Product vs. Platform -- Competing at right angles

I seems like every self-respecting entrepreneur these days is building a platform, not a product.

Many (but certainly not all) of these "platform" aspirants are smart enough to understand that most true platforms (think Facebook, iOS, Android) didn't start out that way.

Platforms tend to emerge in one of two ways:

EITHER: a disruptive new service (e.g. Facebook, Twitter) achieves massive adoption by end-users, and then opens itself to developers to accelerate innovation on behalf of its users.

OR: An incumbent player with a massive existing installed base (e.g., Apple with iTunes, Google with Gmail, Maps + Search, Amazon with its services architecture) leverages that base to offer developers instant distribution via a new platform technology (e.g., iOS, Android, AWS).

But there are just enough exceptions to this rule -- think Heroku for Rails developers, Urban Airship for mobile messaging, Twilio in telephony, GitHub for software development, Etsy for e-commerce -- where a startup actually succeeds in becoming a platform worthy of the name, feeding the dreams of ambitious entrepreneurs who believe they can beat the odds.

Platforms + Reference Apps

Unlike the incumbent players that start out with a big installed base, these aspiring platforms start out empty of both users and applications. Bootstrapping a customer community is brutally hard, and many entrepreneurs are too aggressive, and too impatient, to wait for adoption to come.

To demonstrate the capabilities of their new platform, the founders often choose to create one or more "reference apps" -- specific (vertical) implementations that shine a light on the platform's general (horizontal) capabilities. If the team doesn't handle this well, their "reference app" effort can create dangerous confusion among customers, core team members and potential investors.

Startups are resource-constrained at the best of times, never more so than when they're just starting out. The more "real" their reference app is, the more resources it consumes -- resources that aren't being invested in extending the core platform.

In the most extreme cases, the company finds itself "competing at right angles" -- trying to win on both the vertical (app) and horizontal (platform) axes simultaneously. 

Instead of focusing on the big bet, the team is forced to fight on two fronts. This rarely turns out well. 

This predicament resolves itself in one of three ways:

1. Company fails -- instead of nailing one important thing, the team fragments its efforts and underperforms at two, with predictable results. (This is the default case whenever a team's attention is split)
   
   
2. Platform wins -- the team keeps the reference app in perspective (a demo, not a product) and leans in on delighting platform users. (Twilio provided a set of open-source demo apps at launch, but was crystal clear about not putting itself in competition with its developer community).
   
   
3. App wins -- in a few examples I can think of (Z2Live here in Seattle is a notable one), the reference app becomes the business, and the platform effort is abandoned in favor of the surprise hit.

How to Avoid the Trap

If you aspire to build a true platform and plan to build one or more reference apps to demonstrate its capabilities, here are three things you can do to avoid falling into the trap of "competing at right angles":

1. Over-communicate -- make it abundantly clear to team members, platform customers and investors that your reference apps are that and nothing more, so no reasonable person can misinterpret your intent.
   
   
2. Under-resource -- Don't let your reference designs take on the status of "real" products or you'll undermine credibility (and mis-allocate scarce resources).
   
   
3. Open-source -- the best way to prove that your reference designs are nothing more is to give away the source code to your developer community.
   
   
4. Partner with customers -- instead of creating your own reference apps, work with a few early-adopter customers to create showcase apps that demonstrate the capabilities of the platform, but aren't controlled or maintained by your team.

Seen other clever ways of hacking adoption on nascent platforms? I'd love to hear about them!

Does your first-use experience have a massive "me-value delta"?

I took a swing at this idea over four years ago, but in retrospect I buried the lede. It keeps coming up in my conversations with entrepreneurs, so I figured I'd try again with a more direct approach.

It's insanely hard to get people to adopt new behaviors.

Almost by definition, startups need customers to try something new: a new brand, a new product, a new experience. Some people (the kind that start new companies) are *always* looking for new ideas. But *most* people don't spend their time scouring the world for new products to try.

There's so much crap out there that the default customer attitude toward any new service is skepticism. And rightfully so.

Given how hard it is to talk people into trying something new, I'm always amazed when I meet entrepreneurs who expect users to do a ton of manual setup and data entry in order to get value from their product. They're so in love with their own ideas that they can't imagine others won't be as well.

If you want people to fall in love your product as much as you do, remember the principle of "beginner's mind" and create a first-use experience that has a massive "me-value delta":

Ask as little as possible of your customers, and use that tiny bit of commitment to generate a magical amount of value in return.

The more wired your customers are, the easier this should be. The amount of personal data embedded in the average Twitter, Facebook or Gmail account trumps anything you could possibly ask for in a signup process. So why the hell would you ask users to fill out page after page of form fields when you could just let them log in with an existing account?  Once you have access to the data in that existing account, it's your job to parse, sift and analyze it to create some new intelligence -- and a new experience -- that blows them away.

Take Flipboard as just one example: all you have to do to experience the magic of that application is connect one of your social media accounts. Almost instantaneously, you have a beautiful iPad magazine full of content that's uniquely relevant to you -- because it's sourced from your friends. Tiny effort, huge payoff.

If your onboarding process feels like an effort to capture data about your customers, you're signaling that you don't have much faith in your ability to retain them over time. Your first-use experience is a chance to surprise and delight, not fill your database.

Make magic for your users and they will love you. Earn their love -- and their trust -- and they'll follow you to the ends of the earth.

"Self Provisioning" -- the guerilla assault on enterprise IT picks up steam

 "Self-provisioning" is the enterprise IT manager's description for services that users can select, install, configure and use all by themselves.

The name reeks of corporate-speak, but the impact is all startup. Combine "self-provisioning" with...

- No contract / low monthly pricing -- so no procurement officer has to bless it, and...

 - User-centered design -- so no help desk staffer gets called to support it

... and you have the makings of a full-fledged assault on the traditional enterprise software market.

This isn't a new idea. Before anyone was talking about "cloud computing" or "SaaS" Salesforce created a billion-dollar enterprise software business by renting simple, web-based CRM tools to individual salespeople at $25 a month.

While traditional enterprise IT vendors attacked from the top-down -- with expensive sales teams and executive golf junkets -- Salesforce infiltrated customers from the bottom up: single-user adoption led to teams, then workgroups, and ultimately to enterprise-wide adoption.

What's changed in the last few years is the convergence of Salesforce-style self-provisioning with the dual assaults of agile / lean startup methods (building software products quickly / at low cost) and social media / content / inbound marketing (acquiring customers cheaply through search and word of mouth).

Together, these forces are radically reducing the costs of building an enterprise software company -- making it possible for small, lightly-financed teams to attack opportunities that were once limited to massive VC-backed players.

We absolutely love this theme and are watching it play out all over the Founders Co-op portfolio:

• In Business Intelligence / Analytics, Simply Measured turns social media marketers into data-powered quant jocks, stitching together multiple real-time data sources into beautiful visualizations of business insights. No database. No custom reporting request to IT. No technical expertise required.

• In Digital Marketing, Unbounce lets online marketers create, publish, test and analyze beautiful landing pages for their campaigns with no coding and no IT support. And Smore (still in private beta) makes it effortless for anyone to create, publish, promote and analyze beautiful "online flyers" for their business.

• In Digital / Education Publishing, Highlighter turns any professor into a digital textbook publisher -- with one-click publishing, collaborative social highlighting and commenting, and analytics dashboards to track student engagement -- all entirely for free. 

• In Enterprise Productivity, Thinkfuse (still in private beta) turns the dreaded weekly status report into a social collaboration tool (at the workgroup level) and business intelligence platform (at the enterprise level).

We didn't set out to be enterprise software investors -- and we shudder when we see ideas that require armies of bag-carrying field sales reps -- but we love companies that actually make money, and enterprise IT is still a great place to do that. 

Gratitude

I've been singing a song in my head for the last few weeks -- if you're an old-school Beastie Boys fan like me you might recognize it...

"What's gonna set you free?
Look inside and you'll see
When you've got so much to say
It's called gratitude, and that's right"

- Beastie Boys, "Gratitude", Check Your Head (1992)

Last Friday, Andy and I announced the official close of Founders Co-op II, our second fund as "professional" early-stage investors. With the close of this new fund, we now have a fresh $8 million in capital to do what we love best: scouting out the most talented and ambitious software entrepreneurs in the Pacific Northwest and helping them make a dent in the universe.

I have so much in life to be grateful for, but right now I'm full of gratitude for...

Our portfolio company founders and team members

Money is the least part of entrepreneurial success. Talent is the limiting reagent in the innovation business -- crazy-smart teams with huge product vision, mad coding chops, design genius, marketing hustle, and buckets of raw grit + determination. 

Every time an entrepreneur agrees to work with us, we get another chance to help an insanely talented team make a difference in the world. We do everything we can to honor those relationships every day.

Our Limited Partners

These are the 64 people (66 counting Andy and myself) whose money is behind every check we write. The investors in Founders Co-op are our secret weapon -- 64 successful innovators and business leaders who believe so passionately in the power of entrepreneurship that they put their money (and often their time) where their mouth is by joining our community.

Without them, Founders Co-op wouldn't exist. With them, we can move mountains on behalf of our growing family of portfolio companies.

Our VC mentors + co-investors

$8 million is a drop in the ocean when it comes to building big, disruptive technology businesses. As John Cook noted in his article on our raise, we hope to be "catalysts" for software innovation, but as our portfolio companies grow we inevitably wind up in a supporting role and count on bigger firms with the capital and strategic leverage needed to make success possible. 

Over the past four years Andy and I have had a chance to work with -- and learn from -- some of the best investors in the business. First among these is Brad Feld at Foundry Group. Brad was an investor and board member in Andy's and my last business (we lost his money), and is now a key investor with us on both Big Door and (with his partner Jason Mendelson) Urban Airship.

Among many other great co-investors, the partners at First Round Capital, True Ventures, Madrona Venture Group and Ignition Partners have also helped us learn the ropes and help turn our early-stage bets into bigger + more aggressive insurgents in their respective industries.

TechStars 

Founders Co-op -- along with the entire Seattle early-stage community -- has benefited hugely from the support of David Cohen's TechStars accelerator program. My partner Andy is the Executive Director for the Seattle program, and we host the 10 companies in each year's class in our South Lake Union office. 

TechStars Seattle has become the essential "glue" that binds together many of the most influential players in the local startup ecosystem -- every major venture firm has committed both capital and partner-level advisors to the program, and over 100 experienced software execs (many of them active angel investors) have signed on as volunteer mentors to the companies selected to attend. 

 The Seattle Startup Community

I grew up in Seattle but spent much of my early career in the Bay Area. When I moved back in 2001 I struggled to find people who shared my passion for the pirate's life -- until I met my now-business partner Andy Sack. 

Over the past 10 years we have witnessed -- and made our own efforts to contribute to -- an incredible transformation in the culture of our city. No, we aren't Silicon Valley, nor are we likely to ever challenge the Bay Area's primacy as the center of global tech innovation. But what we lack in heft and global reach we more than make up for with underdog spirit. 

As a community, we punch way above our weight, and I'm convinced it's because we're working together, celebrating each other's successes and cheering each other on. I miss the weather and the cycling in the Bay Area, but I wouldn't trade our culture for theirs on my worst day.

My partner, Andy Sack

 It's getting late, and this post is already way too long for anyone to read, but if you got this far then you can stick with me for a few more sentences.

I didn't set out in life to be a venture capitalist, or even an entrepreneur -- I just kept trying different kinds of work and learning what I didn't want to do, until I figured out what I needed to be happy: 

• working with insanely smart + relentlessly curious people

• pursuing ideas I'm stay-up-all-night passionate about, and

• being part of a team with an unshakable level of trust + mutual support 

 Andy and I didn't start a business and find someone to do it with, we started with a partnership -- and a friendship -- and built a business around it.

So thank you to all the people who let me do what I love to do. I have a ton to learn about being an effective venture investor, and I won't know for years if I'm any good at it, but I've never had more fun in my life, and it's all thanks to you.

Portland is on! Join me for PIE Demo Day, Tuesday 1/17/12

Happy 2012 startup people!

I'm just getting my calendar back together after the holidays and the first event on the books is PIE Demo Day, Tuesday January 17 at Portland's Bagdad Theater.

A little over two years ago, Portland-based creative firm Wieden+Kennedy created the Portland Incubator Experiment (PIE). This coworking space was the spawning ground for two Founders Co-op portfolio companies -- Urban Airship + AppFog -- among many others.

Last fall, in partnership with Coca-Cola, Target and Google, PIE packaged up the learnings from those early days and created an accelerator program for promising early stage startups. Demo Day is show-and-tell time for their inaugural class of startups.

Among the eight companies coming out of PIE this year, several have already announced significant fundraising milestones (including Trinity Ventures' support of cloud cost management platform Cloudability). Tho whole gang will be showing their stuff at Demo Day, and Portland's startup scene will be out in force to see what they've got.

Love startups? Want to see what's cooking in Portland? You should be there!

The "Enterprise Innovation API"

I've written before about the seemingly unbridgeable gap between the elite class of software "makers" and the enterprise customers who most need their help.

I was reminded of the problem by Fred Wilson's post this morning on "vertical accelerators" -- specifically the FinTech program in New York.

In Fred's words...

"the secret sauce of these programs is the leadership of the CIOs and CTOs of the largest banks and financial services companies...

"When I talked to the teams that went through last year's program, this was the thing that all of them gushed about. Getting regular access to the highest level technology execs in these institutions was a game changer for most of the teams"

I'm already on record as a huge fan of accelerator programs, and the pattern Fred describes is playing out all over the early-stage community (other examples include Weiden + Kennedy's PIE program, Rackspace-sponsored TechStars Cloud, and Microsoft-sponsored TechStars Kinect).

Big companies are desperate for access to digital innovation, and are "leaning in" to the accelerator movement for access and influence.

But "access" and "influence" are weak sauce for huge incumbent firms faced with looming digital threats. How can big companies access technology innovation on *their* agenda, with the kind of urgency and impact they need to avoid being disrupted out of business?

The traditional solution to the problem of enterprise innovation-at-scale is M&A: waiting until a disruptor is operating at a "meaningful" level of revenue or impact, and then paying a huge premium to take those innovations in-house (where they usually die a quiet death for lack of cultural and strategic fit).

The new trend of enterprise-focused accelerators is a tacit acknowledgment that M&A is often too little, too late: disruption is happening too fast, on too many fronts, to wait until its potential is obvious to the entire industry.

I'm delighted to see enterprise players engaged with the early-stage community, but I don't actually believe it's really going to solve the problem of fostering digital innovation within the enterprise.

The enterprise-accelerator trend suggests that corporate buyers are ready for a new approach to this hard-but-important problem, a translation layer that connects corporates seeking innovation with the elites of the digital creative class, with the scale + velocity required to help tech-laggard bigcos survive.

Toward an "Enterprise Innovation API"...

There is no one company or product I'm aware of that's solving this problem today, but I expect a successful pattern here to combine the following elements:

• Trusted Executive Access
  
  Delivering impact at enterprise scale requires access and support at the highest levels of the organization, because that's where strategy is formulated and money + power are controlled. Traditional enterprise consulting firms excel at this -- from McKinsey + BCG in strategy; to Accenture and IBM in tech; to WPP, Omnicom,  IPG and Publicis in brand + creative.
  
  Companies will always reject a truly disruptive innovation effort if this layer of the organization isn't bought in -- gaining + maintaining access is critical.

• "Outside-In" Approach 
  
  Traditional enterprise IT projects are black holes (or gold mines, if you're an old-school system integrator), requiring costly and time-consuming coordination of technical and leadership resources across many different departments and budgets.
  
  Delivering truly disruptive technical innovation at enterprise scale requires extreme tactical agility -- tapping strategic data and organizational resources as needed, but pulling them into lightweight frameworks that (largely) sit outside the tangled web of legacy enterprise systems.

• Assemble More, Develop Less 
  
  Another key tactic of old-line enterprise IT consultants is to encourage deep system-level platform development and customization, deploying armies of low-level coders to wrap custom software (and sometimes even bespoke hardware) around enterprise-specific business rules.
  
  Looking forward, high-impact enterprise innovation will be driven by firms that can convince their enterprise customers to embrace the power + agility of modern tools + platforms (e.g., LAMP, AWS, iOS / Android, Twitter, Facebook, SMS / Push, SaaS, IaaS), instead of trying to channel their technology spend into a proprietary system.
  
  
• A Platform, Not a Pyramid
  
  Traditional services firms always wind up looking more-or-less the same -- a few seasoned + strategic folks at the top (the "partners"), a bigger tier of smart + hungry lieutenants below that ("team leads" or "engagement managers"), and a high-churn mass of inexperienced kids at the bottom (which is where the margin comes from).
  
  In a world of high-velocity, software-powered disruption, the pyramid model fails: it's too slow, the needed skills are too diverse, and the quality of "digital creatives" willing to work in the lower tiers of a traditional pyramid structure is too low (for all the same reasons that apply to enterprise recruiting of technical talent).
  
  A winning approach to enterprise-scale innovation will federate the talents of elite performers at each layer in the stack -- senior strategy consultants, brand and creative professionals, IT infrastructure experts and software creatives conversant with the current (i.e., mobile / social / cloud-based) state of the art. 

No single firm can credibly claim to deliver a best-in-class solution across these functions, and I actually don't expect any single entity to emerge as a leader here. Instead, I see an opportunity for a "virtual industry" of boutique advisory firms, led by "partner-level" refugees from the old pyramids who understand how innovation happens now.

These "innovation boutiques" will call in elite teams of specialists, assembled from the emerging class of high-performance talent marketplaces (think Forrst and Dribble for visual design, GroupTalent and oDesk for software execution, Contently for content creation, etc.), to deliver short-duration, high-impact solutions to their corporate clients.

So the "Enterprise Innovation API" isn't a company at all, it's a loosely-federated web of specialist firms, teams and individual contributors that make themselves available for high-impact strategic engagements on behalf of the biggest and most powerful brands on the planet.

The components of this new enterprise innovation market are already emerging and -- as demonstrated by the corporate accelerator trend -- the customers are eager to buy.

Secondary Market Kung Fu

I'm going to catch a ton of shit for this, but here's the truth: Seattle is a secondary market for software entrepreneurship.

But before all you PNW partisans jump all over me, let me qualify that statement:

Compared to Silicon Valley, *every* city in the world -- including New York, Boston, Austin, Beijing and Bangalore -- is a secondary market for software entrepreneurship.

There simply is no other place on the planet with a greater concentration of talent, money, tech incumbents (a.k.a., acquirers) and self-reinforcing media attention for early-stage innovation than the Bay Area.

Entrepreneurs who live anywhere other than Silicon Valley -- which is most of the world's entrepreneurs -- have two choices: pick up and move, or learn a little secondary market Kung Fu.

First, let's talk about what you *don't* get if you choose to build your startup in a secondary market:

• Credibility -- As Mike Arrington will tell you, any entrepreneur worthy of the name will get his (or her) ass to the Valley and never look back. In this view, if you aren't serious enough about your startup to bring it to the show, you don't deserve to be called an entrepreneur.

• Access -- Most entrepreneurial exits are via acquisition, and most tech acquirers are in the Valley. Want to get bought by a tech bigco? You stand a much better chance of getting on the radar -- both formally and informally -- if you're just down the street, not a plane flight away. The same goes for VCs, mentors, or any other scarce human resource -- physical proximity + repeat interactions increase your odds of getting the help you need.

• Coverage -- Journalists thrive on access too, so it's no surprise that the loudest media voices on tech and startups make their home in the Bay Area (unless they're temporarily avoiding income taxes). Since journalists are people too, they apply the same heuristics to startups that investors and acquirers do: if you aren't in the Valley, you must not be serious; and if you're not serious, you're not worth covering.

• Talent -- Not only are there more digital creatives in the Bay Area than anywhere else on earth, but (even more importantly) the culture of entrepreneurship there runs so deep that only the weirdos and lamesters are actually willing to work at a bigco. Any Valley developer with an ounce of creativity and grit is building their own business, not working for someone else.

• Serendipity -- Good ideas come from frequent collisions between people and ideas spanning divergent domains. If you want to increase your odds of producing a truly disruptive innovation, you need to put yourself in the way of as many serendipitous idea-generating interactions as possible. Once again, based on numbers alone, Silicon Valley looks like a winner.

Now, since a Kung Fu master prizes his ability to use his opponent's strengths against him, let's talk about how Caine (photo above) would use those disadvantages to his advantage...

• Credibility -- Secondary-market companies actually *can* find success without the built-in support systems Bay Area folks take for granted -- it's harder to do, and all the more impressive for that. Chicago-based Groupon didn't attract investor and media attention because it was in the Valley. It attracted attention by generating "$1 billion in sales faster than any company, ever".
  
  In my experience, smart investors and journalists actually *like* to learn about companies operating outside the bubble -- there's less competition for the story (or deal), and the excitement of finding a "hidden gem" (or "undervalued asset") is part of the appeal.
  
  

• Access -- This one is hard to hack -- the advantages of regular, face-to-face interactions are real and powerful -- but there are ways to tap the bubble without living in it, and most of them come down to two words: relationships + trust.
  
  If you want access to a Bay Area company, investor or journalist and you're not a local, find a way to engage the people you *do* know who can help. If you're an entrepreneur, seek angel investors or advisors who are well-connected within your target firms. If you're an out-of-town investor (as I am), go out of your way to work with local syndication partners who can help your portfolio companies reach the right folks.
  
  (Neither of these strategies is a silver bullet, but both beat standing outside the store with your nose pressed against the glass...)
  
  

• Coverage -- If you think Silicon Valley is a competitive place to be an entrepreneur, try spending a little time with a tech blogger. Thanks to our industry's ongoing disruption of the news business, it's gotten insanely difficult to sustain an audience for high-quality reporting. The league tables are measured article by article, in the form of views, shares and Techmeme hits, and  journalists care as much as ever about scoops and exclusives.
  
  Seen through this lens, getting good coverage in the tech press is a lot like the Access point above: "outside the beltway" entrepreneurs can earn high impact coverage by investing in relationships with the journalists they respect the most.
  
  Where to begin? Try: 1) offering stories + hooks worth writing about; 2) being respectful of the journalist's time and professional pressures; 3) helping out (e.g., with background interviews / story referrals) that have nothing to do with your own agenda; and 4) regularly "showing up" as a constructive commenter + social amplifier for the writers you follow.  

• Talent -- this story's been told so I won't belabor it here, but the "war for talent" in the Bay Area has a significant downside: recruiting is insanely hard, employee loyalty is low and the prevailing culture focuses more on quick flips and big paydays than teamwork and sustainability. You know things are bad when even Zuck gets in on the culture-bashing:

"If I were starting now I would do things very differently. I didn’t know anything. In Silicon Valley, you get this feeling that you have to be out here. But it’s not the only place to be. If I were starting now, I would have stayed in Boston. [Silicon Valley] is a little short-term focused and that bothers me."

Secondary markets may have fewer entrepreneurial devs, but they also tend to have less-intense cultural and competitive pressures to exacerbate the talent problem. There's a good reason why Bay Area tech darlings like Zynga and Facebook look to cities like Seattle, New York and Boston for expansion offices (and it ain't the weather...)

• Serendipity -- An ironic downside of the intense concentration of startup activity in the Bay Area is that  -- despite the seeming diversity among startups, there is a kind of self-referential monoculture that has developed around the Bay Area tech ecosystem; as a recent article described it, "The Problem With Silicon Valley is Itself"
  
  If -- as Steven Johnson convincingly argues -- good ideas come from the interplay among divergent fields of inquiry, cities with a less-dominant tech culture (or with equally strong intellectual alternatives) are actually better-positioned to generate truly breakthrough innovations than Silicon Valley (even if they're not as well-equipped to productize, finance or wring value from those ideas)

So -- given all of the above -- why would any serious entrepreneur choose to live anywhere other than Silicon Valley?

The more time I spend with entrepreneurs (and between Founders Co-op and TechStars Seattle that's pretty much all I do), the more convinced I am that founders are artists first and capitalists, opportunists and every other kind of -ist second, third, or (sometimes) not at all.

In my experience, artist-entrepreneurs value things like creative expression, personal autonomy and values-based relationships more than anything else. They resist systems that demand intellectual conformity and compliance, and deliberately (sometimes self-destructively) push against constraints that they perceive to be arbitrary or inconsistent with their creative vision -- including the idea that they "have to be" somewhere else to pursue their dreams.

The world is full of entrepreneurial artists -- empowered technology creatives that are absolutely inspired by Silicon Valley, but by no means in its thrall.  Thanks to our mobile, social, ubiquitous technology, these people are finding each other and forging their own communities right in their own cities. They may admire the Bay Area for its many strengths, but they are anything but paralyzed by their outsider status -- it's actually a source of contrarian pride and determination.

Silicon Valley will always be the first and the best, but -- thanks to technology itself -- there is no geographic monopoly on technology innovation, and many paths to get there...