network Effects, Unstoppable Monopolies and The End of Innovation

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Originally posted on mattward.io

With great power comes great profit, and then even the innovative get fat and lazy. This was the paradigm pre 2000s. Rome rose and fell. Microsoft’s monopoly was cracked. Kodak created the digital camera and kept it from customers.

The bigger they are, the harder they fall and the harder they fight. But historically failure was inevitable — no man, country or company ever reigned supreme in perpetuity. Chaos and innovation simply would not allow it.

Fast forward to today. We are entering a world where this may no longer be the case. The companies of today are infinitely more powerful and resourceful than the empires and industry moguls of old.

Established, valuable networks are nearly impossible to create, replicate or overcome. A 10% upgrade isn’t enough, you need 10x.

Historically this was hard but inevitable. New changes and technologies propelled era after era out of existence at rapidly increasing rates (recently much in relation to Moore’s Law).

Today is different

Unlike even 10–15 years ago, tech giants are creating the bulk of the wealth and innovation in the economy. Companies like Facebook, Google and Amazon have more money than most small nations and more control than any one government, should they so choose.

These giants don’t just fight competition, they destroy it. The leaders of today have learned the lessons of old and acquire promising startups often and early to protect their own ass. They have the most talent, the most money, the most data and no moral quandries with flat out copying competitors.

Copy and paste

In an era where user experience is everything and data is king, how can startups compete? US Anti Trust laws are dated. They define monopolies not by their power and control, but by negative impacts (specifically price gouging) experienced by customers.

When you search for dinner and Google shows you your favorite restaurants, knows your preferences, suggests a great vegan cafe and books you a table, how can consumers complain. It is seamless, “Google just gets me.”

But Google scraped Yelp’s database, showed reviews, cloned an OpenTableand booked a place, all without leaving your search browser. And guess what, the government does not care.

Let’s not even start on Snapchat and Instagram. Snap’s growth has flatlined and Instagram appears unstoppable.

Try it before you buy it

Almost all giants have all been accused of Microsoft like monopolistic tendencies. They lure startups in with talks of acquisition, pick apart the tech, pass on the deal and build it in-house. Then thanks to network effects and enormous, engaged user bases, Facebook, Amazon and Google can deploy and dominate the market — just ask DAVE MORIN.

And when Google and Facebook control the channels where startups acquire customers, a small tweak to the algorithm ensures their competitors drift in obscurity.

Sounds like anti-trust is in order. But…

More powerful than govt

And this is why we find ourselves attending congressional hearings on the alarming power of tech and its ability to influence elections (on a sidenote, America has aggressively influenced dozens if not 100s of elections worldwide so it is hard to really whine about being on the receiving side).

Source: Kremlin Press Page

But these hearings and debates are a joke. The regulators assigned do not understand the underlying issue — network effects and user experience.

Amazon’s a great example of this. Amazon aims to kill all 3rd party sellers, yet brands CANNOT afford not to sell on Amazon (more on this here). The rewards are too great. Like eating fastfood, it is great in the short term and deadly in the long run.

By building the West’s strongest ecommerce marketplace (Alibaba and Taobao in China are actually stronger), Amazon has become untouchable. Brands have to play ball and so do the regulators. Imagine the senator or congressman who costs his district a shot at Amazon’s 2nd HQ? No point running for re-election then. Consumer’s love Amazon. It is fast, easy, cheap and convenient. You can order ANYTHING at the click of a button and have it delivered ASAP.

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Too big to fail

The banks got bailouts because they screwed consumers, made money on bad loans and were too big to fail. They did everything wrong and were rewarded. At this point Amazon, Facebook and Google are the utilities of today.

Shutdown Amazon and millions of merchants lose their livelihoods. And customers would rebel. How else can I get my subscription toilet paper delivered?

Plus ~70% of internet traffic goes through AWS. Can you imagine the economic ramifications of in essence turning off the internet?

And what about Google? Google search accounts for 77–80% of search traffic. Google Chrome is the most popular browser with 44.5–63.6% of all users (depending on source). And Gmail is no different with over 1B monthly active users — email is the lifeblood of most businesses….

Don’t forget Youtube, and Google Maps, and your calendar… oh, and all of Android.

Facebook is the same thing. Families and friends would be literally ripped apart. Experiences lost, billions of family photos forgotten… Between Facebook, Messenger, Whatsapp and Instagram, Mark Zuckerberg controls billions of individuals and owns ALL of their data.

When you get used to a rare luxury, it goes from being scarce to being something you cannot live without. Any of these 3 companies could cripple the internet, the American government and the world economy at large.

During the Cold War we called this equilibrium Mutually Assured Destruction. Speaking of Russia…Source: Wikipedia

Social Engineering and News

One of the fascinating effects of social media and our connected world is the rate at which news and information spread. Yet as we’ve seen, facts can be falsified. Propaganda is the use of biased or misleading information to promote a political cause or point of view. And it has never been so influential.

People are inherently lazy. They read the headline and skip the story. And due to the nature of clicks and impressions and the flaws with modern media and “journalism”, we’ve incentivized a culture of click bait and intellectual garbage.

I don’t have an answer for this. But the algorithms are driving this change. As traditional journalism dies, something MUST take its place. And the terrifying thought concerns the power and control of these colossal companies.

Zuckerberg has 2.1B+ MAUs. What happens when a megalith tech company starts to push the limits or censor negative and hateful content? The path to hell is paved in good intentions and absolute power corrupts absolutely (just look at politicians).

These social dynamics make Facebook and Google nearly unassailable (here’s Google’s one achilles heel). With the power to “control” the news, feature themselves and their products and billions of times more data, money and manpower, we could have created the ultimate tool to fascism. One man at the helm pulling the strings has more influence than Rupert Murdoch or Donald Trump.Source: FBTutorial

The big question

Net-net, Facebook, Google and Amazon have been forces for good in the world. They have innovated, increased quality of life, access to information, family, friends, products, entertainment and more.

But they are incredibly dangerous and likely not-regulatable. Are these short term problems or long term considerations? When will rubber meet the road?

This level of control, wealth and power are not inherently destructive, but every empire eventually inherits an evil heir.

Can you create a conceivable future where this doesn’t go horribly wrong? I can’t.

Would love to hear your thoughts below? We didn’t even touch on AI, but artificial intelligence and it data constraints further strengthens the Trinity of Tech.

This isn’t about answers, it is about questions and having an informed debate with smart folks focused on the future. So please share your thoughts below.

And if you liked this article, subscribe to our newsletter to never miss a thing (just opt in on the site).

Be sure to share this on social. People need to understand these issues and have an open debate on our future as a society

Originally posted on mattward.io

Product to Platform — Inside Amazon’s Dominance

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How to Build a Powerful, Profitable Platform from Scratch

Originally posted on mattward.io

Bezos builds businesses like no one else — and arguably better than anyone. Each of Amazon’s 5 major divisions would be multi-multi billion dollar businesses on its own.

And each followed exactly the strategy.

Let me explain.

Platforms

Amazon is a platform company. They want a small (but ever increasing) piece of all commerce. And to date, things are going according to plan.

(For more on Amazon’s entire business, see this post).

But platforms are pretty damn hard to build — you need to aggregate a ton of users and/or customers. That takes time. And often money, lots of it.

You can’t set out to build a platform. That cannot be your first “product.”

Selling books

In 1994 Amazon launched not to build a platform, instead to build a better, online bookstore. It was super niche, super targeted.

But this wasn’t the end-all-be-all, it was phase one. It was a product, a battering ram into the hearts, minds and homes of consumers. And it worked. It was easy to understand, affordable and offered a better selection than any library or bookstore.

If customers can’t explain what you do in a sentence or two, they won’t try. This is key for any business.

And as you acquire customers and market share, expansion opportunities present themselves. But in the early days Amazon sold everything — ensuring great quality and customer service — their main differentiators today.

That wasn’t scalable.

Amazon couldn’t afford to offer (ie own) everything. That is way too much capital. It was either compromise on growth (and grow very slowly with only Amazon branded products) or open up the platform (likely the original plan)

So in 2000 Amazon started allowing 3rd party sellers to sell on their site — it worked wonderfully. Fast forward to today, there are over 2M 3rd party sellers on Amazon accounting for anywhere from ~79–90% of the total products listed on Amazon as of 2015 (Source, Source).

Building infrastructure

As Amazon grew, so too did its infrastructure needs. The bandwidth and storage required to host and display images and information across Amazon.com ballooned as the marketplace grew.

Bezos bet big on in-house and decided Amazon ought to own the infrastructure. Better still, why not follow the existing Amazon.com strategy — internal and then sell externally?

AWS was born out of an internal need and an incredibly well orchestrated, easy to use cloud infrastructure.

That is how Amazon thinks.

Solve it once, then sell it — productization 101.

Today AWS is far and away the largest cloud service provider powering ~42% of the web — more than double Microsoft, Google and IBM (combined) and bringing in upwards of $4B per quarter.

Source: Geekwire

Alexa

The way we interact with technology is changing. Amazon (along with many others) wants to own the space/interface.

Today Amazon is winning BIG. Alexa is a cross-functional voice assistant/interface which in typical Amazon fashion is compatible with everything. If you are building a voice enabled device, Amazon wants it to be powered by Alexa — an “open” ecosystem — even if it canabalizes hardware sales.

Amazon gets it — the platform IS the product.

Voice may well be the next search, but it may mean even more. By owning the interaction, accumulating data and controlling the customer experience, Amazon is inserting themselves into each and every value-chain (a little piece of every pie).

In this instance Amazon broke its own rule — they built the platform before the product. And that was okay. Consumers already trusted Amazon’s brand (as did developers), meaning buy-in from both major parties.

In the case of the Amazon Echo and other Amazon branded Alexa products, the goal is attention, not profit. Amazon is crushing Google in terms of smart speakers shipped through a combination of rock bottom pricing and aggressive marketing and PR — flexing their ecommerce (and Whole Foods) muscle to ensure an Alexa device in every home…

The 2nd stage of platforms

As platforms grow and expand, their values and needs change. Google, Apple, and Facebook needed 3rd party developers to build the core experience and “hook” for the platform.

But as we discussed here, building on platforms is like playing with fire…

Eventually platforms reach scale and existing network effects act as a buffer to competition and value add to existing users. This point platforms no longer “need” you like so many startups, clone your product and push it to their user base.

You never know when the ground will shift.

Building a better wedge

You need a use case — “a compelling, have to have this” type use case to build a successful platform. Companies without this will struggle — high CAC (cost of acquiring a customer) and high churn.

Startups seeking funding (as well as investors) need to understand these dynamics.

It isn’t about the destination, it is about the journey. And for platform businesses specifically, planning the “correct” path is the key to success.

So how do you do it?

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The 2+ step rule

It takes at least two steps to build a platform from scratch. Even Amazon with Alexa needed both hardware (Step 1) and software (Step 2) to succeed — the Amazon Echo plus 3rd party developer support.

And even then they seeded Alexa with a set of “skills” designed to kickstart the customer experience (Step 2.5).

You only have one chance at a first impression.

If Amazon takes 2.5 steps, startups should take note.

NOTE: This is true whether you are building a social media site like Facebook or an IoT, connected home platform — it always takes longer and requires multiple hops.

This is all well and good in theory but in practice, how does it work?

Part 1: Determine end goal (i.e., build the operating system/platform of VR)

Part 2: Determine everything that needs to happen to achieve scale…

  • X number of VR glasses sold worldwide
  • Run your software/OS on Y number of glasses worldwide (where Y > ¼ of X)
  • Get Z number of apps built-in/usable on your platform

Part 3: Create a logical plan to get from point A to point B

  • Example #1: Design OS. Kickstart VR goggles. Begin ecommerce sales. Design enough apps/games. Market like crazy→ owning platform
  • Example #2: Design OS. Trial & partner with existing manufacturers (open ecosystem or open source). Build developer support with 3rd party app/game marketplace → owning platform
  • Example #3: Kickstart VR goggles. Partner with OS provider. Begin ecommerce sales. Design enough apps/games + onboard new devs. Market like crazy. Design new OS to replace existing one and boot existing OS from your headsets → owning platform
  • Example #4: Design OS. Kickstart VR goggles. Begin ecommerce sales. Design enough apps/games. Launch new VR products: gloves, haptics, foot sensors etc… and force compatibility between all→ owning platform

Part 4: Execute and iterate as necessary

This isn’t an exhaustive list but it illustrates the point. There are a lot of ways to achieve market domination and no perfect path to get there. You have to be able to reach, delight and retain customers/users to build a profitable, defensible platform business.

Each market is different but by-in-large, this strategy works across industries and should be emphasized when strategizing your business.

(Happy to chat more on the topic if you need help, just visit thesyndicate.vc or shoot me an email: matt@thesyndicate.vc and lets chat.)

Common platform failures

According to the Harvard Business Review, there are 6 primary reasons that platforms fail. Rather than summarizing a well written article, you can check it out here.

1. Failure to optimize “openness” — Twitter pulled their APIs and busted profitable businesses

2. Failure to engage developers — means having to build all the apps and usage in-house

3. Failure to share the surplus — being too greedy (like Facebook is today)

4. Failure to launch the right side — who matters more: buyers or sellers

5. Failure to put critical mass ahead of money — when do you start advertising or monetizing?

6. Failure of imagination — not realizing that the platform > the products

The 7th platform problem

Remember Google+? It was all the rage for a while. But G+ was inherently a boring Facebook copycat. There was no unique value, it was only inferior in every way.

The seventh platform problem is competition. You need to be 5–10x better than existing product to get consumers/users to switch.

G+ never got off the ground. The same is true of any platform without sufficient differentiation and value add. It has to feel organic, not forced. And usually, but not always, copycats feel pretty forced…

Source: Business Insider

Remember, platforms are networks. Network effects matter. For more on the 5 types of network effects and how to hack them, see this post.

Closing thoughts

Facebook, Amazon, Apple, Google — today’s most valuable companies are all platforms. That is no coincidence. Platforms have pricing power and aggregate the majority of value.

And while many debate the merits and morals of such a monopolistic system, it is the world we are working with.

For a more in-depth analysis on each of above companies, see Gods of the Valley, a series of highly technical, highly researched articles on GAFA’s strengths, weaknesses, future ambitions and likely acquisitions.

Part 1 :

Amazon: The Company Consuming Consumers

Part 2 :

Google: The God of the Internet?

Part 3 :

Facebook: The King of Communication

Part 4:

Apple: The Fading Star?

To succeed in a platform world, you need to avoid and/or understand the big boys. Hope this helps.

Originally posted on mattward.io

Think you understand network effects? You don’t.

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Lessons from Blue Apron, Uber, Amazon, and Facebook

Originally posted on mattward.io

Remember the beach? It was always a battle to build the best sandcastle. But inevitably the tides turned and waves washed away your creation… you were devastated.

I hope you learned your lesson.

Moats are the most important aspect of any business. A defensible moat is the difference between lasting value and profitability and being ripped apart by the waves (ie competitors).

And while every entrepreneur “knows” they are building an unbreakable moat, is that really the case?

Moats

Rats run towards food, founders flock to money. Large opportunities lead to fierce competition — and nothing ruins venture returns quite like competition.

There is a saying among investors.

“Being ‘right’ doesn’t lead to superior performance if the consensus forecast is also right.” — Bill Gurley

Consensus never pays.

Competition catches on to obvious ideas (hence the issues with Uber’s business model).

Uber built a business around the “idea” of a moat. Because of local network effects between riders and drivers, Uber was able to build incredibly strong local networks — and raise over $22B to fund their expansion.

I won’t dig into the issues with Uber’s model/assumptions again, but instead want to use their “moat” as an entry into the various moats most businesses employ.

So, how do you keep competitors at bay?

Many many moats

In business there are many ways to stand out. And what is defensibility if not a reason to choose one brand over another or to remain a customer.

A moat either traps customers on your island or makes your castle an attractive destination… both acquisition and retention drive revenue.

It boils down to: What is your unique competitive advantage?

Without that you don’t have a business. With that, you may have an empire…

Broadly speaking there are 7 customer acquisition and 3 customer retention moats that power the vast majority of businesses.

The best businesses build barriers for both.

Acquisition moats:

  1. Brand
  2. Network effects
  3. Product
  4. Patents and/or proprietary products
  5. Licenses
  6. Distribution
  7. Pricing power

Retention moats:

  1. Brand
  2. Network effects
  3. Switching costs

Understanding moats

Acquiring customers is sexy. People prefer increasing revenue to cutting costs — it is our shortsighted, ego driven nature. In venture especially, revenue is king. If we can acquire customers and make money, we will figure out the economics eventually. Raise round after round until you figure out profitability, right?

Of our acquisition advantages, I’d argue all but network effects are pretty well understood.

You know why you buy Apple (brand), use Comcast (no choice), prefer Netflix (great product) or get the best deals on Amazon (price + selection)… acquisition is relatively easy to understand.

The biggest misconception is with network effects, specifically anticipating them.

The same is true for retention. It is a nightmare to change your bank and you’ve always voted Democrat (brand) so why switch things up? If it ain’t broke, don’t fix it.

The nuances of network effects

Nothing trumps network effects. Businesses without strong network effects (NFx) always struggle, both in terms of growth and profitability.

Thanks to business basics and GAFA’s chokehold on the economy (and our attention), we all have at least a basic understanding of network effects. (For more on the 5 types of network effects and how to hack them, see this post.)

The problem is, by assuming we understand and can anticipate network effects, many entrepreneurs set themselves up for failure.

6 misconceptions about network efforts:

1. Word of mouth ≠ network effects

Telling friends about Facebook improves your experience, the same isn’t true for Starbucks. At best Starbucks gets more business, at worst I’m stuck behind more coffee crazed addicts waiting for a fix…

Word of mouth is a powerful tool, but by itself does not constitute a network effect.

2. Incentivized referrals ≠ network effects

The same holds here. Incentivization is a great acquisition strategy but not a defensible, product enhancing network effect in the majority of instances (cryptocurrencies excluded).

3. Data ≠ network effects

Data alone doesn’t define a network effect. While data is incredibly valuable to understanding and influencing customer behavior, it only becomes a product improving network effect once you learn to effectively utilize it. Plenty of companies capture mountains of data — they just don’t know what to do with it. Insights are valuable, noise isn’t.

4. Law of diminishing returns still applies

Network effects never die, but the resulting impact on overall defensibly and product has diminishing returns. The 2 billionth person on Facebook did little to improve either social graph connectivity or user behavior patterning…

Network effects, like everything else, operate in an S curve, the question is how high is the ceiling?

5. Not all network effects are international

Case in point, Uber. Uber’s product improves as local usage increases, but NYC having more drivers and riders, does approximately nothing for my experience in Zurich. That means local networks are secure but also frail as competitors can enter any individual market, outspend incumbents and claw their way to the top.

In the situation of Uber, because ANY city or country can create competitors and any fool (or fund) can fund those upstarts, the competition tends towards infinity. What happens when supply exceeds demand…

6. Scale decreases CAC, ie improves economics

See below.

Blue Apron’s big problem

We mentioned Uber, but Blue Apron is a more interesting example.

Founded in 2012, Blue Apron pioneered the subscription meal kit. Get all the ingredients for an at-home, five star meal — no worry, no hassle.

The value prop was obvious: easy, convenient, healthy, home cooked, tasty meals. What family wouldn’t want that? And even though the price was a bit high, Blue Apron targeted the upper middle class anyway — it is a health food thing…

Growth was spectacular, it just took off.

And investors ate it up, literally. To date the company has raised just south of $200M (excluding IPO).

On June 1st, 2017 Blue Apron filed for IPO. They were looking to raise $500M from public investors to further growth of the company and hit scale. Interestingly their unit economics were still a bit shaky. But that was okay, plenty of companies had gone public prior to hitting profitability. As long as you were moving towards profitable, everything was on track.

Unfortunately Blue Apron’s acquisition costs and business model were built around a relatively long payback period and anticipated a decreased CAC (cost of customer acquisition) because of course network effects would spread the service (via word of mouth etc…)

It didn’t quite turn out how they planned. Instead customers cancelled at higher rates and it became clear that between market saturation (of high end healthy foodies) and increased competition from other startups, Amazon and even supermarkets, made acquiring and retaining customers much harder and more expensive.

Blue Apron priced their IPO at $15–17 per share. The numbers speak for themselves.

Evaluating network effects

In hindsight, it is obvious to see the flaws with Blue Apron’s business model. The network effects are little to non-existent and competition kills margins. There is no advantage to me as a consumer when my friends use the service. My food isn’t better, it isn’t cheaper, it isn’t faster… Why tell anyone about it?

“Hi, guess what… I’m cooking for my family, but kind of too lazy to do it myself…”

Someone screwed up here. And while investors made out like bandits (if they sold in time), retail investors were left holding the bag.

The question is and will always be, how do you evaluate network effects?

Both as an investor and as an entrepreneur, it is critical to understand the business model and how unit economics and CAC/LTV ratios can change over time.

In Blue Apron’s case they were aggressive with projections. By assuming growth equated with a decreasing CAC and that LTV/retention would remain constant, they set themselves up for failure. The economics could never work.

But the opposite can be equally as detrimental. This occurs most frequently with bootstrapped startups. When startups grow purely via organic growth (or fail to foresee improving unit economics), they can underspend and forfeit a lead. Plenty of funded companies are willing to burn through cash to close the gap and capture the market — slow down for a second and you can be overtaken…

Which mistake is worse? It really depends on the market and the competition. But in the world of venture scale returns, both can come back to bite investors — hence the go big or go home mentality.

Numbers never lie

Blue Apron’s finances were not the problem, the assumptions were. And while eventually the assumptions are proven incorrect, this isn’t always the case in the short term.

In the middle of the hype cycle (ie S curve), it looks like you are going to the moon. The business is taking off, CAC may even be decreasing due to increased exposure in the market and all-in-all the business looks pretty damn good.

But what happens when the ceiling hits sooner than you anticipated or other factors like competition or retention rates begin to change? Suddenly your proven assumptions are shaky, the market reacts and your stock craters…

Productive pessimism

I was interviewing an investor (can’t remember who) for The Syndicate podcast and he said something pretty profound.

“In a room full of optimists, it pays to have at least one pessimist.”

This is important, especially as the stakes become higher. Startups are stupidly optimistic. That is why they take on the world and the impossible and they win. But there comes a time in any company’s lifecycle when a bit of pessimism (plus realism) starts to become beneficial.

If you are willing to listen to the negative nancy, you might be able to avoid the Blue Apron balloon. Questioning the assumptions and beliefs in their apparent network effects would have saved the company a lot of headache.

Unfortunately this is a delicate balance. Negativity neuters greatness.Pessimistic, realistic view points early on can stifle innovation (hence why no one likes lawyers). Move fast and break things is a great motto for a startup.

But you need to know when to put on the big boy pants.

Understanding incentives

Founders and VCs both focus on enormous returns. Carry creates a scenario where investors focus on outsized returns over all else (for more on carry and economics of venture investing, see this article).

This can make ventures capitalists a horrible partner/pessimist. It is in the VC’s best interest to push the envelope and their excitement over large returns can cloud judgement.

It is easier to tell someone they have an ugly baby on the bus than at a family reunion. You aren’t tied together for life or even directly associated with the outcome — in other words, you can be brutally honest without subconsciously seeing green (happy to chat if you need advice).

First principles

Questioning assumptions is the best way to pressure test your projections. Keep asking why and eventually you get to the root of the question.

The best founders and investors are able to “see” the future. I’ll leave you with a little Elon.

Closing thoughts

Nothing beats flywheel network effects — but nothing is harder to conceptualize, create and scale either…

What moats are you most excited about? How have you backed defensibility into your business?

Investors look hard at barriers to entry. Well defended castles create kingdoms. Those are the kind of companies our syndicate invests in. And those are the kinds of strategies and tactics I advise startups on.

It doesn’t take genius, it takes first principles thinking and a hell of a lot of effort, analysis and testing.

Build your business, run like hell but be sure you are building a moat in the process. Snapchat sort of missed the ball here, as did Blue Apron. Both were great outcomes, but both were built on a mountain of sand.

Sandcastles have a tendency to wash away.

Originally posted on mattward.io

Gods of the Valley — Part 3: Facebook — Zuckerberg’s Friends with $$ Benefits

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Originally posted on mattward.io

We are entering an era of unparalleled tech dominance where companies like Google, Amazon, Facebook and Apple control ever larger portions of our lives. This is the 3rd in a series of in-depth articles on the future of the tech giants — including a breakdown of their business models, biggest threats, future plans and probable acquisitions. Today’s topic is of course Facebook.

(In case you are interested, here is what you NEED to know about the future of Amazon and Google, and who ultimately wins…)

The Big 4 – Part One: Amazon – The Company that Consumes the World
The Big 4 – Part 2: The Future of Google

Focusing on Facebook

You probably know the story of Facebook, we have all seen the Social Network. In case you haven’t, Facebook launched at Harvard University in the beginning of 2004 to bring the experience of college (and dating/sex) online. And while its origins are innocent enough, the company quickly become embroiled in controversy as the network spread.

Court cases and hurt feelings aside, Facebook found what the world was waiting for — an easy way to stay connected with those around you while also increasing your influence and circle of friends. And with a ridiculous NPS (net promoter score) and viral referral loop/network effect, it spread like wildfire (or a disease :). (For more on the 5 types of network effects and how to hack them, see this post).

The 5 Types of Network Effects and How to Hack Them
Fast forward to today — Facebook is synonymous with social media and owns our digital identities. As of June 2017, Facebook hit an unprecedented 2B MAUs (monthly active users). That is nearly ⅓ of the population.

But that is just the basics. To really understand the behemoth and see where it is headed, we need to dive deeper. Let the games begin.

The business of Facebook

While there are several divisions within Facebook (thanks to a few successful acquisitions), Facebook is at its core a social media and communications company. Their business model is predicated on eyeballs and attention — and they have optimized the hell out of it.

Today the implications are starting to affect individuals and governments today (more on this later). But first, the business…

Continue Reading …

Gods of the Valley — Part 2: Google — The All Knowing Alphabet

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google is god

Originally posted on mattward.io

We are entering into an era of unparalleled tech dominance. Companies like Google, Amazon, Facebook and Apple control more and more of our everyday lives — owning our data and everything around it. The inherent network effects and flywheels these companies built are unprecedented — both in their scope and ability to stave off competition.

This is the second in a series of articles breaking down not just the strengths and weaknesses of today’s top companies, but also speculating on future opportunities and acquisitions to help startups and investors plan accordingly.

Previously we dove into Amazon and came away with some pretty interesting conclusions and future predictions. Think Amazon will be the 1st trillion dollar company? I recommend checking out this article.

But today we are talking Google, and this one is going to get dirty. So grab your coffee, take a seat and let’s go.

Google is god

In 1998 the world changed forever when two crazy nerds in a garage rewrote our idea of the internet. What was once a disorganized mess of information suddenly had structure — imagine a library without a filing system. That was more or less the state of affairs.

Google revolutionized search, bringing reputation based ranking to the results. And while the algorithm was anything but perfect, the network effects and perpetual tweaks continuously improved the results, resulting in the internet of today.

Now you ask Google (ie god) a question, and you get an answer. It is your go to source for information and one of the few universally recognized words (and verbs).

 Just Google it.

Understanding Google

To understand Google and see where the company is headed, it is important to understand the constantly morphing and expanding organizational structure.

In 2015, Google officially became Alphabet, an overarching entity to let the many business units move faster and more freely to speed innovation.

Continue Reading …