Thursday, December 6, 2012

How to Handle VC Rejection

"I see an opportunity here, but it wouldn't be an opportunity if everybody saw it."

Saturday, November 17, 2012

Can a Great Software Company Produce More Than One Great Product?

For the sake of argument let's define a great software company as having at least one dominant product in a lucrative market, and great for a product as being both the dominant brand in its market and financially meaningful to its owner. I'm using "software company" in a very loose sense here to mean any company who main interaction with customers is through software - this encompasses e-commerce and digital media - and I don't care about greatness from a quality perspective.

If you only look at software, Google is all search; Facebook is all Facebook; Amazon is all e-commerce; and Apple, Oracle, Intel, HP, and IBM don't exist.

Monday, November 5, 2012

The Week of Living Gratefully

It's been an interesting week, to say the least. Hurricane Sandy has done a lot of damage, but it also made us realize what's really important in life and made me grateful for so many of the things I take for granted: cell phones, internet, even electricity and heat. ConEd is my new hero for getting their system back on the grid so quickly - and they keep providing us power, every single day. Is there really any better deal in the modern world than all the electricity we need for less than the cost of our cell phone bill? If you had to choose between your cell phone and electricity, is there really any doubt which one you'd choose?

So many people helped me out this week. I'm particularly grateful to my friend Gina Shedid, who took me in to her Brooklyn home and made it possible for me to comfortably get through the week with all of the first-world amenities that we usually take for granted: electricity, heat, and internet. Gina is an incredible hostess and I encourage you to send your friends to stay with her on Airbnb. Her hospitality even made it into the news.

Friends with whom I had quarreled put differences aside to reach out and make sure I was OK. My friend Kate McCarn and her boyfriend helped her 80 year old aunt down 17 flights of stairs, put her up in their 1-br apartment, and were still generous enough to invite me to crash with them for as long as I needed.

The security receptionist at a Class-A midtown office building let me work out of the lobby on Tuesday afternoon with my phone and laptop plugged into the front desk, when I was frantically trying to complete my application to YCombinator which was due that night (it was later postponed to Friday, but I didn't know that at the time). It turned out he had slept in the building for the past two days and was going to stay there until subway service was restored. I'm not sure if that was because he was paid hourly and needed the money badly enough to put up with the conditions or because he couldn't afford to take a taxi home, but either way it helped me realize how lucky I am to be able to enjoy what I've always thought of as a very modest lifestyle.

When my key got stuck in the lock - which of course had to happen just then - someone I had never met from a neighboring building lent me her cell phone to call a locksmith and her WD-40 when I couldn't get through.

I am going to volunteer in the Rockaways in the morning, which were hit much worse than we were here in the city and really need our help. When people tell me how great it is that I'm doing this, I just think of all the people that were there for me when I needed them. How could I do any less?


Tuesday, October 9, 2012

M&A in Threes

It often feels like consolidation of the middle tier of an industry happens all at once. When the first industry heavyweight makes a strategic acquisition, investment bankers, VCs, and entrepreneurs start salivating, knowing that other industry players are likely to react with defensive purchases of their own. Some recent examples at hand are health insurance for the Medicare and Medicaid programs, social CRM, human resources management software, IT services, and dynamic display ad optimization.

IT services - 16 months, $23.4Bn start to finish:

Wednesday, September 26, 2012

I Forgive Myself

Every year on Yom Kippur I meditate on forgiveness, and post my thoughts here. Last year I was inspired by Steve Jobs, and learned from him that forgiveness is for the forgiver, not for the forgiven. That post made me rethink my attitude towards forgiveness, not as something that I bestow on others (and only if they are really sorry and promise it will never happen again), but a gift that I give myself, regardless of how the forgivee acts or even if they accept it.

What about forgiving ourselves though?

Tuesday, September 11, 2012

Stop Using Lack of a Technical Co-founder As a Crutch

Why should every tech startup be one business guy and the rest engineers? Why should you always finish the product before you build the business? A true entrepreneur doesn't hold up his business because he can't find one factor input. She fakes it, makes it work, pushes forward by sheer willpower. He does it manually until it's clear that there's a business and has developers clamoring to be his CTO.

It's one thing if you are selling technology, be it hardware or software; it's another if you are a tech-enabled business using the web for greater efficiency and scale. Saying you need to be a programmer to start a web-based startup is like saying you need to be an architect and a bricklayer to start a brick and mortar business. Get your business going, then you'll find the greatest architect ever and have more than a dream to sell him on.

The Fetishization of Product

[this post is likely to draw some controversy, not only b/c it goes against tech startup orthodoxy, but also b/c I didn't edit it before pressing 'Publish']

Should product be separate from business? As if business would sully it? Like asking about a business model at NYTM?

Are more people likely to use Uber b/c it has a great "product", or because of the availability of cars?

Twitter still has a horrible "product" - but nobody really cares.

I think we are moving into a post-product world, where people understand that the role "product" is to deliver the business, not the other way around.

Friday, September 7, 2012

Brand Is the Key to Scaling

The startup world loves to talk about the ability of a company to "scale." "Scale" doesn't have a precise definition, but it roughly means growing the business really big, with increasing, non-linear returns on headcount and equity capital. There are many levers for scaling - product, marketing, customer service, partnerships, etc - but they all boil down to one thing, regardless of product or industry: brand.

Sunday, August 19, 2012

A Theory of Traditional and "Social" Media

Media has always been social. People have an instinctive need for shared narratives and experiences at a broader societal level than they can get from directly shared experience. Media has filled those instinctive needs since the dawn of history [1], from the Great Flood (mediated by the Bible) to the non-flood of New York City during Hurricane Irene [2]. Before writing we had storytelling and cave drawings, minstrels and town criers.

Somewhere along the line large media companies arose, and confused creating and distributing experiences with creating and distributing content [3].

Sunday, August 12, 2012

The Importance of the MPG UI Paradigm

It makes computing accessible. It appeals to our intuitive senses. Where in the real world have you ever seen a WIMP interface? Maybe in your file cabinet, at best. WIMP is like doing everything with buttons and levers whose experience is disconnected from their effects. MPG is like manipulating the world directly. This is why kids get it so quickly, why it's so much more enjoyable than WIMP.

Apple realized this breakthrough, not just with the iPhone but with the iPod, whose controls were already gesture based (albeit with only two gestures). Previous to the iPhone, touch screen phone UIs were just WIMP based interfaces in which a stylus or finger replaced the mouse as pointer.

Monday, July 16, 2012

Contained Failure

One of the core messages of lean is "fail fast." Ryan MacCarrigan, VP of Marketing at Lean Startup Machine and one of LSMs best teachers, likes to tell the group that "failing" fast doesn't mean catastrophic-I-went-bankrupt-and-my-wife-left-me type failure. Quite the opposite: testing your riskiest assumptions first helps you avoid catastrophic failure, because the "failures" that you have in your model are contained within the boundaries of the experiment, and so become valuable learning moments rather than disasters.

Friday, July 13, 2012

My Favorite Block in NY

One of the things I love about New York City is the ingenious uses of space you find here. Putting retail in the first floor of residential and commercial buildings to take advantage of the premium they are willing to pay for the frontage / foot traffic is the most obvious. Building a state park on top of a sewage plant, slightly less so. But my favorite block in NYC for this by far has to be Grand Central Terminal.

Wednesday, July 4, 2012

Happy Birthday America, or Startups and Immigrants


"Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me"
        - "The New Colossus," Emma Lazarus, 1883


This year I'm especially proud to be an American. Working in VC has given me insight into so many founders' stories and helped me see how much of our innovation has come from immigrants and their children. US immigration policy is unnecessarily restrictive, but once you are here the sky is the limit. Other countries may have higher percentages of foreign-born citizens, and there are always the gold rush countries de jour (China and Dubai come to mind in recent times), but those places will never accept outsiders as their own. America is still the place whose national dream anyone can aspire to, and this is why the world's hungriest and most ambitious individuals still to come here to seek their fortunes, as they have for centuries. Democracy, capitalism, freedom of speech, and rule of law are the foundation; but immigration is the engine that will keep America exceptional long after China's economic growth slows.


Monday, June 25, 2012

The Titles We Carry

It used to be that Entrepreneur meant someone who started something, and Engineer meant someone with an engineering degree. If you were an early employee, you were certainly entrepreneurial, but not an entrepreneur; if you programmed but hadn't studied engineering, you were a programmer or a developer.

When I was working for UniTeller, a money transfer startup doing family remittances to Latin America,  in 2004-2005, my boss called my El IngeƱiero Elpern (Engineer Elpern) [1], but this was a conscious effort by him to pump me up in the eyes of our latinoamericano partners, who have great respect for titles. We both knew the game we were playing and that we were being a little hand wavy with the word. I have a computer science degree but not an engineering degree, and frankly being called an engineer made me a little uncomfortable.

Over the past couple of years however I've noticed the usage of these words become much looser, particularly in the startup world: people without founder experience are calling themselves entrepreneurs, and people without a real engineering or computer science background calling themselves engineers. When it's just one person, you can say they're exaggerating. When it's a few, you can rant about people who don't know what the words mean, and hope it's just a fad. When it becomes the norm, you have to accept that language has changed and go with it.

This raises the question: if the entrepreneur title no longer requires starting something new, and the engineer title no longer requires the study of engineering, what do these words mean? [2] Is anyone with startup experience an entrepreneur, and anyone who can code an engineer? Or is there a particular bar for using these terms, like being a high-level employee at a startup or being particularly proficient at coding?


Oh, and I'm now an entrepreneur and an engineer, according to my Twitter and About.me profiles.

--
[1] A uniquely Latin American title that is analogous to the use of Dr. to mean someone who has an MD, but for an engineering degree.
[2] In the startup community we don't confer these titles with formal status, but they still manifest themselves in the headlines we write for ourselves, whether on About.me, LinkedIn, or a company site, to say nothing of the way these terms define our self-image.

The Easiest Way to Predict the Future Is to Build It

Academics study the past, at best the present. Entrepreneurs predict the future, by building it.

--

Title quote by Peter Drucker

Friday, June 22, 2012

Tech Then vs Tech Now

In the dot-com era tech was popular for tech's sake. It was this exciting new thing, the Internet, and you could make millions just by adding dot-com to your name. It was revolutionary, the most exciting new thing since railroads, it was the tracks and the trains, the distribution and the cargo. The rush was on, everyone knew what they were chasing, but no one really understood what it was.

Today, there is a giddiness inside the tech sector, but not in the rest of the economy. People already know what the Web is; the difference b/w PC and mobile and tablet is fairly incremental. There have been some important innovations, like MPG replacing WIMP as the dominant UI model, NoSQL databases, REST APIs, and App Stores, but again these are all evolutionary compared with the Web. Today's tech world is Web native, and so we take it for granted. Everyone understands what it is, but no one knows what we're chasing.

Thursday, June 21, 2012

Industry Events - Waste of Time or Customer Development Opportunity?

A colleague recently sent me her comped tickets to a half-day summit on social media and internal communications. Attendees are probably mid to mid-senior level managers at large corporates, but no rockstars or C-levels. The question is whether attending is worth the time.

Most startup folks would say no; these speakers are unlikely to say anything new about the topic that I don't already know, and the attendees probably aren't decision-makers. If I had to pay I would agree, but since I don't it gave me an interesting opportunity to reflect.
What if the benefit from attending a corporate event is not to meet power brokers or learn new ideas, but to understand how the people who will be driving adoption of your product see the world?

Friday, June 1, 2012

Products and Distribution

The tech and media industries have been at each others throats going back to Napster at least. Popular sentiment favors tech, since tech would purport to provide content for free (although it will be interesting to see if the pendulum swings the other way following the recent privacy backlash against companies like Facebook and Google). What's often overlooked is that this is a classic battle between a producer and a distributor.

In the media world, bitter negotiations between content producers and content distributors are hardly limited to the online world. They are probably even more bitter in the offline world, where the stakes are higher. Look at Time Warner Cable's blackout of Knicks and Rangers games over a dispute with MSG Networks over retrans fees.
Battles between producers and distributors have been going on since time immemorial, probably since  economic activity specialized enough to justify dedicated providers of distribution services. Opportunistic repricing, aka "holdup," is a well-honed technique of in the distributors to squeeze more money out of producers under the very real threat that if they don't pay up, the distributor will cut off distribution. Amazon has used this technique repeatedly in its negotiations with publishers. Eric Clemons, whose class on "Information: Strategy and Economics" was one of my favorites at Wharton, gave the classic example of the refrigerated cars that distributed beef from the Great Plains to Eastern markets. Initially, the shippers offered lower prices to entice the cattle farmers to take a chance on this new technology. Later, when the shippers had greater market power and wanted to renegotiate, they could simply say to the meat sellers, "Whoops, we need more money to get your meat to market. It's all going to rot if you don't pay our increased rates." Typically holdups are done after market leverage switches between negotiating partners.

Did SOPA/PIPA represent a tipping point in market leverage between traditional content producers (media) and the new content distributors (tech)? What sort of holdups might we see in the future of this relationship?

Tuesday, May 22, 2012

On the Importance of Having Competition

VCs like to see that a startup has competition. The standard reason given is that the presence of competition validates that a market exists. This is true, but competition is a key signal of a market's maturity, not only its size. Your product might solve a huge problem for a large market, but if your customers have never seen anything like it, you are going to have to spend tremendous amounts of money educating the market.

Netflix recently provided a great example of this. On last week's earnings call, Netflix CFO David Wells blamed a lack of competition for their sluggish growth in Latin America. From GigaOm: "Without other companies showing local consumers that “streaming video actually works,” Netflix endures the entire burden of marketing an consumer education [sic]." [1]



[1] http://money.cnn.com/news/newsfeeds/gigaom/articles/2012_05_16_netflix_cfo_really_we_didnt_kill_spongebobs_ratings.html

Sunday, May 20, 2012

How NY VCs Stay Humble

Me: I work in VC.
Girl: You work in DC?
Me: No, VC.
Girl: What are you doing up here?
Me: No, not DC. Venture Capital.
Girl: What's that?
Me: Nevermind.
Girl: I only date guys who work in finance.
Me: FML.

Tuesday, May 8, 2012

Four Things I’ve Learned from Founders

The best part of working in VC is the opportunity to learn from the amazing entrepreneurs you meet (includes the ones we ultimately pass on). For me at least, that's why I got into the business in the first place. This will hopefully be the first in a series of posts on what I’ve learned from the many entrepreneurs whose companies I've looked at, some of whose identities I hope to be able to reveal soon (wink, wink). Four of the best insights I've gotten from some great founders follow:

1.    Budget-Based Pricing:
This is my favorite. I’ve seen a few startups take an approach to enterprise sales that I call “budget-based pricing.” The idea, roughly, is to calculate how much can I charge while staying under the expense limit of the individual that I am selling to within the organization. If you are selling to Dell, you are not selling to Dell the corporation. You are selling to the marketing office, shareholder relations, production, etc. You are probably selling to an even smaller part of that organization: the marketing department of a particular product line, perhaps even in a particular geography. Once you’ve drilled down to the discrete level at which you are selling, there’s one individual who is your ultimate customer. Ask yourself: how much can that individual authorize for a single purchase without having to get approval at a higher level, and/or having to go through procurement? This is her budget authority. Price at or below this, and she can make a unilateral decision. Price above this, and maybe you can get more money per sale, but your sales cycle will lengthen in proportion to the number of corporate layers you have to go through – as will the risk that someone higher up who is less excited about your product than your end buyer will cancel the sale altogether.

The most elegant use of this tactic is what I call “credit card pricing.” If you can set your price to a level at which the buyer can simply pull out his credit card, charge it and expense it later, not only have you eliminated bureaucratic delays in your sale, but you’ve eliminated the entire order-to-cash (OTC) cycle. This is the fastest way to close an enterprise sale. When you are a large, mature company, with dozens of customers and stable cash flow or financing to support long sales and OTC cycles, you can afford to optimize for long-term income. When you are a startup, you have to optimize for speed and cash.

If you don’t know your end buyer’s expense level, ask them! Many of them will happily tell you, as if they really want your product it’s in their interest to get their hands on it as soon as possible.

2.    Tiered vs Transaction Pricing:
Transaction pricing based on an appropriate unit of measure makes sense when the marginal costs associated with each unit of sale are significant (e.g. cloud services or CPX advertising). The downside of transaction pricing is that your customer will try to limit or game the number of transactions they need, in order to keep their costs down. For example, if you provide a fraud detection service, they will try to minimize the size of the sample they test. This leads to lower revenue for you and a worse customer experience for them. A flat-rate model with multiple tiers avoids this.

3.    Competitive Dynamics of an App or Platform Strategy:
The revenue appeal of an app strategy, or a platform upon which others can build apps, is relatively easy to see (although harder to execute). Recently one founder explained the strategic value of an app platform, namely how it shifts competitive market dynamics in two important ways: many would be competitors will become app partners; while direct competitors are forced to decide between going big or going home. This also points to the risk inherent in the app platform strategy: you need to be ready to go big as well if needed to maintain your app platform lead; nobody wants to build for the number-two platform; while on the downside a platform with few apps not worth much (see under: RIM).

4.    Avoid Long-Term Contracts
It’s natural to get excited when you’re offered a long-term contract. What great validation of demand for your product! There is an advantage in fundraising to be able to point to recurring revenue, but from an operating perspective it’s better to sign a one-year contract and then renegotiate for higher prices once the year is out. Your negotiating leverage as an early stage company will be dramatically higher then. Yes, this introduces some risk that they won’t renew, but they wouldn’t be offering you a three-year contract if they didn’t really like your product. To use the fundraising analogy, giving a discount to your earliest customers make sense, but letting them keep that discount for three years would be like giving your seed investors the right to participate in the A and B rounds, but at the seed valuation.

Saturday, May 5, 2012

The Alarming Self-Righteousness in Tech

There is a growing self-righteousness in the tech community, and like any other self-righteousness, it is ugly. The latest example that I’ve seen of this is the manifesto published by Karma, a Techstars NY company with a vision of more user-friendly mobile service. Don’t get me wrong – I agree that the telecom industry has stagnated and that somebody needs to shake it up, and I applaud Karma’s broader goals – but revisionist history and framing ourselves as the “good guys” in a battle between good and evil makes me uneasy about what lies ahead.

Monday, April 16, 2012

We Are Not the Passionate Job Creators, We Are the Proud Engine of Creative Destruction

In the face of high unemployment in the rest of the economy and around the Western world, the startup world has become increasingly vocal about our role as job creators. A series of emails and Facebook messages I received recently from my friends at Entrepreneur Week claimed that "We are the passionate job creators" [1]. I'm starting to feel like we doth protest too much. Let's be honest with ourselves: we may be creating a lot of jobs, but we're destroying a lot as well.

Saturday, March 31, 2012

Are Privacy Laws the New Blue Laws?

Once upon a time in this country the consumption of alcohhol on Sundays was seen as a great danger, so we passed laws banning the sale of liquor on Sundays. In many states we still have this law, which we find antiquated today.

Today we feel that exposing our data is a great danger, and so we are creating laws to ban what companies can do with our data, and when they can collect it. I wonder if 100 years from now privacy laws will be the new Blue Laws: out of touch legislation that doesn't actually protect us any better.

We need to develop a legal and criminal system that acknowledges that our data is going to be out there no matter what we do about it, and figures out ways to protect and serve in that reality.

Imperial Overreach and the Cost of Health Care in America

All empires peak when they no longer have the resources to sustain their mass. For most empires, it is a war that triggers this: it causes both spending on the battlefield as well as displacement of otherwise productive labor and a rapid consumption of capital. It's hard to reinvest something that just exploded.

If you win the war, great, you get the spoils, but if you lose - or win but aren't able to take the spoils - you just burned up most of your productive resources for no return.

Our empire will be different. We've learned some of the lessons of military overreach, and we live an era where it is not accepted for the winner to plunder the spoils of war so the incentive for conquest is much diminished.

Our empire will achieve overreach because of health care costs. When the age of American greatness ends we will look back on it and say that the trigger for decline was not our WWII (British Empire), nor our Afghanistan (USSR), but a decision the Supreme Court made in 2012.

I hope that our Justices are wise.

Saturday, March 17, 2012

Learning to Be a VC: Giving Feedback to Entrepreneurs and Friends

Probably the hardest part of being a VC is having to say no. You get into the business because you want to help great entrepreneurs succeed, and then you find yourself in a reality where you have to say no over and over. One of the first expressions I hear of this was from Ashmeet Sidana, who told a group of Wharton students I was part of that his job was to say no 99% of the time and write one check a year. When I interviewed for Genacast Gil told me that VC was like fly-fishing: although you know what you're aiming for (catching a fish / investing in a great entrepreneur), you have to enjoy the process because otherwise you'll burn out quickly.


I felt OK with this, but nothing prepared me for the worst: having to say no to people you really like genuinely want to succeed. Many if not most of my friends are tech entrepreneurs and much of my social life takes place in the tech scene. This creates an additional layer of complexity to say no. Learning to balance doing the right thing personally and professionally in these situations has been emotionally exhausting, but it has definitely made me mature in both aspects of my life.


David Biesel wrote a great post about the challenges of giving overly direct feedback to an entrepreneur when passing on their business [1]. One of his interesting points is that "The more negative the feedback (even if genuinely constructive), the less likely an entrepreneur will return ... whenever his business and/or financing details have markedly progressed." VCs know that an entrepreneur whose business they don't think is a good fit today may be a great fit somewhere down the road; David's fund has made more than half of its investments in founders they previously passed on.

For me the "aha" moment came when reading this line:
... great entrepreneurs ... hear critiques as a learning opportunity to refining their business or how they effectively communicate about it.  Great entrepreneurs also value people who are honest and direct about their concerns, and use those points as a foundation for addressing them to build a relationship over time.
In other words, great entrepreneurs are people to whom you can give blunt and honest feedback without worrying about their holding it against you. Honest and blunt feedback may turn away some entrepreneurs, but these are not the people we want to invest in.

This realization also helped me reconcile with the difficulty of having to professionally say no to people I personally like: the best friends, like the best founders, are mature enough to handle criticism, know in what circumstances certain relationships and people fit together and when they don't, and these are the people I want to surround myself with in work and life.


[First in what will hopefully be a series of posts about learning the VC trade]


[1] http://genuinevc.com/archives/2012/3/8/overly-direct-feedback-to-vc-pitches.html

Monday, February 20, 2012

Using Rapportive to Discover Someone's Email Address

Let's say you want to email someone. You know their name and where they work, but you don't have their address. You can guess at it, since for most companies it follows one of a limited set of patterns:

  • First.Last@company.com
  • First_Last@
  • first@
  • [first initial][last name]@
  • etc.
This is kind of annoying to do in practice: it's slow, it might result in your email arriving in the wrong person's inbox, etc. Using Rapportive, all you have to do is type each guess into the To: field, and Rapportive will immediately look up that email address and give you the results.

I discovered this in the best possible way - by accident. Use it and enjoy!

Tuesday, February 14, 2012

14 Ways VC Fundraising Is Like Dating


A lot of first-time entrepreneurs scrutinize the web-o-sphere and the blogs of folks wiser than I like Fred Wilson and Mark Suster for advice on how to come up with the perfect pitch to VCs, but they miss the most basic truth: VCs are people too, and people are all about relationships. So, in honor of February 14, Valentine's Day, I've put together a list of 14 ways VC fundraising is like that oldest of human relationships: dating (or love, if you want to get all historical on me):*
  1. You start with coffee.
  2. There are lots of "dates."
  3. If you're not interested you try to let the other side down gently - "I don't want to lead you on."
  4. The side that starts off aloof can be the side that ends up falling in love - and the one that gets its heart broken.
  5. Begging the other side to give things another chance rarely works.
  6. You can't reason your way into a relationship (aka He's Just Not That Into You)
  7. There may be numbers involved but ultimately it's based on a feeling.
  8. Timing is everything - "This just isn't the right time for me to get into a relationship."
  9. "You remind me of an ex" (another company/investor that left a bad taste).
  10. It's not about one side choosing the other but about both sides finding the right match.
  11. You hope it's about more than the money.
  12. The holy grail is a true partnership.
  13. When the relationship is ready to be consummated there is paperwork to sign.
  14. Moving too fast often produces bad results.
Happy Valentine's Day!

* Please have a sense of humor when reading these. They were written to play off of well-known stereotypes about dating rather than any opinion of how dating should be.



    Saturday, February 4, 2012

    Coupons vs Gift Cards

    I read a Quora question that asked "How do the economics of gift cards compare to coupons for retailers?" Since I've worked a bit in the gift card and payments space* and am super nerdy when it comes to business models and other behavioral incentives,** I wrote a lengthy answer and copy-pasted it below:

    Revenue

    From a revenue perspective, it depends on the size of the transaction to which the gift card or coupon is applied. Most gift cards don't change the amount of revenue a retailer receives. That is to say, there is no discount given with the gift card so a $50 gift card represents $50 in revenue to the retailer. The retailer may pay for distribution of the gift card, in the form of a discount to face value, but this is a separate question.*** From an accounting perspective I don't know if the retailer can recognize revenue at the time the gift card is sold or has to wait until it is spent. A coupon cuts into their revenue, as by definition it is a reduction in what the customer would otherwise have paid for the same items.

    The above, of course, assumes that the customer would have bought the same items at full price regardless of whether an incentive (gift card or coupon) was offered. There is a lot of research and writing on how gift cards and coupons affect purchasing behavior, but that is beyond the scope of this question. What I have anecdotally observed is that versus gift cards, coupons tend to drive more spend outside of the item on which the coupon is used. I.e. I'm more likely to walk into a store to use a coupon and find myself buying more things than just what the coupon is for than I am to do the same with a gift card. To use one example, if I buy $50 of goods in a store and use a $10 coupon, the coupon will directly reduce revenue to the retailer by $10, but it may have indirectly increased revenue by $40. The real question on the use of coupons and other discounts is not their effect on current-period revenue but their effect on margins and as a customer acquisition tool (see for example AT&T's argument that while it loses money on each iPhone it sells at a discount to what it buys them at, it makes up for that loss by the lifetime value of an iPhone subscriber).

    With the gift card in fact I may never spend the full value of the gift card, a phenomenon called breakage which benefits the retailer and is built into the business model of the gift card industry.

    Balance Sheet

    Coupons do not generally affect the balance sheet. Gift cards on the other hand represent a liability, as their balance is indeed owed to the gift card holders, much like a bank deposit. To continue the bank deposit analogy, it is unlikely that all gift card holders would ask for what is owed to them at once. The exception would be a run on a bank, or in the case of a retailer, fear of a bankruptcy. For this reason retailers whose outstanding gift card liabilities represent a material part of their assets should disclose not only the size of this liability but how quickly they expect it to be redeemed (I don't know if this is actually required by the SEC).

    The outstanding liability is one reason that gift cards expire after a certain period. One can imagine an extreme case for an older retailer that if there were no expiry date, the sum of all of the gift cards ever issued that were lost or otherwise not redeemed might end up being more than the rest of the retailer's balance sheet! (the other reason is the breakage component of the gift card business model that is mentioned above)

    Which Is Better for the Retailer

    The answer to this one, like all good questions, is "it depends." This is really a narrower form of the question "What is a good pricing strategy?"

    As Aditya points out, a gift card preserves brand equity better for luxury or higher end brands. On the other hand, for a retailer whose brand positioning includes being low cost - e.g. Walmart, T-Mobile, most grocery stores and pharmacies - a coupon might enhance their image.

    For more directly financial advantages to each form of shopping incentive, the answer is completely dependent on the particulars of the campaign, including the size of the coupon/gift card, the nature of the incentive, the item or items being discounted, the distribution channel, etc. For example, a coupon can be for a percentage vs fixed discount; for a particular item vs run of store; have variable expiration dates; have a minimum spend to trigger the coupon (e.g. $10 off your purchase of $100 or more). 

    --

    * I helped Univision launch their gift card in addition to broader experience w/ other forms of payments.


    ** Because isn't that what business models really are - ways of influencing consumer behavior?


    *** If you are interested, this is referred to as B2B gift cards - as opposed to B2C that are sold directly by the retailer to the consumer - and includes channels such as employee incentives (when a corporation buys gift cards to give their employees), gift card malls (online or offline locations that offer a wide selection of gift cards in one place. You'll often see these in drug stores near the checkout areas), and scrip (gift cards used as fundraising solutions, wherein community organizations such as schools buys gift cards at a discount and then resell them to community members at face value, collecting the difference as a donation). All of these channels share the characteristic that there is a wholesale buyer of the cards, who receives an appropriate wholesale discount.

    Sunday, January 15, 2012

    Teamwork vs Concentration

    I had my belief that co-located teams were more productive challenged by an entrepreneur recently. When we expressed our concern that his four-person team was spread across four cities spanning 10 time zones, he didn't just respond with the usual, "It's not ideal but we make it work." Instead he pushed back and said that they were more productive than if they all shared an office, because they distracted each other less (he was self-aware enough to admit that he was the one doing most of the distracting).

    In an opinion piece in the NY Times on Friday, Susan Cain makes the case that "privacy makes us more productive"
    "In a fascinating study known as the Coding War Games, consultants Tom DeMarco and Timothy Lister compared the work of more than 600 computer programmers at 92 companies. They found that people from the same companies performed at roughly the same level — but that there was an enormous performance gap between organizations. What distinguished programmers at the top-performing companies wasn’t greater experience or better pay. It was how much privacy, personal workspace and freedom from interruption they enjoyed. Sixty-two percent of the best performers said their workspace was sufficiently private compared with only 19 percent of the worst performers. Seventy-six percent of the worst programmers but only 38 percent of the best said that they were often interrupted needlessly."
     She goes on to note that teamwork is still important, but that electronic teamwork is most effective:
    "[While] recent studies suggest that influential academic work is increasingly conducted by teams rather than by individuals ... teams whose members collaborate remotely, from separate universities, appear to be the most influential of all." 
    Since correlation does not imply causation, one could argue that better programmers have better concentration, rather than that more interruptions cause worse programming, or that remote collaboration by individuals at separate universities is more successful because these highly-specialized teams are not limited to the local talent pool.

    The point however is not that one way of working is better than the other, but rather than every team needs to find its own balance.

    I tend to find that at the beginning of any working relationship, or when a new group is formed, that more face time is helpful to establish trust, rapport, and informal rapid decision-making protocols. I prefer to do most of my work independently, but to have many informal phone and email touchpoints, as well as regularly scheduled time together in the same location.

    Regular and informal scheduling allows face-to-face interactions to occur naturally, without the choice of medium sending too strong of a signal or dominating the content and tone of the conversation. At Genacast I am based in New York while Gil and Austin are based in Philly, but Gil and I tend to be in the same city twice a week. This may change as my time with the firm increases, but I find it very helpful for learning from him and for getting to know each other's styles.

    [1] The Rise of the New Groupthink

    Wednesday, January 4, 2012

    Dave McClure is Awesome

    I had this image of him as Silicon Valley's foul-mouthed joker, a sort of VC version of Howard Stern if you will. Not someone whose opinions or advice were respected. Sure he had worked his way into the Silicon Valley elite, but it was probably a mix of self-promotion and being in the right place at the right time. I couldn't have been more wrong.

    I just watched his "How to Pitch a VC (aka Startup Viagra: How to Give a VC a Hard-On)," and I was blown away (in keeping with my new "no hyperlinks" policy, the link is at the bottom). Of the dozens of presentations out there on the topic, this the best I've seen. Every entrepreneur thinking about raising venture capital should watch it. Hell, even if you're not an entrepreneur you should watch it; many of his points are valid for any type of pitch presentation from sales to job interviews to biz dev partnerships. For examples: always lead with a single "splash page" slide that leaves the audience with an image of what you are about, because that might be the only slide you get to show.

    Watch if you haven't already:

    [1] http://500hats.typepad.com/500blogs/2009/03/how-to-pitch-a-vc-aka-startup-viagra-how-to-give-a-vc-a-hardon.html

    Monday, January 2, 2012

    New Year's Resolution: Replace FOMO with CWID

    FOMO. Fear of Missing Out. You know it all too well. The fear that somewhere, someone that you know, is having a better time than you, doing something. It's the dark side of social media that keeps you glued to your email, your twitter stream, and dare we say it, your Facebook feeds. Portlandia does this awesome bit on it.

    I've had enough with FOMO, so for 2012 I am making the following resolution: No Mo' FOMO. Instead of FOMO let's try CWID: Content w/ What I'm Doing.