I’m not doing my usual crazy schedule of running around to panels and events as I’ll be out of town for most of the week but wanted to highlight a few events I’m especially excited about.
Amy and I supported the Pledge 1% Colorado Nonprofit Pitch contest last year with a $10,000 grant through our Anchor Point Foundation and are happily doing it again this year. This and other Social Impact Track events are working to engage the broader startup community and expand Startup Week beyond just high-tech startups.
If you are around Boulder next week or want to see the Boulder community at it’s finest, check out the BSW schedule and join in on the fun.
In the fall of 2007, my friend Phil Weiser, Executive Director of CU Boulder’s Silicon Flatirons Center, convened 25 leaders from CU Boulder and the Boulder / Denver startup community. We spent an afternoon talking about the idea of an entrepreneurial university. Phil called the meeting a Roundtable, even though the table was long and rectangular.
The discussion that day was heated. Some in the room that day questioned whether entrepreneurship should – or even could – be a significant part of CU Boulder. Others made the case for entrepreneurship. Few of us anticipated the level of follow up from that discussion and the report that emerged set the stage for a lot of activity at CU Boulder over the ensuing decade.
One of my suggestions at the 2007 Roundtable was to borrow some ideas from the MIT 100K competition, which was started in 1989 as the MIT $10k. I got involved as a judge in 1993 and was active through 1997 with occasional visits to the finals in subsequent years when I was around Boston. When I reflect on my investment activity, including companies that went through the MIT 10K (NetGenesis, Harmonix, abuzz, and a bunch of others), I probably should have just invested $25,000 in every finalist company over the last 25 years.
In 2008, a group of student and faculty volunteers from CU Boulder launched the CU New Venture Challenge. Nine years later, the CU NVC today provides a platform for anyone – faculty, staff or student – who wants to start a company. The NVC integrates the campus by including all schools and departments. Mentors from the Boulder / Denver startup scene are deeply involved and many companies are emerging from the NVC, including Revolar, Pana, and Malinda.
Amy and I have decided to help take the NVC to the next level. Our foundation (the Anchor Point Foundation) is teaming up with the Caruso Foundation (Dan & Cindy Caruso) to offer a $50,000 investment prize offered to the “Most Fundable Company” at the 2017 NVC 9 Championships. This is in addition to the $25,000 prize money that the NVC already has available. Jason Mendelson will select and announce the Most Fundable Company winner, who can elect to take investment in the form of a convertible note, at the NVC 9 Championship.
So, the CU NVC is now is $75k competition. Next step, $100k … Finals are Thursday, April 6, at 5:30pm.
I’m running another competition for a startup to live for a year for free in my Kansas City FiberHouse.
When I bought my house in Kansas City in 2013, I announced my intentions clearly.
“I’m not going to be living in it. Instead, I’m going to let entrepreneurs live / work in it. Rent free. As part of helping create the Kansas City startup community. And to learn about the dynamics of Google Fiber. And to have some fun.”
The third year could be you! Apply today.
I expect most of you know the fable of the scorpion and the frog, but if you don’t, it goes like this (quoted from Wikipedia):
“A scorpion asks a frog to carry him over a river. The frog is afraid of being stung during the trip, but the scorpion argues that if it stung the frog, both would sink and the scorpion would drown. The frog agrees and begins carrying the scorpion, but midway across the river the scorpion does indeed sting the frog, dooming them both. When asked why, the scorpion points out that this is its nature. The fable is used to illustrate the position that no change can be made in the behaviour of the fundamentally vicious.”
Over the weekend, there was some commentary on AWS in fight of its life as customers like Dropbox ponder hybrid clouds and Google pricing. Amazon turned in slightly declining quarter-over-quarter revenue on AWS, although significant year-over-year quarterly growth, as explained in Sign of stress or just business as usual? AWS sales are off slightly.
“Could Amazon Web Services be feeling the heat from new public cloud competitors? Maybe. Maybe not. Second quarter net sales of AWS — or at least the category in which it is embedded– were off about 3 percent sequentially to $1.168 billion from $1.204 billion for the first quarter. But they were up 38 percent from $844 million for the second quarter last year. In the first quarter, growth in this category year over year was 60 percent. So make of that what you will.”
Could Amazon’s nature be catching up with it, or is it just operating in a more competitive market? A set of emails went around from some of the CEOs of our companies talking about this followed by a broader discussion on our Foundry Group EXEC email list. It contained, among other comments:
- AWS is not the low price provider.
- AWS is not the best product at anything – most of their features are mediocre knock offs of other products.
- AWS is unbelievably lousy at support.
- Once you are at $200k / month of spend, it’s cheaper and much more effective to build your own infrastructure.
While we are in the middle of a massive secular shift from owned data centers to outsourced data centers and hardware, anyone who remembers the emergence of outsourced data centers, shared web hosting, dedicated web hosting, co-location, and application service providers will recognize many of the dynamics going on. Predictably in the tech industry, what’s old is new again as all the infrastructure players roll out their public clouds and all the scaled companies start exploring ways to move off of AWS (and other cloud services) into much more cost effective configurations.
Let’s pick apart the four points above a little bit.
1. AWS is not the low price provider. When AWS came out, it was amazing, partly because you didn’t need to buy any hardware to get going, partly because it had a very fine grade variable pricing approach, and mostly because these two things added up to an extremely low cost for a startup relative to all other options. This is no longer the case as AWS, Microsoft, and Google bash each other over the head on pricing, with Microsoft and Google willing to charge extremely low prices to gain market share. And, more importantly, see point #4 below in a moment. Being low priced is in Amazon’s nature so this will be intensely challenging to them.
2. AWS is not the best product at anything – most of their features are mediocre knock offs of other products. We’ve watched as AWS has aggressively talked to every company we know doing things in the cloud infrastructure and application stack, and then rather than partner eventually roll out low-end versions of competitive products. We used to think of Amazon as a potential acquirer for these companies, or at least a powerful strategic partner. Now we know they are just using the bait of “we want to work more closely with you” as market and product intelligence. Ultimately, when they come out with what they view of as a feature, it’s a low-end, mediocre, and limited version of what these companies do. So, they commoditize elements of the low end of the market, but don’t impact anything that actually scales. In addition, they always end up competing on every front possible, hence the chatter about Dropbox moving away from AWS since AWS has now come out with a competitive product. It appears that it’s just not in Amazon’s nature to collaborate with others.
3. AWS is unbelievably lousy at support. While they’ve gotten better at paid support, including their premium offerings, these support contracts are expensive. Approaches to get around support issues and/or lower long term prices like reserved instances are stop gaps and often a negative benefit for a fast growing company. I’ve had several conversations over the years with friends at Amazon about this and I’ve given up. Support is just not in Amazon’s nature (as anyone who has ever tried to figure out why a package didn’t show up when expected) and when a company running production systems on AWS is having mission critical issues that are linked to AWS, it’s just painful. At low volumes, it doesn’t matter, but at high scale, it matters a huge amount.
4. Once you are at $200k / month of spend, it’s cheaper and much more effective to build your own infrastructure. I’ve now seen this over and over and over again. Once a company hits $200k / month of spend on AWS, the discussion starts about building out your own infrastructure on bare metal in a data center. This ultimately is a cost of capital discussion and I’ve found massive cost of capital leverage to move away from AWS onto bare metal. When you fully load the costs at scale, I’ve seen gross margin moves of over 20 points (or 2000 basis points – say from 65% to 85%). It’s just nuts when you factor in the extremely low cost of capital for hardware today against a fully loaded cost model at scale. Sure, the price declines from point #1 will impact this, but the operational effectiveness, especially given #3, is remarkable.
There are a number of things Amazon, and AWS, could do to address this if they wanted to. While not easy, I think they could do a massive turnaround on #2 and #3, which combined with intelligent pricing and better account management for the companies in #4, could result in meaningful change.
I love Amazon and think they have had amazing impact on our world. Whenever I’ve given them blunt feedback like this, I’ve always intended it to be constructive. I’m doubt it matters at all to their long term strategy whether they agree with, or even listen to, me. But given the chatter over the weekend, it felt like it was time to say this in the hope that it generated a conversation somewhere.
But I worry some of the things they need to be doing to maintain their dominance is just not in their nature. In a lot of ways, it’s suddenly a good time to be Microsoft or Google in the cloud computing wars.
I was sitting with the founders of a company we’ve funded the other day talking about their competition. I love this product and I use it every day. It doesn’t yet have widespread adoption, but it as extremely actively used by the early adopters.
This company has several competitors – long time incumbents with somewhat stale, but useful products, and several new competitors, including well-funded and noisy ones. I use several of these products regularly in different situations and have encouraged the founders to use them also.
During our conversation, we started off by talking about pricing and go-to-market strategies. As part of this, we were talking through a strategy to change the current game being played in the market, both from a product and pricing perspective. We had clarity on the product side (we have several fundamental architectural differences that enable a powerfully different approach at scale) but thrashed for a while on the pricing perspective.
I realized I wasn’t very clear on the pricing strategies of the competitors so we went through them on-line. While this was sort of useful, our knowledge of their products, how they work, and what the current limitations of them are was more enlightening. Ultimately the product differentiation drove the pricing differentiation discussion, which resulted in our hypothesis about how to change the game which we are now testing.
If we hadn’t all be active users of these competitors products, we would have had a stupid conversation. While we have limited visibility into the competitors’ product roadmaps, we know how hard it will be for them to change several dimensions of their products. Sure, we should assume they can and will do this, but as we enter the market in a serious way, I think we can carve out a unique and very significant position for ourselves by leading with the product differentiation and supporting it with a pricing strategy that undermines theirs. In the absence of the product information we have from our experience using their products, we wouldn’t have been able to tie these two constructs together, and our resulting approach would be weak.
My general approach to competition is to “obsess about their products while completely ignoring the company.” If you can identify competitors, use their products continually, if only to have that knowledge when the moment comes that you have the conversation about how you are going to change the game.
I recently received the following email.
I am in a bit of a dilemma and would really appreciate any insight you all have on what to do.
Last month, my team worked with a designer to create a new homepage for my startup. Yesterday, I saw that another company ripped off our entire site design. They have also just recently pivoted into doing exactly what we do.
You can compare the two sites here: Us Them a week ago Them now.
It doesn’t feel right that they can so brazenly steal someone else’s work like that. You would think they would have a reputation to uphold.
Anyway, my question for the group: How can we turn this negative into a positive for us?
My response was:
Welcome to the world. It sucks, but it happens all the time.
There are two approaches:
1. Ignore them and just kick their ass.
2. Make a big deal about it as a way to get more attention for you. Do this in a classy way. Don’t be whiny about it.
So you know, I generally choose option 1. I find that option 2 is very hard to execute and usually a distraction. But if you can do option 2 correctly, especially for a consumer service like yours, it can generate a lot of interest.
After a week or so, a draft blog post, and a little more back and forth the sender concluded:
For a quick update on this front, I think I did want the noise, to hopefully drive more awareness and because I was still kinda mad.
But, after putting it out of my mind for a few days and focusing on making progress on our product and marketing strategy, I feel calmer about the whole thing. Best case scenario we embarrass them – which doesn’t seem as fun anymore now that I’m not as actively mad – and get some sympathy and signups. Worst case scenario it backfires on us. Either way it’s a distraction and a lot of noise that isn’t really my style.
Our team is better, our technology more scalable, our wit sharper. They are right in some ways to make their site a cheap knockoff of ours – our site is great. But they’re fighting a losing battle. So I’m gonna go with option A of ignoring it and kicking their ass.
So yeah, your advice ended up being right on. Thanks for suggesting I sleep on it for a few days and again just for being responsive and helpful overall – it really did mean a lot.
I was proud of this person. The high road is always more fun, especially when you toss boulders down on the person on the low road and crush them before they make any progress toward the top of the mountain.
UberDenver and Uber CEO Travis Kalanick are hosting a rally at Galvanize after the Colorado Public Utilities Commission holds a public hearing on proposed rules changes that could shut UberDenver down.
I’ve had a number of private conversations since I wrote my post The Colorado PUC Trying to Shut Down UberDenver. I continue to think the whole situation is insane especially given our state government’s strong position on advancing innovation in Colorado. The PUC’s behavior is clearly protectionist, anti-innovation, and undermines many of the efforts of entrepreneurs in Colorado to advance and amplify innovation here.
Apparently, the FTC agrees. I just read the FTC comments on the proposed rule changes and they do a very direct job of addressing 6001(ff), 6301(a), and 6309(d) which are the things I called out in my original blog post on 1/30/13. The punch line from the FTC memo is “FTC staff is concerned that these three proposed changes may significantly impair competition in passenger vehicle transportation services, including innovative methods of competition enabled by new software applications (“applications”) that allow consumers to arrange and pay for services in new ways that they might prefer, and thus harm consumers.”
Given that the PUC’s stated mission (on their website) is to “serve the public interest by effectively regulating utilities and facilities so that the people of Colorado receive safe, reliable, and reasonably-priced services consistent with the economic, environmental and social values of our state” I’m hopeful the PUC comes to its senses and serves the public interest in this case, rather than try to create new rules that protect entrenched and incubent companies.
I’ve been told in the private conversations that I’ve had that this will be resolved soon in a way that makes sense. Until then, I continue to encourage anyone in Colorado who is pro-innovation to support Uber’s efforts here and, if you are around Monday, head down to Galvanize between 6pm and 9pm for an UberRally.
I’m mid 2011 I wrote a post titled Competition. Things in my universe had heated up and many of the companies I was an investor in were facing lots of competition. It’s 18 months later and there’s 10x the amount of competitive dynamics going on, some because of the maturity, scale, and market leadership of some of the companies I’m an investor in; some because of the increased number of companies in each market segment, and some based on the heat and intensity of our business right now.
I wrote a few more posts about competition but then drifted on to other things. But I came back to it this morning as I find myself thinking about competition every day. Yesterday, I was at the Silicon Flatirons Broadband Migration Conference hosted by my friend Phil Weiser. I go every year because it’s a good chance for me to see how several of the parallel universes I interact with, namely government, academics, broadband and mobile carriers, incumbent technology providers, and policy people think about innovation in the context of the Internet.
News flash – most of them think about it very differently than I do.
One thing that came up was the idea of creating the best product. This has been an on and off cliche in the tech business for a long time. For periods of time, people get obsessed about how “the best product will win.” Then, some strategy consultants, or larger incumbents, use their market power to try to create defenses around innovation, and suddenly the conversation shifts away from “build the best product.” And then the entrepreneurial cycle heats up again and the battle cry of the new entrepreneur is “build the best product.”
This isn’t just a startup vs. big company issue. I remember clearly, with amazement, the first time I got my hands on an iPhone. Up to that point I was using an HTC Dash running Windows Mobile 6.5. It was fine, but not awesome. I remember Steve Ballmer in a video mocking the iPhone.
We all know how this story has played out.
I remember a world when Microsoft and RIM were dominant. When Apple and Google didn’t have a product. And when people talked about “handsets”, WAP, and we squinted at our screens while pounding on keyboards that were too small for our fingers. Next time you are in a room full of people, just look around at the different phones, tables, and laptops that you see.
In my startup world, the same dynamics play out. Building the “best product” doesn’t only mean the best physical product (or digital product). It doesn’t just mean the best UI. Or the best UX. It includes the best distribution. The best supply chain. The best customer experience. The best support. The best partner channel. The best interface to a prospective customer. I’m sure I’ve left categories out – think about the idea of “the best complete product.”
This is getting more complicated by the day as technologies and products increase in interoperability with each other at both the data, network, application, and physical level. That’s part of the fun of it. And being great at it can help you dominate your competition.
Give me the best product to work with any day of the week. But make sure you are defining “product” correctly.
Six months ago I wrote a post about how I think about competition which included a list of topics that summarizes my philosophy. I covered the first item, Be The First Mover, but then went on to other things, like thinking about competitors every single day. I’m back today with the second topic, “Resegment If You Aren’t In The Top Three.”
If you look at the Foundry Group portfolio, you’ll notice a lot of market leaders. Zynga is the obvious one, but I’ll assert that there are many others, including AdMeld (now part of Google), Cheezburger, Fitbit, Gnip, Makerbot, Oblong, SendGrid, Topspin, Trada, and Urban Airship. After that there is a category of companies who might be market leaders, but it’s too early to tell as they are still very young. And, if you look at some of the successful companies we have had from our previous investing at Mobius Venture Capital, you’d see market leaders like Postini, Return Path, FeedBurner, Rally, Stratify, NewsGator, and Sling Media.
An important nuance is that these companies weren’t unambiguously market leaders when they got started. While some of them created entirely new markets, others entered into existing markets. In some cases, there were only a few players as the markets were new. In other cases, they took the existing market and resegmented it.
Existing markets are wonderful places to go play in especially if they are expanding rapidly. Entrepreneurs are drawn to fast growing markets, which is awesome, but there are many who I see that are simply trying to play a fast follower game. I’ve been there, having invested in “company #17 in a market.” Unless you get lucky, that generally sucks.
I’ve developed a viewpoint that if you aren’t in the top three in your market segment, you should “resegment.” Step back and redefine the market segment you are going after. Change the customer, change a product focus, change the distribution channel, or change the partner dynamic. Sometimes it’s a tweak, other times it’s more radical. But change something so that you are in the top three of the “new market”.
Don’t bullshit yourself about this. I’ve been the investor in many companies who weren’t in the top three that were going to get there with the next release, or a new sales VP, or something exogenous that would happen to the existing market leaders, or a magic trick that no one had thought of yet. This is almost always a losing strategy. Don’t count on luck. Resegment.
Many of the companies that we invest in are the leaders in their respective markets. Often they create the market. Sometimes they appear out of no where and dominate. And sometimes they are in a brutal fight every day with another company or two for market leadership. We don’t care which case it is – we just want to be investors in the companies that are #1 or #2 (and have a chance to be #1) in their markets.
Jack Welch taught us the power of being #1 or #2 in your market many years ago and the VC business reinforces that over and over and over again with relative exit values. The VC cliche is that the market leader gets 50% of the value, #2 gets 25% of the value, #3 gets 10% of the value, and #4 through #263 get the remaining 15%. While these numbers move around (I’ve been in situations where #1 got 90% and in situations where I got lucky and #17 got 25%) they are directionally correct.
Whenever a market leader I’m an investor in is threatened by a competitor, I’ve encouraged them to call a Code Red like they do on ER. In a Code Red situation, every who can is focused on the threat for a short, intense period of time. If the company is less than 10 people, this is easy. But if it is 50 people or more, it’s really hard. And – at 1000+ people, it’s a magic trick to get it right.
When the CEO calls a Code Red, there is often a negative reaction from parts of the organization ranging from sales, development, to operations. Often some people in the organization don’t believe or understand the need for a Code Red. Other times they’ve been through so many unnecessary fire drills in other companies that they don’t believe the Code Red is real. They simply don’t see the same threat the CEO sees. Or they feel undermined by the CEO.
Part of the CEO’s job is to call a Code Red correctly. If you call it every other week, it’s not a Code Red, it’s shitty management and leadership. If you never call it, you’ll one day find yourself no longer the market leader. There’s no right tempo – it’s random, but as with many things you’ll know the moment when you encounter it.
A Code Red can’t last forever. It has to be incredibly focused on the specific threat you trying to address. It has to be clearly communicated across the entire company. It has to be quantitative – once you’ve effectively neutralized the threat, the Code Red is over. This might be in an hour, a day, a week, or a month. But if it lasts much longer than a month, something else is wrong.
I know some people who like to use DEFCON 1 instead of Code Red. I don’t – it’s too nuanced – who cares about the difference between DEFCON 3 and DEFCON 1 – you are in a critical situation. Make it binary.
I know some managers who hate the idea of ever being in a Code Red situation. This is unrealistic view to take in a startup or fast growing company. Once you are a visible leader, people will be gunning for you, imitating you, or coming out with products that disrupt your business. Welcome to being a market leader – own it and when a Code Red occurs use it to propel your business into an even more dominant leadership position to build on. And – for every employee in a company having a Code Red – take it seriously and crush it – the rewards will be quick and obvious and the downside of not dealing with it sucks.