July 2011


When I started angel investing, staying stealth seemed to be partially in vogue. There were still a lot of entrepreneurs who wanted to stay stealth and they would ask me to sign an NDA before talking about their startup. Unfortunately, I can’t sign NDAs in my business; if I did, I would quickly not be able to talk to anyone! But the world seemed to move to a more open working relationship and those who really wanted to stay completely stealth seemed to dwindle in face of the hordes of startups who didn’t care.

Staying stealth was also a barrier to many startups working in the consumer space. At one time, if you could get on Techcrunch, you’d find yourself instantly with 100K users within a week and things would take off from there. You wanted to get out there as fast and as broadly as possible so that users would know about you and come and try you out. More importantly, there were not as many startups back then; thus, competition was always a danger but the rate at which competitors popped up seemed manageable.

Lately, though, I have found myself advising at least two recent startups to now stay stealth as long as possible. While their stealthness wasn’t during the fund raising or development process, I thought it was now a bad idea to announce themselves to the organizations that cover or announce startups and is normally read by other current and near current entrepreneurs. This is because now the world has changed: it is much easier with today’s tools to create a startup, and since so many people want to become entrepreneurs today, the likelihood of somebody just copying you is much higher than ever before. Internationally, there are already teams working solely with the aim of copying US based startups and launching them in their local countries.

Today, in my search for startups, I try always to work with startups with no or very few competitors; it’s one of the most basic concepts for investment selection and in today’s climate, it is back to being one of the most important. But given the ease at which competitors pop up, it now benefits a startup to keep from announcing themselves to other potential entrepreneurs for as long as possible so that you can get a headstart on your operations, customer acquisition, product development, and dominance. This is much easier if you don’t have the typical 5-10 guys who seem to suddenly pop up every time a startup with a new idea gets funded (Or think Groupon, who has HUNDREDS of competitors).

My new word is: stay stealth for as long as possible to the places where other entrepreneurs tread often; go public only because you have to in order to gain customers and in those places which reach the general populace, which unfortunately does contain entrepreneurs but you can’t really do anything about that.

Definition:

Accelerants play a major role in chemistry. Most chemical reactions can be hastened with an accelerant. Accelerants are catalysts which alter a chemical bond, speed up a chemical process, or bring organisms back to homeostasis. An accelerant can be any substance that can bond, mix, or disturb another substance and cause an increase in the speed of a natural, or artificial chemical process. [Source: Wikipedia: Accelerant]

It is probably obvious that the economy can act as an accelerant to a startup’s success. It is more obvious when the economy is rocketing skyward. Rewind back to the dot-com boom years of 1995-2000; the stock market was rising on the backs of tons of internet IPOs. Confidence was high, people had money and to spare. No matter what people did, it seemed that they could make money and spent it accordingly, confident that more money was coming in. Thus, startups of all shapes and sizes can ride an economic boom to success because there is free spending power to jump in the path of, from both individuals and corporations.

When the economy is bad, most people think that this puts the brakes on businesses and startups. However, I don’t think that is completely true. I think that a crappy economy can also act as an accelerant to startups and their success, even as those companies built to last in booming economies falter.

Let’s take a look at a snapshot of our current crappy economy, as posted by 24/7 Wall St. in Ten Signs The Double-Dip Recession Has Begun:

1. Inflation is rising, despite the Fed’s efforts to keep it in check.

2. Investments have begun to yield less.

3. The auto industry seems to be coming back, but prospects aren’t good. Auto sales are a sign of consumer confidence and if sales don’t rise, then the auto industry will tank again.

4. Oil prices are at their highest, putting a huge dent in consumers’ wallets just to get around and to work.

5. The federal budget sucks and the Republicans and Democrats are sparring with our livelihood on trying to get a measure passed to deal with the debt ceiling, and how to reduce spending overall.

6. The Chinese economy seems to be slowing down, which will cause American companies to earn less.

7. Unemployment is still super high. And unemployment benefits and checks are ending.

8. The debt ceiling will probably be reset but austerity measures to reduce debt aren’t going to have a positive effect across the economy.

9. There is lack of access to credit across the board, hurting small businesses especially.

10. Housing and mortgage issues still abound. Huge numbers of consumers can’t pay their mortgages, and distressed mortgages are still on banks’ balance sheets and can’t be rid of easily.

We’re in a world where a lot of the population have lost their jobs (and their unemployment checks are ending), can’t find new jobs, or are earning less in their current jobs. But, the price of everything is rising, like gas. People need to make at least minimal ends meet but can’t find jobs anywhere. Or their current company is downsizing and moving operations elsewhere, or eliminating them. If consumers don’t or can’t spend, there is the trickle down effect to all corporations down the chain, and eventually all these positive earnings that companies are reporting are going to stop.

You’d think that early stage startups would have little chance of succeeding in a world where consumers have no money to spend, or corporations are unwilling to spend even if they have large hoards of cash (although perhaps this is changing finally?).

However, I don’t think that’s the case. There is evidence that startups that are built on the backs of the crappy economy are thriving. Here are some:

Flash sale sites (Gilt Groupe, Ideeli, Rue La La, Hautelook) given consumers their luxury brand goods, but at much lower prices than normal. Despite having less or no earnings, people can still get their goods at least until their money *really* runs out.

Deal sites (Groupon, Living Social) are enormous juggernauts, again, where people can get deals on anything from restaurants to interesting things to do, to great places to travel to.

Sites that allow you to make money off your own stuff or skills (Etsy, AirBnB, GetAround) are flourishing because people under pressure to make money to survive may find it much more worthwhile to just start renting out their extra rooms or cars, or start a business themselves.

Small business and crowd funding sites (Kickstarter, Profounder, IndieGoGo) are also doing well because people who want to start businesses can’t find funding anywhere else in today’s bad economy where banks won’t lend.

Given the crappy state of the economy today, what other ideas can flourish besides those above?

HOWEVER, if you try to start a startup in today’s crappy economic environment which requires a great economy as an accelerant, you might as well be trying to start a fire in a pouring rainstorm. Ignoring the economy when designing your startup could be fatal; in my post, Mark Fletcher at Startup2Startup and the Evolution of Startup Business Strategy I talk about Mark’s advice on startup building in different economic conditions and how he changed the way he approached his startup due to the conditions at the time. I now add that the state of the economy has a dramatic effect on what you’re building too – if you choose something that does not take advantage of the economic conditions at the time, then you could be doomed to fail no matter what you do.

[Still, this also means that if you launch the same idea in a different economic climate, it could work beautifully – is it time for the new pets.com to emerge yet?]

Blog post written by John Lanahan, LaunchCapital Analyst based in San Francisco

After reflecting the last few days on what I would write about for my first blog post and quickly realizing I’m not an expert on, well, anything, I figured I knew enough to talk about one thing: myself.  More specifically, my generation: those 20-somethings roaming big cities, a few years removed from college still acting like they’re in college, the generation that is more likely to identify the song “My Generation” as the song by Limp Bizkit, and not The Who; but most importantly the generation that has grown up with cell phones, social networks, and instant gratification.  How can businesses large and small adapt their marketing messages to the generation that has a 4-second attention span?

You’ve seen us and you know who we are – we’re the ones walking down the street, headphones in, head down… looking at our phones, texting, tagging, tweeting, tumbling, turntable.fm-ing, but God forbid certainly not actually talking on our phones! Just as we change, advertising to us needs to change with us.  How effective are billboards when our heads our down looking at our phones?  How can you possibly expect us to watch a commercial when all our shows are DVR’ed?  So how do you get your message across?

Get us talking. 

Social networks have given us a really big microphone, a very loud microphone to shout a message that can go viral and reach millions of people in a matter of hours.  The best way to reach out to our generation is to turn us all into unpaid marketing interns… er, I mean, brand advocates.

Social media marketing has been around long enough now that companies know this already, right?  RIGHT?? So many times I’ve seen companies who force traditional media marketing into social media platforms.  “Awesome there’s a banner ad on my Facebook page with a link to my site! I have 1,000 people who ‘like’ me! Social media!  Sweet!”  What does that even mean? How are converting those ‘likes’ into sales? Are people actually talking about you or is your fan page buried somewhere way down on the user’s profile?

To borrow a term coined by Gary Vaynerchuk in The Thank You Economy (if you haven’t read it yet, you’re missing out), companies have to play “ping-pong” for their message to be heard.  Start real conversations with real people.  Someone rips your restaurant on Yelp?  Reach out to them and give them a meal on the house to try you again.  Someone says they love you on Twitter? Send a quick note saying thanks. We’re used to making purchases online and in big box stores, where the interaction between business and consumer is minimal.  Cure our ADD with a little personalization, and I promise we’ll not only pay attention, we’ll tell all our friends about it too.

One word of warning: don’t fake it.  I’ve heard many times from friends working at advertising agencies that clients tell them, “Make me one of those viral videos”. *Cringe*.  That statement alone indicates you have no clue about social media.  Things need to grow organically.  Just like you can spot a fake, so can we and we will call you on it – or maybe worse, ignore you altogether.  Pull us into the conversation and keep us engaged, don’t push things on us.

We realize social media can be a scary place for businesses.  There’s little control over your message, it’s not an established marketing platform, and there’s no clear-cut ROI.   But that’s short-term thinking.  Show our generation an ad and we’ll think about you for a second.  Engage us in a conversation and we’ll become long-term advocates.

Oh, hold on, I just got a text…

I bugged a friend of mine at Google and instantly got up and running on the new kid on the block, Google+.  Of course, now I’m much cooler than you since I got in and you’re not haha – alas, I’m sure that coolness is short-lived.

I launched into Google+ with little expectations.  As soon as I got in, I was presented with a rather overwhelming page – circles? streams? friends? a bunch of tweet-like shares sitting there in my stream already – pictures also. Talk about information overload.

So I poked around.  Trying to invite some other friends was really tough.  Why bury that in the circles function?  And why do I need to add their name? Can’t I just send them an invite? After all, I want all my friends on the system.

But oh wait, these circles allow me to categorize my connections. The drag-drop UI is pretty slick, but geez I just ended up dragging them all into my Friends circle.  It’s too hard to categorize these people.  And I’m pretty particular with who I add to my Facebook friends in any case – but even that has reached unmanageable numbers (or so I think: I just went to Facebook to look up how many friends I have and I can’t seem to figure it out! I’ve got SO many that Facebook can’t even count them up for me LOL).

Man, it seems that Google threw the kitchen sink in here. No MVP for them! Or actually, the M stands for Maximal instead of Minimum. So maybe MVP still applies!  It will take me a few days to navigate around and figure this out.  Somebody tagged me in a picture so many of the usual Facebookian functions are found here.

The stream is fun – seeing pictures auto displayed there is pretty cool, although it wrecks the stream UI a bit so scanning is tougher than just lines of text on twitter.  Still, Twitter is the default real time stream of choice due to momentum.

Which brings me back to this point.  Big, established internet companies have a huge advantage when launching new products in the area of distribution.  In the old days at Yahoo!, we used to call this the “firehose” of users which we can direct to any property we launched.  We merely had to create and launch a new site, and then if we could get permission to get it listed on the Yahoo! homepage, it would instantly get traffic.  In fact, it didn’t matter if the site sucked or not; merely putting it on the Yahoo! homepage guaranteed a steady stream of users who clicked on the link and visited the site.  In fact, many business units in the past dangerously created revenue projections on traffic patterns generated by the presence of that link on the Yahoo! homepage, which suddenly were destroyed when somebody decided that the link to that site shouldn’t be on there any more, or moved to a less advantageous position on the page like below the fold.

Today, getting users is tough – tougher than you can imagine. Which is really why only someone like Google could even think about launching something that competes not only with Facebook but also with Twitter at the same time, especially given the dominance that these two sites have among the userbase.  A company which does not have an existing userbase with which to firehose a new service will stand little chance of gaining any sort of traction, like startups for example.

But is it enough? Firehoses are super important, but you have to firehose the right thing or else once the firehose stops, then traffic dies off too, like in my Yahoo! example.  Or in some cases, even firehosing isn’t enough to generate traction.

After a few minutes of playing around, it seems that the real time aspect dominates the initial views.  Then, I can group my connections into circles and I can share posts to certain or all circles.  And on top of that, there are some nice UI/UX enhancements and arguably there are some differences in UX between the two even as a lot of the UX is similar.  I’m not sure Google+ has a better UX than Facebook or Twitter though; at the moment, they seem very similar and there are things I like more about Facebook and Twitter as I like some of the new elements in Google+.  So I can say for now that I think that there really isn’t some dominant aspect of Google+ that would attract me to switch and use Google+ more than my old services of Facebook and Twitter.

Therefore, if Google+ competes head to head with Twitter and Facebook, is the firehose enough to win, along with some incremental enhancements in the UX?

First, as I’ve often talked about, incremental improvement is simply not enough to cause switching (see condition 3 in <a href=”http://ds.ly/fLt9er”>What I Really Mean By “Souring on Internet-Only Startups”</a>).  The state of Google+ doesn’t seem to be all that much better.

Granted, there may be better integration with Google services – many of us have often noted that email is simply a representation of a social network already but nobody has really exploited this fact to great effect.  Certainly, a ton of people have Google mail services so there is an enormous base to draw from.  Perhaps the inertia of early adopters may draw enough people in to start using Google+ to make it survive.  Still, I think it is going to be hard given that Facebook and Twitter dominate social networking.  To make it more likely, I think Google+ needs some exponential improvement over Facebook and Twitter but I don’t see that yet; perhaps there will be something in the future.

Another potential competitive advantage that could be exploited is branding.  Facebook used to be a cool brand but I’m not so sure right now – I think it’s more utility now.  Twitter is more recently cool and still there is more cool brand value than Facebook; it’s also moving to utility now that people are exploring its news and communication delivery capabilities.  But would you consider being part of a Google social network a must-have, enhancing your own coolness by being on it?

The firehose of a highly trafficked web service like Google is an incredible asset and brought to bear on a truly transformative, useful, and/or cool web service, it can accelerate discovery and adoption and vault it into the mainstream.  But point that firehose at something less than that and the service will die once you take that firehose away.  The jury is still out on whether Google+ can be more than just on parity with its competitors, Facebook and Twitter.  If it doesn’t, what waste of a perfectly good firehose…