Wednesday, January 28, 2009

Health Care Startups: Dancing With Elephants

At 15%+ of U.S. GDP, it's impossible to ignore health care as a vector for investment. By all accounts the system is badly broken, which should create myriad opportunities for nimble startups to find and exploit inefficiencies. But the sheer size and complexity of the system, not to mention the thicket of state and federal regulations woven through it, calls to mind the folk expression: "when elephants dance, the chickens must be careful".

Since Founders Co-op invests in companies at the earliest stages of development, we're particularly sensitive to the kinds of "non-market" risks present in health care. We've cheered from the sidelines as friends like Henry Albrecht at Limeade, Christopher Parks at change:healthcare and Tom Lee at 1Life Healthcare have waded into the battle, but - until recently - haven't seen a bet that fit our model of investing.

Late last fall we got wind of a Seattle-area startup aiming at well-documented pain point in the current system: the rapidly-escalating cost of group health insurance for small business owners. The company, Array Health Solutions, had come up with a unique application of the IRS-sanctioned Health Reimbursement Account and created a Software as a Service (SaaS) offering enabling employers to shift from a "defined benefit" to a "defined contribution" model for their employee health benefit spending (analogous to the shift from employer-sponsored pensions to 401(k) accounts in the 1980's).

We weren't the first to hear of the deal and, by the time we got there, the terms had pretty well taken shape in a way that prevented us making a big bet, but we liked the team and the opportunity well enough to participate as a minority investor. We made the investment just before the global economy really drove off a cliff and have been watching carefully to see how the opportunity is changing as a result. Unsurprisingly, more companies than ever are looking for ways to control costs, and health care benefits are a major line item for most small to medium-sized businesses. We liked their chances before the downturn, but it's now clear that Array is a great counter-cyclical bet, ideally positioned to create value for both customers and investors through the down cycle and beyond.

Now that we've taken the leap we're digging deeper into the health care market, looking for holes that small, scrappy teams can run through to create value, generate early cashflows and chip away at the mountain of inefficiency out there. Seen anything like that out there? Let me know.

Friday, January 16, 2009

Open Startup: Askablogr's 1-Year Birthday

Longtime readers will remember Askablogr, a blog Q&A widget I created with my friend Craig as an experiment in late 2007. I just realized that Wednesday was the product's 1-year birthday, so here's a brief update for anyone who's been wondering what happened since I stopped paying attention.

Members: 701
Questions: 1,220
PageRank: 4
Alexa Rank: 785,941
Visits: 12,382
Page Views: 37,914
Average Time On Site: 2:17
AdSense Revenue: $22.19

Long story short, despite some early wins the idea never generated enough organic momentum to sustain itself. As I got busier with Founders Co-op, my attention shifted and the product and community stagnated.

Here are a few lessons learned (or reinforced) from the experience:
  • Distribution is King: This is a recurring theme on this blog so it won't come as a suprise to anyone. The Web is so vast that no offering stands a chance unless it comes with a unique insight about how to cost-effectively attract customers. Our best wins in this area were on the PR front, but PR isn't a sustainable strategy for customer acquisition. The bet was that, as bloggers and blog readers encountered Askablogr in the wild, some would adopt the feature themselves, slowly building organic momentum around the offering. But the idea wasn't good enough to garner a sufficient base of installs to sustain organic growth, and the weak economic fundamentals of the product forestalled an aggressive paid distribution strategy.

  • Constant Innovation is Table Stakes: At Founders Co-op, we don't invest in companies where at least one of the founders (and preferably all of them) is a strong a versatile software engineer. But Craig built Askablogr as a side-project and both of us treated it more like an interesting experiment rather than a core activity. As a result, we were slow to turn around members' feature requests and - as soon as we got busy - stopped making anything but critical updates. I'm not sure that the idea had enough merit to become a success, but our lack of responsiveness to customer feedback almost guaranteed the lackluster results.

  • Starting a Web Software Company is Staggeringly Cheap and Fast: Results aside, we built Askablogr in very little time and (despite paying Craig for some of his hours) comparatively little cost. The biggest investment required to start a Web company is the opportunity cost of the founders' time. This is the precious resource that we bet on and work to leverage with our Founders Co-op investments, applying our capital and time to accelerate the raw power of our founding teams' brains and enthusiasm. In this context, team and opportunity selection are the critical steps, because a good team can progress very quickly from idea to product, and choosing the right idea conserves their time and energy by focusing it on the right activities.
At this point I'm not sure what to do with Askablogr. I still think it's a useful and well-executed feature for certain kinds of bloggers, but I'm not giving it the love it needs even to support that niche purpose. If you know of a Rails developer who's looking for a project and wants to take it over, send them my way...

Monday, January 12, 2009

Nice post from Tim O'Reilly: "Work on Stuff That Matters"

Tim O'Reilly has used the phrase "stuff that matters" before, but yesterday he laid out his rough definition of what that means to him, and it's a list that will probably resonate with anyone who's taken a more entrepreneurial path in life. It's a long-ish post but the actual list of "stuff" is short:
  1. Work on something that matters to you more than money
  2. Create more value than you capture
  3. Take the long view
In my experience, the number or people actually living this advice is relatively small, but I completely agree with Tim that those happy few have more fun, live more interesting lives and create more good outcomes for themselves and the people around them.

Tuesday, January 6, 2009

Will smartphones finally unlock the micropayments opportunity?

Cost-efficient transaction processing for "micropayments" (transactions in amounts less than $10) is one of the many unrealized dreams of the Internet age. Of the literally dozens of venture-backed companies that have attempted to crack the opportunity, only PayPal can claim even modest success (just last October they announced new, lower micropayments pricing designed to capture a bigger share of this market). Online gaming communities like IMVU and Gaia Online have also made inroads, but mostly by selling credits for the purchase of virtual goods useful only within the confines of a specific gaming environment.

In today's MacWorld keynote, Apple's Phil Schiller pointed out that more than 75 million customers now have active credit card accounts at iTunes, and that over 5 billion songs have been downloaded since the service first launched. In December Apple also announced that over 300 million iPhone applications had been downloaded from the App Store in the five months since it opened. Most of these transactions were for items priced as low as 99 cents, and Apple's strategy for managing transaction costs on these small purchases is the same one employed by gaming evironments: selling blocks of credits in larger denominations.

Thanks in large part to the runaway success of iTunes and the App Store, every major smartphone platform is now scrambling to release a similar offering for their customers. Google's Android Market was the first to ship, but BlackBerry and Palm are headed the same direction, and Nokia's Symbian can't be far behind. Not to be outdone, Amazon has also been investing heavily to stake a claim to their share of the digital goods pie.

Taken in aggregate, these efforts will pump hundreds of millions of dollars of new virtual currency into the micropayments market, in the form of purchased credits (e.g., iTunes Gift Cards). And unlike the credits offered by gaming companies, these currencies will allow consumers to purchase an ever-widening array of digital goods, including music, movies, TV shows, software applications, digital books, etc. From there it's not a big leap to imagine these marketplaces (and particularly Amazon) opening themselves up to third-party sellers of low-priced goods, making their virtual currencies as portable as Visa and MasterCard are today.

If you're one of the 75 million iTunes account holders Phil Schiller mentioned today, you're already a customer of the Bank of Apple. And given the state of our traditional banking system, maybe that's not such a bad thing...

Great Post from Alex Iskold on the New Physics of Software

Alex Iskold of Read/Write Web has a great post out today on the cultural shift underway in consumer computing. His premise is that the first generation of PC software (and specifically the once-dominant paradigm of Microsoft Windows + Office) made computing tasks too hard to understand, alienating most users. By contrast, the current generation of AJAX-y Web software and user-centered design (with much credit given to Apple) has brought computing tasks into closer alignment with the physical laws of cause and effect. As a result, computers and software (including the latest generation of mobile devices) are quickly shifting from a necessary evil to mainstream icons of status and culture.

Monday, January 5, 2009

Memetracking: The smartphone is the new car

An old friend once shared a telling (and slightly off-color) story about working for a Hollywood studio. He didn't have much money and his car was a shabby older model. One day his boss (a successful producer) took him aside and urged him to upgrade for the sake of his professional image: "In this town," the producer advised with a serious tone, "your car is your dick."

As crude as this analogy is, the symbolic power of consumer goods as totems of social status is very real. And while cars were once the most powerful icon of individual achievement (especially here in America), the smartphone is emerging as the new global symbol of success among the young and technology savvy.

The Economist (my favorite print magazine) spotted this trend early, filing a story in April 2004 titled, "Why phones are replacing cars":
"Phones are now the dominant technology with which young people, and urban youth in particular, now define themselves. What sort of phone you carry and how you customise it says a great deal about you, just as the choice of car did for a previous generation."
Just a few days ago, the New York Times picked up the thread with a story titled, "Play Flute, Name a Tune (or Make a Call)":
"So your cellphone has a brushed-metal shell, can flip and slide four ways and has more buttons than an airplane cockpit. Big deal. The new status symbol is what your phone can do — count calories, teach Spanish, simulate a flute, or fling a monkey from a tree."
In the almost five years that have passed between the first story and the second, phones have gone from being primarily voice communication devices to fully-functional portable computers. Thanks in large part to Apple's iPhone and App Store, it is their very "computerness" - the ability to run fun and engaging local applications on a (relatively) large screen - and not just their role as objects of conspicuous consumption - that has turned the smartphone into the status symbol of the moment.

That personal computers and software are now a leading indicator of cool is interesting enough as a social science phenomenon, but it's equally significant as a vector for investment; even in the current economic downcycle, it's not hard to see how this emerging smartphone/netbook technology ecosystem will offer a rich vein of opportunity for smart software entrepreneurs and their backers.

2009 Prediction: Android Takes Off

I've been watching Google's Android project with interest to see if (unlike so many other Google projects) it will actually amount to something. It's still very early in the game, but everything I'm seeing tells me that Android is about to become one of the top stories in tech for 2009. Here are some of the dots I'm connecting - let me know if you see a different pattern than I do in this data:
  • Successful launch of T-Mobile G1 - Despite what most reviewers describe as pretty clunky hardware, T-Mobile shipped an estimated 1MM G1's (the first-ever Android-powered mobile handset) in 4Q08. Hardware aside, software reviews of the first-rev Android operating system were positive to glowing.

  • First "indie" Android phone appears - Just weeks after T-Mobile started accepting orders for the G1, Kogan (an Australian company) announced the first "unlocked" Android phone, the Agora. To me this was early evidence that Android (the only free, open source smartphone operating system) will spur device innovation of a quality sufficient to challenge Apple and RIM.

  • Mobile heavyweights sign on to Open Handset Alliance - Not long after the Kogan announcement, 14 new members (including Toshiba, Sony Ericsson and Vodafone) piled into this Android working group, signaling a shift toward market acceptance of the platform by the wireless establishment.

  • VentureBeat ports Android to a netbook (in about 4 hours) - Google talks about Android as a smartphone OS, but this non-commercial demo shows how readily the OS can be adapted to the fastest-growing segment of the PC market. And as ZDNet points out in a related story, Google plans to retain 30% of all revenues from Android Market app sales, a revenue line that could get big fast if Android takes off.
Of course the leading indicator for any Android prediction is the runaway success of Apple's iPhone and App Store. Apple has built an amazing product and created a powerful ecosystem of independent developers, and I'm not sure any device will ever match the seamless and elegant experience of the iPhone. But Apple's strategy of vertical integration, unilateral control and premium pricing leave a gaping hole in the market for Google's Android strategy to run right through.

Consumers around the world love the smartphone experience, but only the very top slice of the market can afford Apple's version of that dream. In the great depression of 2009-10, Google's free, open and device-agnostic (i.e., Netbook-friendly) offering looks like a very smart bet indeed.