Thursday, April 10, 2014

Tripling down on Cascadia

I’m happy to announce that we just closed $10 million in fresh capital for a new Founders’ Co-op fund to help build the next generation of world-changing software companies here in the Pacific Northwest.

This is our third fund and, while our values and approach will remain the same, we’ve upped the ante in a few important ways that reflect how much Andy and I have learned since we started Founders’ Co-op back in 2008.

1. More Money

This will be our biggest fund ever -- counting both closed and committed dollars it’s already twice the size of our 2011 raise and with the potential to be more than three times as big (the fund is capped at $25 million). Not only can we now back more great early-stage companies, we can also play a more important role in their journey along the increasingly long and winding road to Series A (and beyond). This is the capital markets gap we set out to fill when we started the fund, and we’re now in a position to do that job right.

2. More Brains

Andy and I are proud of what we’ve built together as a team of two. But they aren’t making any more hours in the day and the Northwest innovation ecosystem keeps getting stronger, so we knew this time around we’d need to find a way to do even more.

Luckily for us, local super-angel Rudy Gadre was thinking along the same lines and -- after many long conversations about the kind of firm we wanted to build, and the kind of impact we wanted to have -- it was clear to all of us that joining forces was the right answer. As of today, Rudy has officially joined Andy and myself as a full investing partner in the fund.

Rudy isn’t just bringing his considerable brainpower to Founders’ Co-op, he also opens up a whole new facet to our investing work. Having played early leadership roles at two of the consumer web’s biggest success stories -- Amazon and Facebook -- Rudy adds a deep understanding of the consumer opportunity to our partnership’s established strength in the enterprise, allowing us to say ‘yes’ with confidence to an even larger set of early-stage companies.

3. New Partnerships

Last time we raised a new fund we added an important new partnership with TechStars, one of the world’s leading startup accelerator programs. This time Founders’ Co-op and TechStars Seattle are joining forces with the University of Washington -- the region’s top research university -- and UPGlobal -- the world leader in entrepreneurial education -- to create Startup Hall, a hub for high-performance startup activity in the heart of Seattle’s University District. The City of Seattle has made the UDistrict a centerpiece of its economic development roadmap and the Startup Hall partnership will play a key role in transforming the University’s backyard into Seattle’s next great innovation neighborhood.

4. Bigger Dreams

Over the past six years we’ve been lucky enough to invest early in some of the Northwest’s most exciting startup success stories -- companies like Simply Measured, HasOffers and Urban Airship. We’ve also seen great local companies like Tableau and Zulily make it all the way to the public markets, adding more strong independent tech leaders to our local ecosystem.

Everything we’ve learned as investors, mentors and troublemakers in our regional startup community has convinced us that the Pacific Northwest is one of the best places in the world to build companies that matter -- economically, socially and culturally. We admire every entrepreneur who has the courage to strike out on their own, but as a fund we’re on the lookout for teams hungry and foolish enough to think they can build the next world-changing company right here in our own backyard.

We wouldn’t be able to do the work we love so much without the trust and support of many, many people in our region and beyond. We’re thrilled to have another fund’s worth of shots on goal, and we want to thank the dozens of friends and fellow entrepreneurs who have trusted us with their money, and the even larger number of founders who have invited us to join them as partners on their own entrepreneurial journeys. We wouldn’t be here without you, and we never forget that we work for you.

Let’s do this.

Tuesday, March 18, 2014

Foreign Direct Investment

Today one of our earliest Founders' Co-op investments -- Simply Measured -- announced a $20M Series C led by Karan Mehandru of Trinity Ventures. Last year the company raised an $8M Series B, led by Ethan Kurzweil of Bessemer Venture Partners. Not long after that round closed, we also participated in the first-ever raise for HasOffers, a $9.4M Series A led by Rich Wong at Accel Partners.

Beyond being great fundraises for world-class teams, what do all these fundraising events have in common? They represent important "foreign direct investment" wins for the Seattle innovation ecosystem.

We're delighted whenever a strong local company completes a successful raise -- whether we're investors or not -- because it increases the odds of yet another tech leader being built in the region. A healthy innovation ecosystem requires a critical mass of strong companies at every stage of development -- thousands of early-stage startups, hundreds of growth-stage companies, dozens of mid-market companies, and several global giants -- to provide a liquid and resilient market for talent and entrepreneurial wealth creation through both good times and bad.

With the collapsing cost of software innovation, a great software company can be started almost anywhere there's a concentration of talented makers. But scaling a tech company to a dominant position in the global economy still requires massive injections of capital, and the capital markets are as concentrated as innovation markets are diffuse.

The only "full stack" capital markets functions for growth companies in North America are Sand Hill Road (for innovation-based companies) and New York (for later-stage companies of all kinds).

Building a great company anywhere begins with talent, mentorship and seed capital - ingredients available in almost any major city. But making innovation a systematic, scalable engine of long-term growth requires strong direct access to at least one of the major money centers for innovation finance.

Talent is sticky -- people like to live in vibrant urban centers that feed both their careers and their social and intellectual lives -- but money flows more easily, and it flows most quickly and in greatest quantity toward opportunities most likely to produce the biggest returns.

We're lucky in Seattle to have a history of massive entrepreneurial wins -- once-fragile startups that grew into massive, publicly-traded companies that dominated their categories and produced life-changing wealth for their founders, investors and early employees. But a key tenet of business (and sports) is that you're only as good as your last game, and past performance is no guarantee of future results.

A city's ability to attract "foreign direct investment" -- strong fundraises led by well-regarded partners from leading firms in the major money centers -- is a leading indicator of its future success as a global hub for innovation.

So congratulations to Simply Measured and HasOffers -- and Zulily, Tableau, Avalara, Smartsheet, Socrata, Inrix, Apptio, Porch and every other Pacific Northwest startup that has attracted major injections of "foreign direct investment" from the money centers of innovation finance. You are laying the foundation of our region's future -- making it clear to the global capital markets that the talent is here, and the smart money is beating a path to its door.

Sunday, March 2, 2014

Decision Compounding

"Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it." -- Albert Einstein
Interest isn't the only thing that compounds.

In startups -- and in life -- every decision you make changes your trajectory and sets up the conditions for your next decision. Each new circumstance you find yourself in is the child of all the decisions you made up to that point.

Early in the life of a company (or a person) this tendency for decisions to compound is more difficult to see. The world is your oyster, and it's easy to try many things and learn lessons from each without feeling like you've committed yourself irrevocably to any. The so-called "lean movement" has institutionalized this lightness of being among early-stage companies, with "pivots" now an accepted -- even celebrated -- part of the startup journey.

All of this is both good and true: young people and young companies should cast a wide net before settling into the course of action that will come to define their later lives.

But for founders who aspire to scale the highest heights of startup success -- attracting world-class talent, asserting and defending a leadership role in their chosen category, and accessing the capital markets on fair terms at each step along the way -- those early decisions have a tendency to compound in ways that either enable, or impede, this goal.

Running a startup is hard and founders can't afford to optimize on every front, but there are three categories of decision that I would urge young founders to give more time and consideration than any other -- with an eye to setting up a positive rather than negative decision compounding cycle for their companies and careers:

1. Team + Culture

This has been said many times, but as I watch the teams I work with scale -- or fail to scale -- through the many difficult moments in a young company's life, the one variable that defines the positive outcomes more than any other is quality of people the founders are able to attract, retain and integrate as a high-performing team.

There's no one "right" way to do this, but the thread that ties all successful startup teams together is a deep and universal conviction that the entire team is on an important and exciting journey together, and that each's person's maximum effort and contribution is required for the team as a whole to succeed. As soon as leaders begin to turn a blind eye to underperformance, or create an internal competitive culture that celebrates individual achievement over the work of the team, a negative compounding cycle is set in motion that can be very hard to reverse.

Leadership is hard and many first-time founders find themselves in charge of other people's lives and careers with very little practical experience or effective coaching on how to do it right. Despite some celebrated negative examples, founders who put themselves on a positive path -- investing in their own self-awareness and devoting themselves to the craft of leading -- can create a massive unfair advantage for themselves.

2. Investors + Terms

Nothing is more frustrating to me as an investor than to meet an exceptional team striving toward a worthy goal that has -- out of ignorance or desperation in their earliest days -- taken on a set of investors and associated investment conditions (which can be any mix of inappropriate valuation, preferences, governance or other "special rights") that make the company effectively uninvestable by later-stage investors.

Despite significant cyclical changes (the overcapitalization of venture in the first internet bubble and the current overcapitalization of the seed stage are just two recent examples) the institutional capital markets for innovation are a highly functional and well-ordered system. Specialist firms at each tier -- from the newly-institutionalized Seed tier through Series A and B venture and on to the growth equity and pre-IPO "crossover" funds -- have a professional interest in helping strong companies progress through each stage of the system, fueling the company's growth and (if successful) creating wealth for founders, employees and investors alike.

Any player at any level in the capital markets stack that overoptimizes for his or her gain at the expense of founders or later-stage investors can trigger a negative compounding cycle that either prevents the company from proceeding through later stages, or steadily skews its financing options toward less and less attractive financing and liquidity options as time goes by. This counterproductive behavior is most evident at the angel stage, but I have seen it crop up among "professional" investors as well and should be a red flag to founders at any stage.

3. Ethics + Transparency

All relationships are built on trust, but few industries rely so heavily on trust among all parties as the early-stage startup and investing community. Almost by definition, privately-held companies with short operating histories create massive information asymmetries -- between founders and early hires, investors and founders, current and prior round investors, acquirers and insiders, etc. -- leaving the door open to financial and ethical abuses of various kinds.

In my experience, the startup community has a much lower incidence of bad actors than the general business population, but they do turn up from time to time. What these folks may not realize is that the professional startup community is actually very small, and is a lifetime "repeat game" for most players -- founders, early hires and investors alike. Because roles tend to change over time -- early hires often become founders, and successful founders very often become investors -- every repeat player has more than the usual empathy for the roles of the others. This also means that every ethical player has a strong incentive to weed out bad actors at whatever level of the system they find them.

Ethically challenged members of the startup ecosystem are often surprised find themselves shut out of companies, financings and other opportunities that appear to be unconnected to their past behavior. The easy answer for people who want to make startups their life's work is to deal openly and fairly with all participants -- not just the ones who have the power to fight back today.

So go ahead, move fast and break things -- that's what entrepreneurship is about, after all -- but when it comes to the three topics above, take care to make decisions that will compound in ways you'll feel good about when it's way, way too late to take them back.

Tuesday, February 4, 2014

The stories we tell ourselves

Last week I spoke on a panel at a World Financial Symposium event in Seattle. I arrived a little early and was rewarded with a great talk by Brian David Johnson, a "futurist" at Intel.

Johnson had interesting things to say about both the process of "futurecasting" and a few of his specific predictions, but the idea that stuck with me was his closer (I took a photo of the slide to make sure I got it right):
Q: How do we change the future? 
A: Change the story people tell themselves about the future they will live in.
This deceptively simple statement captures a fundamental truth about leadership -- whether as a parent, as a manager, or as a community advocate:

Consistent, positive actions spring from a coherent sense of identity -- a self-reinforcing set of internal narratives about how people like this behave in circumstances like that.

For kids, these shards of identity most often describe the self, as in: "I'm the kind of person who..." "...doesn't give up easily", or, " good at soccer", or, "...likes to travel".

For companies, the most productive narratives are generally those that describe the role the company aspires to play in its customers' lives, with a structure like: "We make it easy for our customers to... save for retirement", or, "... manage a complex sales process", or "... shop for a new car".

For communities, the most powerful narratives are often about the values and activities that the community comes together to accomplish, as in: "We're a community that ... supports entrepreneurship", or, "... invests in its schools", or, "... embraces diversity".

Seen through this lens, effective leadership is made up of of just two core disciplines:
  • Forging plausible, inspiring stories about the future we wish for ourselves, our families, our companies or our communities, and
  • Sharing those stories with people in a way that allows them both to embrace them, and to make them their own.
Entrepreneurs are especially good at this kind of work -- which helps explain why our culture is so drawn to them.

Friday, January 24, 2014

Marketplaces, operational excellence and the "Amazon effect"

I love marketplaces as an investment theme: technology is fantastic at bringing transparency and liquidity to previously opaque and sticky markets, making life better for both buyers and sellers.

But as e-commerce becomes the default for an ever-greater share of consumer purchases, our expectations for what a "satisfying" purchase experience looks like have fundamentally changed. This change is forcing marketplace operators to think harder about the often-messy operations work that comes after a transaction, a significant expansion of their role as simple matchmakers for supply and demand.

What's causing this shift in consumer expectations? And how can marketplace owners stay in front of it? 

The first question has a one-word answer:

Amazon has been boiling the frog of traditional retail for over a decade now, so we shouldn't be surprised to find them chipping away at the defenses of their e-commerce peers as well.

Amazon's first trick wasn't so different from any other online marketplace -- making it easy to find and buy almost anything online, saving both time (i.e., physically getting yourself to stores, hunting for merchandise + checking out) and frustration (too often, the item you needed either was either not carried at all or temporarily out of stock).

But the company's latest PR stunts -- announcing delivery by drone and predictive delivery -- show just how far they've pushed their advantage on the operational side of their business. Online shoppers now expect their merchandise to arrive at their doorstep within a day or two of ordering, with free two-way shipping and effortless returns (Amazon will even credit a customer for a return and let them keep the merchandise if their shipping and restocking costs calculation tells them they're better off that way).

Any e-commerce buying experience that falls below the Amazon standard becomes a reason to switch, finding another online seller that promises more, or just shifting yet another category of shopping activity to the one company that gets it right every time.

Contrast this with the canonical marketplace operator, who matches individual buyers with goods offered by a large and distributed array of independent sellers, each responsible for their own operations (i.e., pick / pack / ship / returns / exchanges / post-purchase support). Even simple tasks -- like ensuring that the goods offered for sale are actually in stock -- become much harder when those goods are distributed across thousands of garages and living rooms around the world, with no barcodes or RFID tags assigned to track their movement through the supply chain.

Now extend that problem to every other step in the post-purchase experience and you begin to see why any marketplace operator who aspires to brand loyalty and repeat purchases in their customer base needs to define their value proposition more broadly than just matching buyers and sellers.

So what's a smart marketplace operator to do -- without killing the economic magic of a business that largely relies on outsourced operations to make up for the lower margins that come with being a matchmaker rather than a merchandiser?

There are many strategies a savvy marketplace operator can use to meet (or exceed) customer expectations without killing margins. Here are just a few:

1. Invest early in seller tools + "virtual automation"

This is the first and most obvious step, and without it most marketplaces wouldn't scale past the first year of operations. Marketplace owners must establish standard post-sale procedures for all sellers and provide automated digital tools (e.g., email and SMS notifications, secure web-based tracking forms and process-linked compliance checks for each step in the fulfillment and post-sales support process).

This approach works best when combined with a well-communicated seller Service Level Agreement (or SLA) that sets clear standards for response times, error rates and customer ratings -- with performance incentives (e.g., higher rankings in search results) and disincentives (e.g,. removal from the site) for outperformance or underperformance relative to the SLA.

2. Centralize operations for top items + sellers

The next escalation of operational investment for a growing marketplace -- particularly once the gains from automated seller tools and incentives have begun to plateau -- is to make the leap to centralized fulfillment for the subset of sellers and items that show the steadiest and highest-volume demand.

This doesn't have to be a margin-killer -- fulfillment costs money and this is a value-added service that smart sellers are willing to pay for -- and it can also be a growth enabler for both the marketplace and its best sellers. Many small vendors struggle to scale their operations as demand grows, and helping them construct a more scalable supply chain -- while pooling the costs of doing so across multiple sellers -- can add meaningful economies for seller and marketplace alike (with the added benefit of deepening the relationship with your most valuable sellers).

3. Completely redefine the value proposition

This is the most interesting vector of innovation for marketplace operators, and also the most effective line of competitive defense as Amazon and other online superstores gobble up the market for commodity general merchandise.

To survive in the face of Jeff Bezos' implacable assault on e-commerce, your online marketplace needs to own a value proposition that is strategically divergent from Amazon's: offering not only merchandise, but also experiences, values and emotions that that company's laser focus on price and speed won't allow it to replicate.

The solutions to this puzzle are as diverse as the modern range of successful e-commerce players:

  • Etsy's focus on the quirks, craftsmanship and personal stories of individual sellers
  • Threadless's community-sourced design process and celebration of the humans behind the design
  • Stella and Dot making in-person / social selling the emotional center of the brand experience
  • Uber's embrace of the smartphone to bring immediate gratification, predictablility and transparency to the taxi-hailing experience
  • AirBnB's leverage of social media as a trust-enhancer, making individual homes viable as a globally-scaled form of lodging
  • StichFix's flipping the fashion retail model from "pull" (customer search and browse) to "push" (stylists select and proactively send), with a focus on indie designers not found in big box stores.
Some of these innovations are operational, but most include a healthy dose of the one thing Amazon fails at -- human warmth. When you care about the seller and not just the merch, you're more likely to take a risk on a new item or experience. And if the purchase delivers an experience along with a thing, your feeling about will stay with you much longer than the item itself. 

There's risk in this strategy -- bad experiences are even more potent than good ones -- but by coupling technical + operational excellence with human warmth and experience-based differentiation, smart marketplace owners can build and defend franchises that even Amazon will be hard-pressed to attack.

Monday, December 16, 2013

Cascadia, global innovation + "big tent" capitalism

I've been reflecting lately on the cultural differences between the Pacific Northwest and Silicon Valley.

I grew up in Seattle and have deep family ties here, but lived in the Bay Area both before and during the tech bubble of the 1990's, so I feel like I have a decent grasp of the values that animate each region.

A common refrain among Seattle tech folks is that Valley is culture is fundamentally "greedy" or "short-sighted". An Amazon friend who recently relocated from Seattle to the Bay Area described it more gracefully as a culture of "premature optimization"-- where people are so focused on scrambling for money and status that they rarely dig in long enough to build something of lasting value.

By contrast, Bay Area people either don't think about Seattle at all, or dismiss it as just another farm-team town full of B-players going nowhere, with maybe a few big-leaguers-in-training who will eventually wake up and head south to be in the Show.

As with all stereotypes, neither view is entirely accurate, but both contain just enough truth to draw blood.

All this got me thinking: is there anything really, fundamentally different between the two cities, or are all the perceived differences just a matter of degree rather than kind?

At this point, more than a dozen years distant, I don't think I can fairly represent the deep culture of the Bay Area any better than that thoughtless loudmouth. But I go as deep in Seattle as anyone, and here's what I've come to believe:

Seattle -- and the Pacific Northwest more broadly -- are forging a new kind of "big tent" capitalism that is fundamentally different from the kind that's taken root elsewhere, and that will make the region more and more attractive to digital creatives as the global income divide grows wider.

This is a bold claim, and as a prodigal son of the Northwest I'm acutely sensitive to this region's tendency to throw its arm out of joint patting itself on the back. But every day I meet more people in Seattle who add weight to my belief that there is some seriously divergent economic thinking going on up here, and that we should actually be leaning into it, not trying to hide it like the crazy aunt in the attic.

First, let me try to explain what I mean:

A significant wave of recent economic and urban design thinking -- like Enrico Moretti’s The New Geography of Jobs"and the Brookings Institution’s related analysis, "The Metropolitan Revolution: How Cities and Metros Are Fixing Our Broken Politics and Fragile Economy" -- suggests that the world's leading innovation hubs are also becoming the functional center of economic and political power, both here and abroad.

The cities at the forefront of this shift -- the ones profiled in last year's Startup Genome report are as good a list as any -- are also the ones where the income and opportunity gap between those with knowledge work skills and those without is most acute.

Any city that aspires to a leadership role in the global knowledge economy will be forced to make some very hard choices about how it wants to compete going forward. 

A civic leadership class that leans toward free-market libertarian principles will compete most aggressively by favoring the needs of the the technical and financial elite over the urban poor and working class. Conversely, a leadership class that worries most about social justice and social mobility will channel more resources to their city's least-advantaged populations, but at the risk of alienating the entrepreneurial knowledge workers they rely on to stay competitive.

Well-meaning people in every city will try to strike an appropriate balance between these two extremes, and no city will have an easy time reconciling the two as the income gap continues to widen.

My contention is that Seattle is emerging as a global leader in fusing the growth-oriented culture of techno-capitalism with a deep and broad commitment to social justice and social mobility.

What evidence do I have to support this view? When I started looking for examples my list quickly became too long to track, but here are just a few of the most noteworthy ones:


It may be hard to imagine for kids born in the 1980's and '90's, but Microsoft was once the most feared and admired company in tech, largely owing to the brilliance and relentless competitive drive of its founder and CEO, Bill Gates.

Gates created the foundation in 1997 and left Microsoft to run it full-time in 2008, devoting a majority of his Microsoft fortune ($28 billion to date) to fund its work. Warren Buffet has since pledged a significant share of his own fortune to the foundation, and the foundation's "Giving Pledge" program has elicited similar commitments from over 100 of the world's richest families.

Unlike many charitable foundations that are designed to exist in perpetuity, the Bill & Melinda Gates Foundation is chartered to exhaust its resources and "sunset" itself within 50 years of the founders' deaths. Most importantly (at least as far as my thesis goes): the foundation is explicit about its use of market-based methods to achieve social aims, embracing an approach that has come to be known as "philanthrocapitalism".

The presence of the Gates Foundation in Seattle is more than symbolic -- the foundation is the anchor investor in a significant cluster of high-performing local organizations that are helping to enact the foundation's diverse agendas in global health, vaccine delivery, agriculture and education -- importing and sustaining a significant local talent pool that shares their aims.


Most people think of Starbucks as a globally reliable place to get a decent cup of coffee, and with over 20,000 stores in 62 countries that's certainly true. But what may be less obvious to the millions of loyal Starbucks drinkers around the world is the company's deep and long-standing commitment to labor and social justice issues.

From the company's early commitment to extend health benefits to part-time store staff, to supporting fair trade coffee producers, to more recent public stances on gay marriage and gun safety, founder and CEO Howard Schultz has repeatedly used the company's global ubiquity as a platform to advocate for progressive ideas. As the company has grown, executives trained up in the Starbucks model have spun out and formed companies of their own with similar ambitions for business success and positive social impact.


 + Costco 

The largest outdoor specialty retailer and the second largest retailer of any kind in the U.S. are both based in the Seattle area. And while the companies have different histories, brands, corporate structures and leadership styles, they share one important distinction that sets them apart from most other retail companies in the world: they are both membership organizations.

REI is a member-owned co-operative that actually sends dividend checks to its members based on their year's purchases; Costco uses membership fees -- and the implied buying power of its membership base -- to deliver rock-bottom prices on an astounding range of household goods, grocery items and financial services. 

Neither organization is explicitly animated by a social mission -- their membership models are fundamentally business model innovations, not philosophical statements -- but their customer-centric and value-driven cultures are emblematic of the Pacific Northwest's strange breed of capitalism.


While the company itself is now struggling for relevance, the unique history of Real Networks has left a lasting impression on Seattle's startup culture. Microsoft alumnus Rob Glaser founded the company in 1994 as "Progressive Networks", with a vision of using streaming media to help politically progressive content reach a wider audience. 

The idea of using technology for social good wasn't unique to Glaser, but by combining the technical and competitive energy of Microsoft with a passion for social impact, Real Networks built a business that married the democratic ideals of early Internet adopters with the fierce competitive spirit of the (at the time) most powerful company in tech.

The company was ultimately forced to broaden its social mission to stay alive, creating the then-dominant format for streaming digital music and going public in 1997. But even as the company's influence waned, Seattle-based tech reporter John Cook has made a convincing case that Real Networks alumni went on to become some of the most prolific and successful tech entrepreneurs in the Pacific Northwest


Seattle entrepreneur Paul Brainerd was a co-founder of Aldus, a pioneering desktop publishing company that merged with Adobe in 1994 to create the global leader in digital design and document management.

In 1995 Brainerd created a family foundation focused on Pacific Northwest charities, and a few years later created Social Venture Partners to encourage his peers in the high tech industry to contribute both money and time to social causes.

Today, Social Venture Partners is a global organization with affiliates in 34 global cities and nearly 3,000 members worldwide. The term "social venturing" is now in common use to describe the use of for-profit business skills and techniques to increase the effectiveness and accountability of charitable giving.


Seattle entrepreneur and angel investor Hadi Partovi built and sold several technology companies before turning his attention to one of the most fundamental challenges facing the U.S. economy: the lack of job-relevant computer science training among poor and underserved populations. 

The organization he created this year to tackle this problem,, has already touched over 16 million lives worldwide, attracting endorsements from leaders as diverse as Mark Zuckerberg, Bill Gates and Barack Obama, and announcing partnerships with public schools around the country to deliver its free computer science curriculum.


He's just one man, not a global organization, but Nick Hanauer has become one of the country's most powerful critics of income inequality by attacking the problem from the inside. As one of the original seed investors in and a co-founder of Avenue A (acquired by Microsoft for $4.6 billion), Hanauer is a card-carrying member of the 1%. But rather than fade into comfortable obscurity, Hanauer has taken to writing pieces like this one in Democracy Journal, challenging the laissez faire approach that dominates American capitalism today and advocating for a more just and equitable approach to economic policy-setting and income distribution.


These are all just anecdotes -- and I'm sure many other cities could pull together a similar list of high-impact efforts by well-meaning citizens to use their business skills for social good. But what interests me is whether the geographic clustering of these efforts can somehow make a whole greater than the parts.

The central thesis of "The Metropolitan Revolution" is that our national political framework has become too unwieldy and fractious to do anything but maintain the status quo -- if we want to make progress as a nation we need to forge policy at the city and state level.

If that thesis is true, the political character of a city or region is more than just idle cocktail party chatter -- it's the working model for the kind of democracy and social compact that will carry our country forward for the next 200 years, in the context of ever-accelerating global change.

I'm excited about Seattle's continued role as a leader in the global technology business, but I'm equally energized by the idea that we are forging a society that fuses all the competitive and economic energy of modern techno-capitalism with a deep and abiding commitment to social justice and social mobility for all. Our region may not be unique in its efforts, but -- if the list above is any indication -- we're in the fight, and that's a start.

Friday, November 8, 2013

Native mobile: a new (and scary) link in the enterprise value chain

In my Defrag talk this week I tried to make the case that the accelerating pace of technology change has reached a point where most large companies can no longer keep up.

Technology risk now presents the single biggest existential threat to established companies + brands, and nowhere is this more true than in the current rapid shift from web to mobile.

One of the books I read in preparation for the talk (thanks to a recommendation from the brilliant Venkat Rao) is Charles Fine's Clockspeed: Winning Industry Control in the Age of Temporary Advantage. While some of the examples in the book are showing their age (it was published in 1999), the basic framework is still very useful as a tool for thinking about the impact of ever-accelerating cycle time on business strategy.

The core of Fine's thesis is that technology is accelerating the "clockspeed" -- and thereby shortening the economic lifespan -- of every product, process and capability in the enterprise value chain. Companies can't manage this risk just within the four walls of their business -- to survive, their entire value chain must become more agile and responsive to the shifting needs of the market.

The shift from desktop to native mobile computing is the most profound -- and fastest -- disruption to the enterprise value chain the world has ever seen.

It took about 15 years for the combination of PCs and web browsers to shift the default mode of interaction between customers and businesses from voice / face-to-face to visual / digital. Along the way, the technology industry developed many effective ways to drive customers to a website, offering brands a range of competitively priced options for both organic and paid customer acquisition. And once those customers arrive at a website, the real-time nature of the Web allows companies to quickly spot friction in their digital customer interactions and address them -- or escalate them to a human -- before the relationship can be lost or damaged.

But just as brands were beginning to figure out how to embrace the Web as the front door to their business, yet another door has been added to the stack, and it's not one they fully control.

The iPhone and iPad are so deeply embedded in our culture now that it's hard to believe they didn't exist until just a few years ago. The slide below (excerpted from Ben Evans' excellent long-form analysis) shows just how quickly and decisively the PC has been replaced by mobile devices.

It's tempting for brands to think of mobile as just an extension of their Web strategy. After all, mobile devices have browsers too, and websites can be adapted to render on those smaller screens without a significant loss of fidelity.

But treating mobile like an extension of the Web is a potentially fatal mistake for any large company (and many small ones too).

There are at least four critical differences between Web and native mobile that require mobile to be afforded the same strategic significance as any other entirely new link in the enterprise value chain:
  1. Distribution / customer acquisition

    Apple and Google have constructed well-defended tollbooths through which customers *must* travel to access native mobile apps. Unlike the web, which offers a huge array of customer acquisition methods (both paid and unpaid), the app stores are currently the only way that mobile apps can make it on to a customers' device (ignoring for the moment the small-but-passionate jailbreaking / sideloading communities).

    Not only is the eye of the distribution needle for both iOS and Android incredibly small, it's also -- for the moment -- frustratingly opaque. Even if you're willing to devote resources to mobile customer acquisition (and the dollars here are huge, for reasons we'll come to in a minute), the app stores have made it frustratingly difficult to definitively link a specific install to any specific marketing campaign, leaving marketers in the dark about how to spend their budgets most effectively.

  2. Experience / customer value creation

    Once you get a customer to install your app, the potential to create powerful experiences goes way beyond what's possible on the Web. Access to the phone's full range of sensors -- GPS, accelerometer, touch interfaces, haptic feedback and more (not to mention direct integration with the address book) -- makes it possible to create immersive, contextually relevant experiences unlike anything the Web can deliver. The net result, based on data from a range of both consumer and enterprise mobile publishers, is app engagement times in the tens of minutes per session, versus single digits for either web or mobile web visitors.

    Brands that understand the power of native mobile are much more likely to create experiences that delight smartphone and tablet users. Those that simply port their web experience to mobile -- or worse yet rely on mobile web alone to serve their mobile customers -- risk losing engagement and loyalty to firms that take full advantage of the native runtime to engage their customers. The lifetime value delta -- and existential risk of losing customers to "mobile-first" competitors -- keep driving the cost of paid mobile installs to new heights.

  3. Connectivity / customer intimacy

    The gains in customer experience quality that come with native mobile can easily be offset by losses in customer intimacy resulting from device-based software and spotty mobile connectivity. Unlike a web experience that can be instrumented and managed in real-time, mobile publishers are often blind to user actions on native mobile until well after the fact, making it difficult to know when customers are having trouble until it's too late, the customer is disappointed (or worse) and the app is uninstalled.

    Brands that have built a reputation for customer service are the ones most exposed to the loss of customer intimacy represented by third party app stores and native runtimes. Those that develop new and creative solutions for restoring customer touch and intimacy on mobile devices will have an unfair advantage over brands who fail to recognize the risk, or simply accept it as a cost of doing business in a mobile world.

  4. Engagement / customer activation

    Native installs are expensive and hard-fought, so maximizing lifetime value for each install is a core driver of business value. But unlike the web -- where search marketing, retargeting and email campaigns can all be used to draw past users back to a site -- native mobile customers are much more difficult to re-engage. Push messaging is the single most powerful tool for mobile customer engagement -- especially when integrated with location, day-part and behavioral data triggers to increase relevance -- but also risks customer annoyance, fatigue and privacy concerns if used too aggressively or for messages that deliver too little value.

    Learning how to market effectively to native mobile customers -- taking full advantage of the always-on nature of the mobile relationship, and using both onboard sensors and data-intensive customer intelligence to activate mobile customers without alienating them -- is a powerful new area of both risk and opportunity for major brands.

Accepting that native mobile is a permanent addition to your enterprise value chain -- effectively the new front door to your business -- is fundamental to the continued competitive relevance of nearly every firm. 

Companies that try to wish it away -- or hope that adapting their digital offerings to the mobile web will somehow be good enough -- fail to understand how different the basis for competition in native mobile really is.

Only by developing a deep competence in each of the disciplines outlined above -- mobile customer acquisition, mobile customer experience, mobile customer intimacy and mobile customer engagement -- can incumbent firms hope to defend themselves from "mobile first" challengers who are able to meet modern customers where they want to be.

The accelerating speed of technology change in the mobile environment means there's no time to waste in developing a competence in native mobile. The fastest clockspeed segment of your value chain is the one that calls the strategic tune, and the pace of change in mobile is the fastest the world has ever seen.