Inbound marketing in an App Store world

Fred Wilson wrote a great piece this week on the pain and frustration felt by mobile app publishers who rely on iTunes or Android Market as the primary distribution channel for their apps. In Fred's words:

"Centralized control of an ecosytem never offers as much opportunity and diversity as a decentralized system. And in the leaderboard driven app store model, we have centralized control. Let's rise up and protest against this model. It's not healthy for anyone, most certainly not healthy for small developers of the kind we like to work with."

I'm all in favor of breaking the app store's stranglehold on app distribution (and have been working with the team at AppStoreHQ to create alternative modes of app discovery for a while now), but blaming the app stores for poor discoverability is a little like blaming Google for not putting your site on the first page of results -- getting found is the responsibility of the publisher, and is as much a part of the entrepreneurial game as building a great product.

Web publishers have faced this problem for more than a decade now, and a sizable industry has grown up around the problem of getting found in an vast and turbulent ocean of information. Broadly defined as "inbound marketing", this includes new disciplines like search engine optimization (SEO), blogging and social media marketing, as well as time-honored crafts like "earned media" and public relations.

In the early days of the smartphone revolution, the app stores had so few apps that traditional retail merchandising -- category browsing and "top seller" lists -- worked well enough that most app publishers didn't bother with out-of-store marketing efforts. But that time has passed, and expecting the app stores to do your heavy lifting is a little like expecting DMOZ to drive your web traffic.

Wake up app publishers: You are responsible for your own demand generation!

Instead of waiting for the app stores to fix the discoverability problem, app publishers need to dig deeper into their entrepreneurial toolkits and embrace the power of inbound marketing to generate their own demand. Inbound marketing for mobile apps is an emerging discipline -- the methods and tools that have evolved for web publishing won't necessarily apply. But taking control of your own lead generation isn't a nice-to-have in the app world any longer, it's essential to your survival.

I'm aware of at least two companies that are out in front on this effort to adapt the tools and techniques of traditional inbound marketing to the app store world:

• MobileDevHQ (disclosure: I'm an investor) is currently in private beta on a suite of app store optimization tools, including app store search rankings, keyword analysis and competitive benchmarking for app store performance. Ian Sefferman, the company's founder, has embarked on a campaign of "radical transparency" to share the company's own experiences in the app store and how they're using the tools they've developed in-house to drive organic demand.
  
• Smore (disclosure: they're a TechStars Seattle 2011 company, I'm a mentor) is "Tumblr for products, services and events", a lightweight publishing platform that makes it trivially easy to build, publish, promote and analyze beautifully-designed online flyers. Mobile app developers are a core audience for the platform -- Smore is building a really smart set of tools designed to showcase apps in ways the app stores don't allow, and to drive and measure demand to a marketing platform 100% controlled by the publisher, not the app store.

Are there other companies out there pioneering the discipline of inbound marketing for mobile apps? Sound off in the comments and let's start Fred's #OccupyAppStore revolution!

Starting a Fund vs. Starting a Company: Turtles all the way down?

I recently had a fun and wide-ranging conversation with a Founders Co-op limited partner (i.e., an investor in our fund) who's now a principal at another early-stage fund.

One of the recurring themes in the discussion was the fractal similarities between starting a new company and starting a new fund -- as my friend observed, "it's turtles all the way down."

Like most comparisons, you have to squint a little to see it, but based on my experience to date, here are the top five similarities between starting a new venture fund and starting a venture-backed business...

1. Always Be Raising
   
   Unless your startup gushes cash -- and sometimes even when it does -- good entrepreneurs are always weighing cash on hand vs. monthly burn with an eye on the next raise. Wait too long and you (and your current investors) can get stuffed by a round raised under duress. Raise too early and you risk wasting a ton of time (and having your deal be perceived as "stale" by the investor community) chasing cash when you should be chasing customers and partners.
   
   Fund cycles may seem longer -- the typical venture fund has a 10-year life -- but the investment period is much shorter, usually just 3-4 years, with the balance consumed by follow-on investments, portfolio support and (hopefully) liquidity. You never want to be perceived as being "out of market" -- not having funds to invest in new deals -- and venture fundraises can take as long as (or longer than) any company raise. So by the time you're a year or two into your investment period you'd better be warming folks up for your next fund so you don't cut it too close.
   
   
2. It's All About the Talent
   
   Great companies are built by great people, and the best founders have a gift for finding amazing folks and convincing them to sign up for whatever dream they're currently working on. (Really exceptional founders often have a "warm bench" of amazing people that they call into battle each time they start a new company). Especially now, when the market for engineering talent is as tight as I've ever seen it, quality recruiting is the engine that powers everything else a company does.
   
   The relationship between money and talent has changed significantly over the past several years. As the capital costs of starting a software business have fallen, the power dynamic between funders and entrepreneurs has done a 180. Back when it took $1 million or more just to get in business, talent had to chase money. Now that any skilled developer can start a commercially viable, globally visible company on a few thousand bucks, the tables have turned and money now chases talent.
   
   To a fund investor, the founders themselves are the talent pool we're targeting, and we need to deliver an incredibly compelling value proposition to get them to join our "team" -- which in our case is our portfolio of invested companies. The shortest, simplest description for what we do at Founders Co-op is this: we're talent scouts, looking for the most incredibly talented entrepreneurial engineering teams in the Pacific Northwest. If we build a great team, we're well on our way to building a great fund.
   
   
3. Distribution is King
   
   Most first-time entrepreneurs don't appreciate the power of distribution. In a world of nearly perfect competition in software -- where plummeting capital costs and the dream of easy success spawns dozens of entrants for each new idea -- winning the fight takes more than great product. Killer execution on "distribution" -- my loose description for the intertwined disciplines of sales, promotion, PR and partnerships -- is usually the difference between the top dog and the also rans.
   
   Effective fund investors bring the same focus on "distribution" to their "product" -- the founders and companies they back: building trust with the next tier of venture investors (the ones most likely to lead follow-on rounds in your portfolio companies); understanding the corporate development needs of the most active and strategic acquirers; even building an audience of blog readers or social media followers can be seen as a "distribution" strategy for investors looking to maximize the opportunities for their portfolio companies to succeed.
   
   
4. Mentors Matter
   
   Building a company for the first time is a wild plunge into the unknown. Almost everything about the experience, from setting up the entity to building a team, raising money, navigating competitive markets and engineering an exit (or winding down gracefully) are new experiences for the first-time founder. Luckily, there is a huge and welcoming community of experienced entrepreneurs who understand the journey you've embarked on and are willing to help (typically with no expectation of compensation).
   
   Leading accelerator programs like TechStars have built their entire brands around the idea that effective mentorship is a critical ingredient to startup success (and as a TechStars mentor and co-host -- with my partner Andy -- of the TechStars Seattle program, I'm 100% convinced that it's true).
   
   When we started Founders Co-op, I didn't even know what I didn't know about being a professional investor. We started out doing what we'd done as angel investors -- looking for great teams and trying to help them succeed in any way we could. And that was -- and continues to be -- a part of what we do every day.
   
   But running money for other people isn't the same as making your own bets. You have to understand why they gave you the money -- what job they're expecting you to do, and what role that check plays in their overall asset allocation. Instead of playing checkers -- looking for one great deal at a time -- you have to learn how to play chess, building a portfolio and a firm that can deliver returns to founders and investors that more than justify your fees and carry over the long haul.
   
   We're just two funds in at FC and I still have a ton to learn about how this game is played. Fortunately for us, we have an amazing group of advisors and mentors, many of whom have been in the business much longer than we have (and have both the trophies and scars to show for it). We continue to be incredibly grateful for their advice, feedback and patience as we learn the craft.
   
   
5. It's a Long Journey, Enjoy the Ride
   
   The more time I spend with entrepreneurs, the more convinced I am that entrepreneurship is a benign pathology, not just a personal choice. Just as artists have an innate need to realize their visions, so too do entrepreneurs. The "vision" of the startup founder isn't a painting or object made of metal or clay, but an idea about the world as a different and better place. The "work" of the entrepreneur -- which may take several attempts to be realized, if it's realized at all -- is to relentlessly pursue that vision with the help of talented team members, like-minded investors and all the luck that hard work can produce.
   
   Most founders have more than one vision in their heads at any given time, and are always coming up with new ideas about how the world is broken and needs to be fixed. There is no endpoint to entrepreneurship, it is a life journey that -- once embarked upon -- is almost impossible to turn away from.
   
   When Andy and I started Founders Co-op, I didn't really know where it would lead us, all I knew is that it somehow "felt right" as the next step in our partnership. I had no real appreciation for how long a journey it would be -- each time we raise a new fund we re-up for another 10 years together -- or all the new things I'd have to learn to even approach competence in my new role.
   
   What I know now -- just four years in -- is that we have given ourselves the greatest gift I could have imagined: a lifetime pursuit full of meaning, for ourselves, for the entrepreneurs we work with, and -- if we're lucky -- for the community in which we and our families live.
   
   As Brad Feld has been known to say, building entrepreneurial communities is a 20-year journey. We're just getting started, there's a long road ahead, and I can't imagine doing anything else.

Beware of "angels" with sticky fingers

I've heard several disappointing stories recently from first-time entrepreneurs who are out building their mentor and investor networks.

The companies' specific situations differ, but the basic story goes like this:

-- A credible-seeming business person reaches out to the company offering "help" with their business or fundraising.

-- This person represents themselves as an active angel investor with check-writing capacity, but is uncomfortably vague when describing their own recent investing activity.

-- Before any material "help" has been delivered, the "helper" hints (or flat-out demands) that they be compensated for their valuable services with equity in the entrepreneur's company.

The requests can be astounding to anyone familiar with early-stage financings -- more than once I've seen self-declared angel investors asking for double-digit percentages of founders stock for their invaluable "advice and assistance" -- with no investment forthcoming.

In the best case, the entrepreneur smells a rat and quickly turns off the relationship. But all too often these deals get struck and the cap table gets loaded up with "advisors" who promise a lot (often including an angel investment) but wind up creating no value and piggybacking on the hard work of the team for the life of the company.

My views on this are probably too strict, but I'd rather not see anyone in an early-stage cap table that isn't (a) a founder or full-time employee of the business, or (b) someone who wrote an actual check (not an "in-kind" contribution of services) when the company really needed the cash. The only exceptions that make sense to me are grants for carefully vetted and truly strategic advisors or board members, and even these should be small (e.g., a fraction of a point for advisors up to a full point for board members) and subject to annual vesting and renewal.

Good mentors are critical to entrepreneurial success, and programs like TechStars earn their reputations by connecting top-tier teams with amazing mentors who serve on an entirely volunteer basis. Every mentor has their own reasons for doing what they do -- some love to teach, some want to give back, some love new ideas and many want to have a chance to invest directly in the teams and ideas they connect with. But...

...no high quality mentor does what they do with the expectation that they're going to receive material compensation for their help.

In my experience, good mentor relationships never start with a request for comp, and any time you find yourself in a conversation with a "mentor" or "angel" who spends too much time focused on how they're going to get paid for their "help", my advice is to turn and run.

Freemium + Adverse Selection (a.k.a., The "Groucho Marx" Problem)

Eminently quotable comedian Groucho Marx once sent a telegram to the Friar's Club of Beverly Hills -- to which he belonged -- stating:

"PLEASE ACCEPT MY RESIGNATION. I DON'T WANT TO BELONG TO ANY CLUB THAT WILL ACCEPT PEOPLE LIKE ME AS A MEMBER"

This phrase pops into my head at least once a day, usually when I'm talking to an entrepreneur about their business model.

The "consumerization" of enterprise software has shifted a huge chunk of the SaaS market to "freemium" pricing -- allowing anyone to use a basic set of features for free and then mining the large free user base to upsell heavier users (or those with special needs) to paid premium accounts.

This is a fantastic and low-cost way to build an initial customer base, and many companies (including several in our portfolio at Founders Co-op) have used it successfully to build their business. But there's a downside to the freemium approach, and it's particularly acute for companies that facilitate commerce (think eBay-style marketplaces), promotion (directory, coupon or affiliate marketing sites) or publishing (free blogging platforms like Blogger, Tumblr or Posterous).

Long story short, if you expose a free platform for driving sales leads to the public web, the first people to find it will be the ones you least want as customers: porn sites, link spammers, and snake oil salesmen of all description will beat a path to your door and bring their friends.

In economic terms, this is called "adverse selection", and it's one of the harder business and branding problems that freemium companies face. Offering a service that creates economic value for free will tend to attract the most marginal economic players -- the ones for whom almost any amount of low quality free distribution is worth the effort to claim.

If these low-quality early adopters don't impact the overall perception of your service, their negative impact may not be significant...

...but if your customers' content and activity on the service reflect publicly on your own brand, you may find yourself trapped in a negative feedback loop that's hard to break out of.

Shady early adopters attract more shady early adopters and infuse your entire brand with shadiness, driving away higher quality customers who might have been attracted by the value proposition, but are turned off by the "company they'd be keeping" by using your service.

There are many solutions to this problem, but all of them require adding some level of friction to your offering. Examples include:

• Closed beta - Announcing a freemium service but keeping the public doors closed until you've amassed a core group of high quality early adopters that reflect the type of brand you aspire to build. Launchrock has built an entire company on the idea of helping startups manage their beta lists.
  
• Public / authenticated identity - Spammers don't usually like to show their faces in public. Requiring validated identity, especially via a "real names" 3rd-party service like Twitter or Facebook, can shine enough light on the person behind the account to limit (but not eliminate) spammers. Oauth emerged as a framework to enable exactly this kind of shared authentication and make the web a safer place.
  
• Payment / micropayment - Because most spammers are marginal economic players that rely on volume and automation to make money, adding even a token "registration tax" to participate in your service can weed out an amazing number of junk signups.
  
• All of the above - I'm not sure one data point qualifies as a trend, but I was interested to see lightweight authoring tool Mightybell require a $1 fee to access their closed beta - a new and compound twist on the idea of adding friction to freemium to ensure quality.

It's a bummer to pour cold water on the magic of free, but if you're building a business -- and a brand -- for the long term it just might be worth adding a little friction to your funnel.

Agree? Disagree? Have a better way? Please sound off in the comments!

Note: Image at top sourced from Wikimedia Commons

Smartphones, "headless" devices and the stealth singularity

WARNING: This is one of those posts I occasionally write to organize my thoughts and test some ideas -- it won't hold together that well and feedback is what I need most, so please comment if you're interested in the topics below.


Q: What do smartphones, robotics, mobile health, quantified self, and the singularity all have in common?


A: When the "mobile phone" becomes a digital proxy for human identity -- the filter through which we perceive the world and the intimate facilitator of an ever-increasing share of our intellectual and physical activity -- the barrier between human and machine shrinks dramatically. 


A corollary: the more powerful, portable and personalized these machines become, the more we will employ them as interfaces to every other machine we interact with -- including our toys, our cars, our televisions, and ourselves.


Smartphones are the Singularity on little cat feet


Since the release of the first iPhone in 2007 this future has been visible, and the competitive energy introduced by Google's Android project has only accelerated our progress in this direction. 


In 2010, 19% of the 1.6 billion "mobile phones" sold around the world were smartphones -- personal mobile computing platforms loaded with sensors and pre-configured to run the more than 1 million apps currently available. As technology inevitably does, smartphones keep getting both smarter and cheaper (Huawei is now offering an unlocked Android smartphone in Africa for $80) turning a first-world luxury into a global commonplace and further accelerating the mobile innovation ecosystem.


Early attempts to grasp the envisioned future of technology-enhanced human experience -- "augmented reality" apps like Google Goggles and Layar, "personal instrumentation" offerings like Fitbit and Wakemate -- are faintly ridiculous to "normals" and interesting only to early adopters and future-freaks (myself included) living inside the technology bubble. 


But when a leading innovator -- and perfectionist brand -- like Apple decides to include mobile, personalized artificial intelligence in their flagship product, you know something's up.


It's not yet commonplace to ask a machine a question and expect a sensible answer -- particularly not an answer that's conditioned on your current location, past history of questions asked and current appointment calendar (not to mention real-time access to a wide array of cloud-based datastores) -- and it will likely take time for the broad swath of consumer culture to embrace the behavior as "normal". 


If any company has demonstrated an ability to shift both behavior and culture it's Apple, so this will be interesting to watch.

+++++++

Smartphones will "behead" most consumer electronics

The "personal computer" was never all that personal, and the ongoing shift to the cloud has made any computer with a modern browser the functional equivalent of any other. But the average mobile user checks his or her device 40 times a day and is never more than three feet away from it. 

The Unique Device Identifier (UDID) assigned to each smartphone handset is a key value that unifies every aspect of our lives -- our social graph, how we pass through space and time, and the content, offers, media + entertainment we consume along the way. The more this data is used to enhance and personalize our mobile experience -- as Siri promises to do for iPhone users -- the more tasks we will assign to our little digital helpers. 

It's not a wild leap to see that every waking moment of our day (and, via apps like Wakemate, our sleeping hours as well) will ultimately produce a digital crumbtrail -- bound to our UDID -- rich in meta-data and ready to be converted into labor-saving rule-sets and shared back with us (and others) as insight into how we're living and how that might be improved.

As soon as one machine in our lives takes on this central role -- and especially if it endears itself to us with ever-more-clever personalized solutions to our most-common needs -- we won't want to split our time across multiple machines. And we won't tolerate the need to "train up" a new device when we already have one that gets it. 

We'll want every other machine in our lives to automatically detect the presence of our "master" device and respond as a "slave" -- performing its specific function under the direction of the primary device.

This has interesting implications for the full spectrum of consumer electronics makers -- especially those that make their margin on hardware sales. Why should anyone have to program their DVR, or the treadmill at the gym, or the navigation system in their car, when their smartphone already has the answers? 

Machines that aspire to be "smart" will want to get "dumber" to stay in the game, and machines that "have to" be dumb for cost reasons now have an opportunity to be a whole lot smarter, by borrowing the brain of the master device. 

(For one early take on this, check out Romotive, a member of the current TechStars Seattle class)

+++++++

Humans will use machines to become better humans

Even if the Singularity's not your bag, there's still plenty to like about the creeping ubiquity of our smartphone overlords. Business wonks are fond of the saying (apparently misattributed to Dr. Deming): "you can't manage what you don't measure". And there's nothing that humans like to think about, talk about and "manage" (or try to manage) more than themselves.

The "Quantified Self" movement is currently a geeky fringe culture of tech- and data-enthusiasts who are willing to invest significant effort -- and adopt bleeding edge tools and techniques -- to understand themselves better as people and organisms. 

Very few people are willing to go to such lengths (the official Quantified Self forum shows just 288 registered members), but the U.S. market for "self-help" was estimated at over $9 billion in 2006, and a quick search through any bookstore shows thousands of titles devoted to the topic of self improvement.

With mass adoption of smartphones, a huge slice of the world's population is voluntarily instrumenting itself with a sensor + transceiver package that effortlessly gathers data about its owner's activities, movements and need states. 

Most of those people care deeply about their own well-being. How many of them will be willing to download an app or opt-in to a service that interprets their activity data and feeds it back to them in the form of insights and constructive suggestions for self-improvement? 

(For a mind-bending conversation about the technology and business implications of this trend, check in with Buster and Jen at Habit Labs).

+++++++

Am I nuts? Not thinking big enough? Let's discuss!

The future of work: What happens when talent trumps capital?

I've been thinking about the future of work lately, and I keep coming to the same puzzling conclusion: there is a seemingly unbridgeable gap in the market for engineering talent between the elite class of software "makers" and the wealthy enterprise customers who most need their help.

The story goes something like this:

As Marc Andreesen wrote recently in the Wall Street Journal, "software is eating the world" meaning every organization now needs access to software talent to remain competitive.

Because every company needs software talent, the global market for "technology creatives" (from UX design all the way down the stack) is as hot as it's ever been

With the hard costs of starting a software business rapidly approaching zero, the best creatives would rather start their own company than work for someone else -- they don't need anyone's permission to get in business, and the worst-case scenario is that they fail and have to take one of the many jobs available.

The hottest tech companies can still recruit good talent -- if they offer interesting problems to work on, a superstar technical peer group and meaningful participation in the upside, but...

The big, profitable companies with the most urgent need for tech talent are the ones least able to access it. 

Those that failed to spot this trend early and lack a native culture of technical competence have very little hope of hiring the talent they need to survive, no matter how much they offer to pay.

Traditionally, the big system integrators and custom dev shops owned the answer to this problem, but increasingly they suffer from the same ailment that their best customers do: no really talented engineer wants to dwell in the bowels of a BDC (big dumb company) for years at a time working on yet another failed enterprise software deployment. And so the vendors who might once have helped solve the problem will increasingly become its victims as well.

One punchline to this story is that we are likely to witness a string of spectacular business failures over the next decade as the incumbents who fail to engage the "technical creative class" are eviscerated by nimbler and more tech-savvy operators. As Chris Dixon writes:

"Predicting the future of the Internet is easy: anything it hasn’t yet dramatically transformed, it will. People, companies, investors and even countries can’t stop this transformation. The only choice you have is whether you join the side of innovation and progress or you don’t."

It's the last sentence in that statement that interests me most.

Many late adopters will eventually want to "join the side of innovation and progress" and face extreme difficulties recruiting their way to a solution. As that happens, I see it opening up a window of opportunity for a new type of marketplace that makes the services of the most talented software creatives available to the biggest and most powerful incumbents via "Innovation-as-a-Service".

The winning providers in this category won't be the traditional SI body shops, nor will they be the low-end "rent-a-coder" platforms like Elance and oDesk. Instead, a successful firm operating in this market will find a way to:

• Convince incumbents to expose their most interesting and strategic technical problems to the innovation marketplace
• Attract the attention of the global elite among the maker class to tackle these problems on a project basis
• Deliver measurable value to incumbent buyers without requiring full-time or long-term commitments by the elite maker class
• Transfer enough of the value created back to the makers to reward them for their engagement.

I would argue that the best accelerator programs -- led by TechStars and Y Combinator -- offer an early look at what Innovation-as-a-Service could look like. Paul Graham periodically issues a Request for Startups, pointing YC applicants toward a specific opportunity he sees as ripe for disruption. TechStars Cloud is a further refinement on the model, focusing an entire class of entrepreneurs in a particular direction. And Weiden + Kennedy's PIE program -- which actually engages incumbent brands like Coke and Target in the entrepreneurial process -- looks like another evolutionary step.  

What if there were a platform where the world's top brands could offer bounties of cash, support and possible acquisition to entrepreneurs who agreed to take on their knottiest technical innovation challenges? Not just for task-level challenges like InnoCentive, but for bigger and more strategic issues, the ones that are most likely to put them out of business if left unaddressed?

See anything like this? Let me know!