False Positives, False Negatives, and Reading Decks in Advance

As a VC, I take the majority of my meetings without seeing a presentation or “deck” in advance. And when I do get slides, I tend not to study them closely in advance. I’ve never explained why and wanted to do so.

I had an interaction recently with an entrepreneur where I think I both hurt said entrepreneur’s feelings and was perceived as lazy because I hadn’t read the deck in detail in advance. About two years ago I made a conscious decision not to read or require decks prior to meeting. To be clear, I rarely ask for a deck as a condition of taking a meeting. Nonetheless, I get them sent to me prior to meetings. Keep in mind that at SoftTech we invest primarily in seed stage companies – we are investing in the team and the opportunity, not just what’s in the presentation. The following thoughts might be less relevant for people presenting to later stage firms.

False Positives vs False Negatives

In my job as a venture investor, there are two risks when it comes to deciding which meetings to take. There is the risk of false negatives, which I define as declining meetings you should in fact take. The alternative, false positives, are meetings that you feel like you want to take but end up being less valuable or interesting than you anticipated going into the meeting.

I will get into more detail later, but I find that reading decks in advance creates more false negatives than it saves false positives. Let’s think about why VCs ask for decks in advance.

By and large, I think the reason to ask for a deck in advance is to figure out whether a given company makes sense for our firm. My default orientation is to meet with people, particularly at the seed stage. So why would I say no?

  • Portfolio company conflict – If, after learning a bit about the company, I have the sense that there’s a conflict with an existing portfolio company I’ll just ask. It’s simple to point out that we have a investment in a related company and ask the entrepreneur if he or she sees a conflict.
  • Poorly conceived idea – I find that a simple paragraph gives me enough context to figure out whether the basic market opportunity and company idea sounds interesting. If the paragraph is well-written and compelling, I find the deck tends to be so as well. When I struggle to get the big idea from the intro paragraph, I’ll usually just sent a follow-up email to ask more. Still beats looking at slides.
  • Disagreement about the market opportunity – Sometimes I just see the market and market opportunity differently than the entrepreneur. I find this only comes from meeting people and hearing their story live.

In most cases, I’ve found that I can assess the questions above without a deck. A simple paragraph describing the idea will generally suffice to get the point across.

Downsides of Reading Decks in Advance

I’ll jump right into what I think of as the downsides of reading decks in advance. I know that I, in particular, am vulnerable to the things below. Others may have different thoughts.

  • Decks do not communicate personal connection and energy – I find that even the most well-crafted deck or presentation does not tell me anything about how I’ll feel when the entrepreneur or team comes in to present. I value the opportunity to get a sense for the energy and personality of the team when they present live.
  • With a deck, all questions are asked and answered – The best thing about a live presentation is that I get to ask questions in real-time. If I have a question, I can get the team’s feedback on the issue before I have time to reach my own conclusion. One of the hard things about decks is that every question I have in reading a deck either goes unanswered or I have to answer it myself. And I know that I bring that baggage and set of questions into pitch meetings with me.
  • Not all of the secret sauce is in a deck – I’ve met many entrepreneurs who rightly fear that their decks will be shared. So they do not put all of the “secret” sauce of their ideas in the deck. Generally speaking, that information comes out in a pitch meeting but is not always included in the deck. It’s unfair to penalize people who hold that info back out of an abundance of caution.
  • Some people are good at describing and poor at deck creation – Simply put, some people have great businesses and have lots of compelling reasons why they will succeed but are not good at VC presentations. This is not surprising – presenting to investors is very different from closing customers or growing your business.

I am sensitive to wasting people’s time, but I’ve learned that I do a better job paying attention to pitches and giving people a fair shake when I come in unbiased.

As always, I love to get feedback on blog posts. Comments are open below and you can also reach out to me on Twitter @chudson.

Competing with LinkedIn and the Case Against Unbundling

I’ve been thinking about LinkedIn quite a bit lately. I think LinkedIn is really interesting because in many ways I think it is one of the most durable and hard to disrupt companies that sit at the intersection of SaaS and social networking. I’ve also been meeting a ton of companies that I think are looking to compete with LinkedIn by attacking them on a feature-by-feature basis as opposed to a full frontal assault. There are some interesting and emerging things I’m seeing on this front and I wanted to write down some of my thoughts on the subject.

LinkedIn as a Three-Legged Stool

I think LinkedIn is a company that has three facets to its model that all work together in a very complementary fashion:

  • LinkedIn is a directory – LinkedIn is a directory that allows professionals to create profiles with lots of information about their past work history and professional interests.
  • LinkedIn is a social network – LinkedIn uses social networking features to show how people are interconnected in a professional context. You can call it the business graph or the professional graph.
  • LinkedIn is an enterprise software company – LinkedIn makes a lot of money from selling services to companies that want to use its platform for business development or recruiting.

All three parts of that business work together. Encouraging professionals to create profiles fills out the directory. The social connections give context to how professionals are interconnected. This data plus the context allows LinkedIn to offer recruiters and business development professionals access to their platform for a fee. I think this chart gives a sense for just how much leverage they get from the 3 legs of their stool. Recruiting Solutions continue to drive the bulk of the revenue the company sees.

The Challenge in Competing with LinkedIn

LinkedIn really is a juggernaut of a company in the world of technology. If you’re not convinced, I’d encourage you to check out the 10-Q and see how well they are doing. In thinking about how to compete with LinkedIn, there are a few things that I believe make it particularly challenging – I’ll outline them below:

You Won’t Disrupt LinkedIn by Better Design – The Craigslist Analogy

It’s very easy to criticize LinkedIn’s design. It isn’t the most beautiful site on the planet. It’s not the most modern design. But it is very functional. People largely know how to use LinkedIn. Search works reasonably well. The site is also very, very SEO friendly, which helps greatly in terms of organic traffic. It does not feel like the way to compete with them is to build a more beautiful version of the experience – LinkedIn wins on utility, not design.

People Are Unlikely to Actively Recreate the LinkedIn Graph Manually

I think it’s highly unlikely that the majority of people will go and recreate a professional profile from scratch for a new service if it requires manual data entry. It’s one thing to create a new social profile on a consumer social network. Those usually only require a simple photo and a little bit of information to get started (if that). Creating and maintaining a professional profile is a lot of work. Unless the benefit of creating this new profile on a new service is clear, I think it will be hard to activate professionals and recreate that same graph that LinkedIn has built.

LinkedIn is Unlikely to Allow a Competitor to Build Itself on the Back of its API

Perhaps most importantly, I think LinkedIn understands the power of the profiles they’ve collected and that the fastest way to competing with them is to get your hands on that profile and relationship data via their API. I think it’s totally fair and smart of LinkedIn to be fairly conservative as to whom they allow to access their API and how they allow them to use it. I don’t see them intentionally enabling a competitor by allowing folks looking to disrupt them to use their own API to do so.

Hard to Imagine an Asymmetric Version of LinkedIn

When Twitter started to emerge as an alternative to Facebook, it seemed natural to me that the two services would head in different directions. Facebook, like LinkedIn, is largely about symmetric “friends” and not asymmetric “followers”. It is very hard for me to envision what an asymmetric LinkedIn would look like. What would it mean to follow a professional contact? Part of the value of LinkedIn is that symmetric friendships validate that both parties have agreed that they know each other.

The Case for Unbundling LinkedIn is Not Obvious to Me

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One of the most common themes in the conversation around platforms is this theme of unbundling. For those of you with a general interest in unbundling and apps, I think there are two really good posts out there on the general theme of service unbundling, including this one by Benedict Evans at a16z and this one by Tom Tunguz at Redpoint.

I’ve been trying to wrap my head around what it would mean to unbundle LinkedIn and whether it would in fact be a good, useful thing for the company to do. It’s worth thinking through which pieces of itself LinkedIn could effectively unbundle, what it would mean for consumers, and what it would mean for their business model. My initial thoughts are that unbundling makes less for LinkedIn, regardless of whether it works in practice, than it does for someone like Facebook.

A simple search of the app store already shows that LinkedIn is experimenting with some form of unbundling, with separate standalone apps for a number of functions including Job Search, Pulse, Contacts, and Recruiter. I think the case for LinkedIn is very different than the case for Facebook:

Facebook is a platform that relies on ongoing consumer engagement to power its ad-supported business model. Any new entrant, such as Instagram, WhatsApp, or Snapchat, that competes for or siphons off end-user attention represents a real threat to that model. The decision to unbundle apps like Slingshot, Poke, Camera (remember that one), or Messenger makes sense in the context of retaining access to customer attention. LinkedIn is quite different. LinkedIn is a platform company that needs relatively accurate data and comprehensive coverage to power its enterprise model. So long as LinkedIn continues to have access to relatively accurate profile and relationship data, the core of their business model should continue to work well. The argument for LinkedIn to unbundle its core functions around network intelligence, contact management, and recruiting seems weaker.

The Opportunity to Compete with LinkedIn

Despite the sizable moat that LinkedIn has built around its business, there are some clever ways that companies can compete with them to build professional graphs and value-added services. A few things worth keeping in mind if you want to compete with LinkedIn:

  • LinkedIn does not have a monopoly on professional network data – While LinkedIn has a potential monopoly on its own network or platform data, it does not have a monopoly on all social networking data. Increasingly, I find out about people’s professional lives on Twitter, Facebook, AngelList and other channels. That data can be leveraged to construct professional graphs and network relationship data.
  • Contact info and basic graph data is available via app permissions and mail and calendar info – While LinkedIn does have a great store of contact info and past interaction data, that data can be gleaned from mobile address books, calendars, and email inboxes.
  • Mobile favors quick, simple applications and interactions – LinkedIn is still one big monolithic application. Doing anything that’s simple or quick still means you need to open the core application and navigate to your desired function or section of the app. Mobile tends to make monolithic applications vulnerable to competition from single-purpose applications.
  • Ability to combine professional and personal data to improve profile “freshness” – If I could identify one weakness in LinkedIn’s model, it’s that they don’t prioritize or even need the freshest profile or relationship data in order to make their model work. LinkedIn’s business model will work just fine so long as they have reasonably fresh profile information on their users. There is an opportunity to focus on the type of applications where data freshness is more valuable and useful.

When I look at the latest crop of applications that are focused on professional networking, including Refresh (I wrote about them here), Accompani, and RelateIQ, I think a lot of them are pursuing smart strategies around how to compete with LinkedIn without poking the bear. I’m very interested to see how these companies evolve and develop in the shadow of a giant.

LinkedIn is a very good company with a very good business. Trying to take LinkedIn head-on seems foolish to me. Whatever will compete with LinkedIn will have to chip away at the monolith by exploiting opportunities that seems small today but are likely to become valuable over time.

As always, comments are open. Feel free to leave your thoughts below or connect with me on Twitter @chudson.

3 Ways Deep Linking Could Play Out

I’ve been spending a lot of time thinking about how deep-linking is going to play out. For those who are not familiar, deep-linking is a technology that allows app-to-app communication to function very similarly to the way that web pages work. In the same way that a hyperlink to a website need not drop you off on the front page of that website, deep links hold the promise of allowing app developers and advertisers to deliver users directly to specific sections or portions of a mobile app, provided that the consumer has that app already installed. If deep-lining takes hold, long gone will be the days of clicking on a link to an app and either being delivered to the front page of that application or to a subpar mobile web application experience. That would be a significant improvement over the current state of affairs for consumers, advertisers, and developers.

There have been a number of somewhat recent announcements, including Facebook’s AppLinks announcement at f8 and the large round that URX raised from respected VC firm Accel. There is clearly a lot of attention being paid to this space.

Given how fundamentally powerful the concept of deep linking is, I can imagine a number of ways that deep linking could play out on in the market. My fundamental question about the space is whether a singe company or constellation of companies can control the technology or whether it will become an Internet standard. I can imagine three scenarios for how the market plays out in the short term:

1. Universal web standard service wins out – In terms of ecosystem simplicity, this would be my preferred solution. Some universal, well-understood and widely adopted convention and infrastructure for how web apps talk to each other regardless of the underlying OS would make life much easier for all parties involved. There would be no need to worry about whether the target user was on an iPhone, Android device, or desktop computer. Imagine a world in which you had to rewrite webpages to make them link properly for Google, DuckDuckGo, Bing, and every other web search engine. That would be a nightmare – thankfully we have standard conventions for the web. I would love to see this happen for mobile, particularly for those companies whose strategies are rooted in cross-platform development.

2. OS-specific solutions from Apple and Google – This seems to me to be the worst of all worlds and the most likely thing to happen. I don’t see any compelling reason for Google and Apple to collaborate on a common way to make this work in the short term. I would expect that each would focus on what works best for its respective app ecosystem. The set of companies that should have the most vested interest in a common set of protocols is the Pinterest / Twitter / Facebook crowd – large applications with meaningful audiences that span both platforms and who have larger platform ambitions. Having a common framework would make it much easier for developers utilizing their respective platforms to support deep links with less friction.

3. 3rd party solutions carry the day – There is a handful of companies, including URX, a number of ad networks, Facebook, Twitter, and others who have their own agendas for building deep linking solutions that are not deeply tied to any specific OS and advance their own specific interests. The potential benefits to developers are a) those solutions can be cross-platform and b) they are likely to work today as opposed to standardization deliberations which can drag on and c) they could be a useful abstraction layer as the OS and app store specific solutions morph and change over time.

My sense is that the third party solutions will have an opportunity to establish themselves before the OS-specific deep linking frameworks really take hold. And if you are an iOS or Android specific application, the need to support cross-platform frameworks is greatly diminsihed.

As always, comments are open below or you can send me your thoughts on Twitter @chudson.

The Potentially Divergent Paths for Facebook and Twitter Mobile Ads

Mobile ads, particularly app install and direct response ads, have become a big business for Facebook and are likely to become a big business for Twitter very soon. Much of the focus has been on the app install business and how large that line of business can become. While I think the app install market will be huge for both companies, I think there are some things that Twitter can do more easily than Facebook when it comes to the broad direct response category on mobile.

My First Experience Clicking on a Twitter Ad

I had my first interaction with a Twitter direct response ad about a week ago. It was a really clean experience. It was an ad for an upcoming General Assembly class. I clicked on the link and it took me immediately to a landing page where Twitter offered to pass my email address to the brand so they could follow up. I clicked yes and a few minutes later I got a ping back from GA telling me more about the class and offering me a way to sign up for the class. It was a really clean experience – almost no friction and the loop was closed on email, where it’s easy for me to manage the next steps.

As soon as I went through that experience, I wondered whether I would have been willing to go through the same flow on Facebook. I don’t think I would have felt comfortable doing that on Facebook. Over time, my relationship with Facebook has been one where the platform, app developers, and advertisers seem to aggressively want my contact info and personal details for ends that are unclear to me. In a lot of ways, that feeling (which is hard to describe in concrete ways), is why I have scaled back some of my Facebook usage in favor of Twitter.

Over time, I have become very comfortable sharing my interests with Twitter both explicitly by choosing to follow certain brands and people and implicitly by what I retweet and what I click. Twitter has all of that data around what gets my attention. And, to date, Twitter has made me feel good about continuing to share and create that data on their platform as they have not aggressively used it for marketing purposes.

The Difference Between Social Relationships and Interests

Facebook has clearly done a great job in driving mobile install ads. They know a lot about which apps I use on their platform, which Facebook Connect enabled sites and services I use, what content I share and like, and with whom I chat. That is a lot of data about my social interests. And that, combined with a platform with insanely high daily engagement, provides a really robust opportunity for advertisers to target me based on my social relationships and activities. This will continue to be a big business for Facebook so long as they continue to maintain high daily usage, regardless of whether I’m actively or passively sharing my interests with them. The reach they offer advertisers on mobile is and will remain a huge draw.

I have a feeling that Twitter’s strength in mobile direct response will not be as much around the social connections that I have with my followers and those who I follow. I think it will be much more around using Twitter’s data around my interests and (most importantly) my current interests to show me offers that are relevant to me. I think these interest-based ads will attract a different kind of advertiser looking for a different kind of interaction beyond app installs. It could be for advertisers looking to grow email lists by getting new subscribers, call-to-action offers to buy stuff, the opportunity to sign up for an in-person event, and lots of other things beyond driving app store installs.

Feel free to leave a comment below or send me your thoughts on Twitter @chudson.

Vertical Marketplaces and the Durability of Craigslist

Lately I’ve seen a resurgence of the conversation around disrupting Craigslist and other marketplaces. One of the better new ones to this meme is Fabrice Grinda’s post. Earlier contributions to the overall idea of unbundling or disrupting Craigslist from Josh Hannah’s on Quora and Andrew Parker on his own blog are also very much worth reading. In the four years since I’ve been following this thread, I’d say that Craigslist is still fairly resilient, albeit with stepped-up competition in some of its core offerings around housing, gigs, and electronics.

I meet with a lot of vertical marketplace companies in my role at SoftTech and have even invested in a few. One of the more common memes in the Craigslist disruptor pitch is that Craigslist’s UI is dated and ugly. After hearing that comment for what felt like the nth time, I felt the need to tweet the following:

I think it’s easy to bash Craigslist for what it isn’t. It isn’t particularly beautiful in terms of modern design concepts. It isn’t “social” in the sense of deep integrations with social services for distribution or identity. It doesn’t have integrated payments or strong trust and safety. In thinking about what Craigslist doesn’t do well, it’s also worth revisiting that it does well.

What Craigslist Still Does Well

I have bought and sold a lot of things on Craigslist here in San Francisco. Two things about Craigslist still make it my go-to site for most things I’m looking to buy or sell:

  • Craiglist is a very liquid market for buying and selling things in most major metro areas – Transactional liquidity is the real measure for whether a marketplace works. If buyers find sellers and sellers find buyers quickly, the marketplace is healthy. By almost any measure, Craigslist is the most liquid place to sell things.
  • Local fulfillment and immediate payment on delivery – Unlike other places like eBay, selling things on Craigslist usually involves the buyer meeting your somewhere and taking possession of the item while also paying right away. No holds or escrows on the money, no trips to the post office or FedEx. Settlement happens quickly.

What I Dislike About Craigslist Transactions – What’s “Broken”

  • Cash transactions can be sketchy – Because most Craigslist buyers and sellers are unknown to each other, cash is the obvious medium of choice for settling transactions. Depending on the sum of money involved, settling in cash might not be safe or desirable.
  • Management and marketing of leads and communication with prospective buyers – If you’ve posted a popular item on Craigslist, there is some overhead associated with responding to people who write back with questions, want to get a lower price, plan to come by and don’t show up and the like.
  • Onsite haggling – In almost all cases I’ve experienced, every Craigslist transaction involves some bit of face-to-face haggling at the last minute. The buyer usually wants some discount or comes up with some other clever reason why the price that was quoted was too high.
  • Post-sales arbitration – If something you bought has an issue after you’ve bought it, there are no returns, there is no dispute resolution. There is no real trust and safety promise – once you bought it, you bought it.
  • Sellers have little help in price discovery- Trying to figure out the right price for an item your are selling can be a challenge. There are some categories, namely electronics, where there are secondary markets that can help with pricing on popular items. But for lots of other categories, it can be hard to determine the market clearing price for an item on Craigslist.

What Vertical Marketplaces Can Offer Consumers

I recently had one of those “ah ha” moments about what vertical marketplaces can do to actually provide a good end-user experience. I recently started selling things on FOBO, which is a mobile-first marketplace for selling electronics here in San Francisco. I’ve sold a few items and it has been a good experience. A few things about the experience stood out to me as good ways that vertical marketplaces can compete with Craigslist. I thought I’d list out a few of the things that I’ve seen in some of the more successful vertical marketplaces and what it means for finding a wedge to be a better experience than Craigslist.

  • Artificial or real liquidity – The starting point for competing with any established marketplace is the ability to provide comparable liquidity for buyers and sellers. That liquidity can either be real (as in there is a large pool of buyers and sellers) or somewhat artificial, with some guarantee that transactions will clear by having the marketplace take inventory or some other mechanism.
  • Price discovery – In both product and service marketplaces, figuring out what to charge can be a challenge. Vertical marketplaces can help sellers and buyers by either setting prices, providing 3rd party data on prices (particularly useful in electronics), or providing community-wide pricing information on recent transactions (which usually takes the form of suggested pricing).
  • Settlement and Escrow – For smaller transactions, I don’t mind settling in cash. There comes a point, though, at which the idea of walking around with a large amount of cash to buy an item from a stranger isn’t the safest thing to do. So long as there is a trusted 3rd party that verifies that the buyer has funds, whether cash or credit, the need to settle in cash on the spot goes away.
  • Trust and Safety – Last but not least, it’s nice to have a service that has some platform-level trust and safety programs. That can include every thing from dispute resolution to reputation systems to refunds.

In the last four years, Craigslist certainly hasn’t gone away, but I am seeing more vertical marketplaces make inroads. If you have thoughts on this, feel free to leave a comment below or send me your thoughts on Twitter @chudson.

Making City Living Better as an Investment Theme

Sometimes I find new investment themes proactively by trying to think about the world and where I see technology heading. In other cases, I realize that I’ve become interested in a theme by looking back at the companies I’ve met and find fascinating. I recently took a look back at a lot of the companies that I found really interesting, regardless of whether I invested or not, and tried to group them. It turns out that there is a large cluster in one theme – city living. While San Francisco is not as dense as New York or Tokyo, it does have sufficient density to unlock some really interesting businesses that maybe wouldn’t work as well in a more sparsely-populated area.

I think part of my interest in companies that make living in cities more interesting, convenient, or pleasant stems from my recent full-time move to San Francisco. Living and working in SF has given me a different view on what convenience means after living in Mountain View and Palo Alto for 14+ years. I can broadly lump my investment in things that make urban living better into a few large clusters:

  • Transportation – In addition to the obvious breakouts such as Uber and Lyft, there are lots of other people tinkering at how both intra-city and inter-city transportation can be improved. This includes everything from companies that are doing interesting work in mass transit to those who are innovating on ride sharing. I’d put companies like Leap Transit, Corral, Ridepal, Scoot Networks, and others in this category.
  • Logistics, Storage and Delivery – One area that I really appreciate as a city dweller is the investment in making logistics and delivery much easier. This is everything from making it easier to get on-demand delivery from services such as Postmates (disclosure: I am an investor) to services such as MakeSpace and Boxbee that make it easier to get access to storage for items that don’t fit in smaller apartments or living spaces. And then there is an emerging category of services such as Luna and Doorman that enable consumers to receive packages at night when they are actually at home.
  • Food – There is no shortage of companies that are looking to build services that will deliver food to you, whether that food comes from a restaurant or is made in a commercial kitchen on behalf of a given service. This includes everything from Munchery to Sprig to SpoonRocket to many other emerging providers and established providers like GrubHub and Caviar.

I think I like companies in this category for three reasons. One, they can achieve meaningful scale by focusing energy and attention on a relatively small number of major metros that offer dense concentration of potential customers. Second, the secrets to what make these businesses successful is often non-obvious and rooted in the things you learn from operating a service at scale. This gives you a real edge in terms of defensibility when it comes to competing with new entrants. Last, a good number of these businesses either have strong network effects or are likely to lead to winner-take-all outcomes given the economies of scale you get from being a market leader. I’ll probably write more about that last point in another post.

If you’re working on a business that makes living in cities or urban areas more pleasant or interesting, I’d love to chat with you. Feel free to leave a comment below or send me your thoughts on Twitter @chudson.

On-Demand Music Streaming is Winner-Take-All, Right?

This is a quick full blog post that is a follow up to a question I posted on Quora. One thing I’ve been thinking about is whether the battle between Spotify, Deezer, Rdio, Beats Music, and the various other competitors from Google, Amazon, and others will result in a winner-take-all scenario. I have a few basic thoughts on the space and am curious to hear what others think – I’m including my basic views on the space below:

  • All properly-capitalized providers have access to the same basic catalog of music content – From what I’ve seen, most, if not all, on-demand music companies can negotiate or simply license access to the same catalogs of music content on roughly equal terms.
  • While UI / UX is a differentiator, most UI / UX and design innovations can and will be copied by competitors – While companies can innovate around and within design and UI, anything innovative and interesting will be copied by a competitor and hence cannot be a long-term differentiator or advantage for any well-capitalized company in the space.
  • Consumers care about price and no provider will get a sufficiently differentiated pricing agreement such that they can differentiate in terms of end price to the consumer – Ultimately, consumers do have a fixed budget for what they will spend on music and the price of unlimited or limited on-demand music offerings has a firm ceiling in terms of what consumers will pay. And given the nature of licensing terms and catalog access, no company will be able to get preferential licensing and access terms for any reason other than scale and usage. There is no “club deal” to be done by any provider on the long term. This does not mean that some companies cannot afford to lose money in the short term to secure market share, but I do not see a model for a long-term price advantage for a single provider.
  • Eventually, the winner will be the company that can spend the most on customer acquisition and afford to wait out the content owners (labels) until their rivals wither – If no single player can get preferential economics when multiple players exist and all players have access to the same underlying content catalog, the winning company will be the one that can advertise the most and acquire the largest consumer base. I don’t believe most consumers, particularly those with budget constraints, will subscribe to multiple services. In the end, most consumers will subscribe to one service and one service only.

When I add all of this up, it seems to argue to me that there will be one major winner in on-demand music streaming. The one wildcard in this space is companies like Google and Amazon for whom on-demand music streaming can be marketed as a loss-leader. Given Google’s interest in both the Google Play ecosystem and Android and Amazon’s larger ambitions in boosting both Prime and its own content ecosystem around the Kindle and other content, both of those companies could make the decision that subsidizing on-demand music as part of a larger offering makes sense. I’m not sure that’s a good idea, but I believe it is possible and potentially aligned with their larger strategies.

I am by no means a music expert but interested in the space. And I feel that Internet radio is fundamentally different given the licensing rules and nature of the experience. The one thing I do think that is potentially interesting is seeing some of these streaming providers becoming effectively “labels” in that they have preferential licensing and distribution terms for breakout content.

Feel free to leave a comment below or send me your thoughts on Twitter (@chudson) or Quora.

Commerce Marketplaces, Network Effects, and Winner-Take-All Outcomes

In the past few months I’ve looked at quite a few commerce marketplaces and social networks. One thing I’ve been trying to understand more deeply is the set of circumstances when commerce networks tip toward winner-take-all outcomes, with one dominant network accounting for the bulk of transactional activity. This blog post is very much a work in progress, but it’s a topic I want to understand better as I’m interested in continuing to invest in marketplaces going forward.

Winner-Take-All in Social Networks

In social networks, we’ve seen strong winner takes all dynamics in some geographic markets and around certain horizontal use cases. Facebook and Tencent are global general purpose social networks that offer their respective user bases a wide variety of social sharing and communications features. But even with their horizontal dominance, there are other strong networks that have emerged to compete with them. In some cases, the vector of competition is geographic focus (Kakao Talk, LINE) and in other cases its around a laser focus on a particular feature (Instagram before Facebook bought them, WhatsApp prior to the Facebook acquisition, Pinterest around visual sharing and communication, and many other examples too numerous to list). The one other thing we’ve seen in social networks is the ability to defeat powerful incumbents by focusing attention and product development on interaction models that are orthogonal to the core value proposition of the leaders. I would put Snapchat and Twitter in this boat – in each case the interaction model (asymmetric follow for Twitter, temporal photos for Snapchat) is very different from what Facebook proposes and hence it has been hard for that company to compete with those services effectively.

In most social networks, it seems that they tip to winner-take-all in broad horizontal categories because most people want to participate, share, or interact where others are. Not surprisingly, social networks are largely governed by the power of network effects when it comes to sharing and communicating.

When Can Commerce Tip to Winner-Take-All?

The dynamics of commerce marketplaces is slightly different. Most social networks seem to grow or die based on ongoing usage and participation by one’s social network – that engagement reinforces the value of being a part of the network and encourages you to participate more fully. For commerce networks, the incentive is somewhat different. For commerce networks, buyers want to be where sellers are and sellers want to be where buyers are as that formula tends to drive maximum liquidity for all.

The more commerce marketplaces I see, the more I tend to believe the natural state of affairs for the markets in which they operate is to have one dominant marketplace provider that wins. Late last year, I started asking myself the same question every time I get excited about a particular new commerce marketplace:

Is there a really compelling reason that all buyers and sellers shouldn’t be on one single platform? If that outcome doesn’t maximize transaction liquidity, why?

Framing the question this way has helped me think through the opportunity to invest in marketplaces. In trying to get to the answer to the question above, I try to think about the 3 somewhat durable ways I’ve seen commerce marketplaces differentiate themselves:

  • Geographic segmentation – For some marketplaces, there are reasons that you cannot have a global or national marketplace in a given product or service. That could be due to the nature of the product, cultural differences, fulfillment issues, or some other reason that allows several regional players to flourish over time (as opposed to exploit a temporary advantage). Increasingly, I find geographic segmentation to be more of a temporal, as opposed to durable, advantage for marketplace companies.
  • Supplier or Buyer Self-Selection – One other reason that marketplaces can avoid tipping to winner-take-all is that buyers or sellers self-select into or out of a given marketplace. One way in which this happens is by the chosen business model for the marketplace. For example, if the marketplace sets prices, wages, or rates, service providers who want to charge more might opt out of the marketplace. By the same token, if the quality of service providers is concentrated in either high-skill / high cost or low-skill / low cost, there can be buyer populations whose needs are not served in that marketplace. This can create multiple marketplaces that self-sort based on the needs of buyers and suppliers.
  • Commodity Products vs Experience Goods – Last, I think the nature of the product or service being sold really does matter. As I’ve written about in a previous post, the nature of the product or service being sold matters. Is the product or service a standardized service or product that is easy to evaluate prior to usage or is it something where consumer preferences and tastes matter and the only way to evaluate the service is by becoming a consumer? For commodity or standardized products, I think the power of concentration on one platform is high – if I want to buy an unboxed iPhone, I’ll probably want to buy it at the place that has the most unboxed iPhones for sale as they’re all the same. Service marketplaces tend to be different – in many cases, the only way to figure out if the marketplace meets your needs is to test the service providers offered.

Of the 3 bullet points above, I spend the most time thinking about the implication of the last bullet points. Understanding the nature of the product and service being sold really drives a lot of my thinking. Take ridesharing for example. If you think that a ride from point A to point B is a commodity good where the primary driver in consumer decision-making is price, then you’d suspect that the one provider who can consistently provide the lowest cost and highest liquidity will win the entire market. However, if you think that ridesharing is an experience good where consumers do not think of a ride from point A to point B as a commodity but as an experience where they will trade price for convenience, style, or some other feature, there is a strong argument for why multiple services can thrive.

In addition to ridesharing, the other areas where I think this could play out in an interesting way are the home and apartment rental sharing space (airbnb and onefinestay), peer-to-peer second-hand commerce, and those who are trying to chip away at Craigslist on specific vertical use cases.

As always, comments are open below. You can also share your thoughts with me on Twitter @chudson.

Only Apple Can Fix Its App Store Search

A few days ago I was trying to find two new-ish apps, Jelly and Secret and I went to the App Store and just tried to find them via search. The results were not encouraging. I got a lot of results that were not at all what I was looking for. It turns out that the fastest way for me to find both applications was to actually just do a search on Google and click on the iTunes link that pointed to the app install pages. I shared this tweet and got a lot of interesting results from developers and others:

Only Apple Can Fix iOS Search

Apple will never let a 3rd party take over its App Store search. They have been pretty consistent about that. I don’t think we’ll see another situation like where Google powered search on Yahoo – nobody will be given that opportunity. And anyone who has tried to create a recommendation or discovery layer that puts their company between Apple and the consumer gets shut down or decides to do something else. I think the reason is very simple. Apple, like most other companies that own their own search engines, understands that owning the data on search intent is valuable and critical to understanding how consumers are ultimately finding the content they desire. And I took Apple’s acquisition of Chomp nearly two years ago as a signal that they were going to devote more resources to improving the search experience.

I don’t know much about how the Apple App Store search algorithm works, but I do know that it rarely seems to return my intended result at the top of the list. In many ways it feels like searching the Internet before Google had PageRank up and running. There’s lots of obvious keyword stuffing and title or description manipulation designed to capture people looking for popular apps. In my experience, the App Store search engine seems to do a poor job of disambiguating app names and category names. It’s hard for me to understand how search results are ranked when I do get results for queries. Overall, it’s a frustrating experience for me in searching for apps and most times it just feels easier to use Google.

At some point I hope that Apple App Store search feels more like Google, with largely relevant and consistent results, than the Internet pre-Google. But only Apple can make that happen and I hope they are continuing to make progress on that front.

As always, feel free to leave a comment below or send me a message on Twitter @chudson.

Marketplaces, Rating Systems, and Leakage

In the past three years I have had the pleasure of meeting many marketplace companies looking for seed funding. I have also had the privilege of investing in quite and continue to learn along the way. One of the things I spend a lot of time thinking about and exploring is what drives “leakage” and what marketplaces can do to keep transaction settlement on their platforms. One of the most common ways in which marketplaces try to keep transactions on-platform is by rolling out rating or review services for service providers (and in some cases for buyers as well). I’ve been thinking about when and why these rating systems work (they are not instant panacea) and more broadly about some observations about marketplace dynamics that tend to lead to “leaks”, or off-platform transactions where the platform provider does not capture the revenue associated with the transaction they helped facilitate.

What Good Marketplaces Do Well

I studied Economics in college, so I’ve always been attracted to the marketplace model. When applied and executed correctly, good marketplaces do many things to reduce transaction costs between buyers and sellers, including the following:

  • Reduce search costs for buyers and sellers – Good marketplaces make it easier for buyers and sellers to find and connect with each other. This liquidity is the lifeblood of a healthy marketplace.
  • Reduce transaction costs for both parties – When speaking about transaction costs, I don’t simply mean facilitating financial payments. Many marketplaces have standard fees and rules that make dealing with unknown strangers simpler and transactions more standard.
  • Reduce bargaining and enforcement costs – A good marketplace usually has both norms and rules that make dealing with unknown parties safer. These rules and services can include payment escrow, trust and safety teams, and dispute resolution for cases when things go wrong.

The nice thing about the marketplace business model is that marketplaces that provide the services above are often able to command a transaction fee or premium for doing so. However, doing so often means that the marketplace needs to be in the middle of the transaction. The real risk to most marketplaces is that they provide all of these valuable services and, at the moment of the transaction, the transaction “leaks” and the buyer and seller settle the transaction off platform.

Experience Goods Tend to Have Marketplace Leakage Issues

Experience goods are products and services that require actual usage and experience in order to evaluate the quality of said service. For example, housecleaning services and ridesharing services are both experience goods. On the other hand, any unboxed iPhone is effectively the same as any unboxed iPhone – all unboxed iPhones are effectively commmodities. For experience goods, the main risk for a buyer is often that the quality of service, once delivered and experienced, will prove to be of low quality. For commodity goods, the main risks are that the seller will not actually fulfill his or her end of the transaction by providing the product or that the product will prove to be counterfeit or otherwise defective.

The reason that experience goods tend to have leakage is that once you know that a given supplier has proven to be good, there is a tremendous incentive to use that person again. And given that a lot of the value that many marketplaces provide is associated with the search and identification of a trustworthy service provider, there can be a strong incentive for both parties to complete future transactions out-of-band as it allows both the buyer and supplier to avoid the marketplace transaction fee. If you want to kno more about marketplace, rakes, you should definitely read this post by Bill Gurley as I reference it often.

One way that many marketplaces try to combat leakage is by rolling out rating and review systems. More on the logic as to why below.

The Role of Rating Systems in Transaction Costs and Leakage

Ratings systems are a pretty simple and tried-and-true system to grasp. In most cases, buyers have the ability to review the experience in dealing with a seller. In some marketplaces, namely eBay and Uber, both sellers and buyers can review each other. In order for a review system to work in terms of enforcing norms of good behavior, two things have to be true:

1. Suppliers have to value their rating, either as a buyer-facing signal of quality or because supplier rating determines how leads are distributed and routed within the marketplace.

2. Buyers have to trust in the validity and quality of the rating as a reliable indicator of supplier quality.

When both of these conditions hold, there is at least a chance that reviews will be of some value to those in the market. If suppliers do not value their rating, they will not care about taking their transactions off platform because having a high rating does not tie to the things they care about – making more money and potentially getting more customers. And if buyers believe that ratings are gamed or otherwise influenced, they lose their value as a signifier of quality. Getting review systems right is not easy, but well-designed rating systems can provide a strong nudge to settle transaction on-platform.

There are three situations where I continue to see strong incentives to go off-platform even in the face of the existence of a rating system. I’ve outlined them below:

  1. Situations where there is real value to repeat usage with a chosen service provider. One area where I tend to see opportunities for leakage is the world of services marketplaces. In the case of tutoring, housecleaning, childcare, or any other service that is truly an experience good, there is almost always buyer risk on the initial transaction. But once you, as a buyer, find a service provider you like, the search is over. And, often the value of completing the transaction on the marketplace and paying the associated fees goes down. It might be more economical and simple for both the supplier and buyer to complete the transaction off-platform and avoid paying a fee.
  2. Marketplaces where the marketplace itself delivers a small percentage of the service provider’s total income.The other situation in which I tend to see marketplace leakage is where the marketplace delivers a relatively small portion of the service provider’s total revenue. In those cases, suppliers tend not to care about their ratings because the amount of money to be made or lost on that marketplace is small relative to their total income. Any money or leads lost due to a low rating can easily be made up elsewhere.
  3. Marketplaces where the buyer and supplier are geographically proximate and can easily complete the transaction offline. Last but certainly not least is what I describe as the Craigslist use case. In situations where buyers and sellers meet in person, there is a huge opportunity to simply settle in cash, Square, or some other form of payment rather than complete the transaction on the platform.

Of the three points mentioned above, I think the first tends to be the most pernicious. And the more marketplaces I meet, the more I am beginning to believe that the most pernicious situation of all is the combination of #1 and #2. I might even argue that marketplaces that are struggling mightily with #1 and #2 might want to rethink whether they are in the marketplace business or really in more of a lead-gen context. And when I meet new marketplaces, I try to get comfortable with how they will address the points above should they occur.

I think it’s really hard to build a marketplace that effectively balances the three concerns above. I think the ridesharing services, Uber in particular, are doing a great job of balancing all of these pressures. I suspect that Uber-delivered rides represent a significant chunk of income for their drivers. And drivers and riders are matched with each other in part based on their respective ratings or scores. That creates a pretty strong incentive to not “cheat” the platform and to care about your score as both a service provider and a buyer. That, to me, is evidence of a well-designed, well thought out system.

If you’re working on a marketplace and have insights to share, I’d love to speak with you and hear your experiences. As always, comments are open below. You can also chat with me on Twitter @chudson.