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New York Magazine has a great article in its current edition where it attempts to understand the psyche of the users of social networks, especially the younger users. Although as investors and entrepreneurs, we do our best to get into the heads of these users, many of us are a generation (or at least half a generation!) too old to be of this demogrpahic. The article won’t have much new to say to regular readers of Dana Boyd and Clay Shirky, both of whom are quoted in the article, but its worth reading none the less.

The author, Emily Nussbaum, has been tracking this theme for several years and wrote a good story in the NYTimes a couple of years ago on teen blogging that is also a good read.

Nussbaum talks about younger internet users’ willingness to reveal their private lives on the Internet (blogging, posting photos, sharing “private” details on myspace or facebook) as causing the first true generation gap since rock and roll 50 years ago. She satirizes the older generation’s “disgusted, dismissive squawk” as going something like this:

Kids today. They have no sense of shame. They have no sense of privacy. They are show-offs, fame whores, pornographic little loons who post their diaries, their phone numebrs, their stupid poetry- for God’s sake, their dirty photos! – online. They have virtual friends instead of real ones. they talk in illiterate instant messages. They are interested only in attention – and yet they have zero attention span, flitting like hummingbirds from one virtula stage to another.

Nussbaum highlights three changes in the mindset of younger internet users who grew up as Digital Natives:

They think of themselves as having an audience

They have accepted that in a world of cellphone cameras and security videos and Google, there is no guarantee of privacy anyway. Whereas once only celebrities and politicians had to parse every sentence, these users have learned to modulate their voices to address their constant audience. They have learned the coping skills of Paris Hilton: enjoy the attention instead of fighting it and do your own publicity before someone does it for you. One telling quote “why go to a partiy if you’re not going to get your picture taken?”

They have archived their adolescence

Unlike older generations, whose memories of their youth are largely centered around yellowing old photos in shoeboxes and the occasional artifact – a trophy or an award, this generation has a detailed history of their lives stored digitally. This archive is open to anyone – potential employers, spouses, friend – but most importantly it’s open to its creator, who can dip back into her past with ease. Its certainly open to online predators and pedophiles too – but worrying about that is akin to saying “How can you move to New York? You’ll get mugged!” in the minds of these users who have grown up learning to deal with porn popups and IMs from dodgy strangers.

Their skin is thicker than yours

Public life is fun. It’s creative. It’s where your friends are. It’s theatre, but it’s also community. But the flip side of all of this is that you also open yourself up to shaming, to snark, to anonymous flaming. These internet users can feel embarassment and absorb it without shutting down. Quoting another of Nussbaum’s interviewees “Well, I guess you have to be sort of honored that someone takes the time to write about you, good or bad”.

The key takeaway for me is that user generated content on social networks (whether away messages on AIM or posts on the Wall at Facebook or restaurant reviews at Yelp) is as much about performance (for an audience) as it is about communication. Self expression is not about what I think, its about what I want you to think about what I think.

In an offline world, my self expression is limited to choosing from a predefined set in a confined space: which bumper sticker will I put on my car, which poster will I put on my dorm room wall, which colored charity band will I wear on my wrist. In each case, I’m carefully choosing my “self expression” to make sure that it casts me in the light in which I want to be seen. Online, my self expression is unbounded. As is often the case, online adoption occurs fastest when it mirrors existing offline behaviour and improves it, and we definitely see this in the area of social networks.

So while I highly recommend reading the article, and agree with a lot of its observations, I ultimately don’t think that this generation is so hard to understand. They’re just like us, only moreso.

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I subscribe to Harvard Business Review but rarely read it – the long articles intimidate me! However, a friend of mine recently pointed me to a fantastic article in the October 2006 edition entitled “Strategies for Two-Sided Markets” by Thomas Eisenmann, Geoffrey Parker and Marshall W. Van Alstyne that is well worth reading.

The article addresses a common phenomona in technology, where a platform brings together two groups of users, each attracted to the other group. Examples might include Ebay (bringing together buyers and sellers), Monster (bringing together job seekers and employers), Youtube (bringing together video posters and video watchers), even Gaming Consoles (bringing together game developers and players). The article discusses all such platforms, but I found the most interesting cases to be when members of both groups want to be part of the platform where there are the most members of the other group, or “cross-side positive network effects” in the parlance of the article.

The article answers two critical questions to owners of such platforms:

Who do you charge?

In a two sided market, you can charge one side or the other, or both. Typically platforms end up charging one side (the Money side) and subsidizing the other.The article suggests that there are six guidelines in making this decision, some more obvious than others. I’ll highlight three of them here:

    Subsidize the more price sensitive side. E.g. Adobe gives away its PDF reader for free but charges for Acrobat.

    Subsidize the side that is more sensitive to quality (i.e. charge the side that has to PROVIDE quality – and let suppliers use their willingness to pay as a signal of quality). E.g. console game players (PS3, Xbox 360, Wii) demand high quality. Developers pay a high fixed cost to deliver quality so they need a lot of players to make their business models work. They are willing to pay a high royalty and adhere to strict licensing terms to reach those big audiences.

    If strong “same-side negative network effects” exist on one side (e.g. if one side would prefer not to see too many others on the same side, such as competitive suppliers), charge that side and possibly limit the number of available slots. E.g. Autobytel gives zip code exclusivity to dealers in a given territory and charges dearly for that limitation


Proprietary or shared platform?

Often in these sorts of markets only one platform will survive because both groups want to be on the platform where there are the largest numbers of the other group. Competitive platforms need to make a “bet the company” decision – to fight to be the winning platform, or to cooperate and share a single platform. The article says that there is typically a single winner if the following conditions apply:

    Multi-homing costs are high for at least one user side – i.e. it is expensive to support multiple platforms. This is true in the case of online auctions (if I only have one antique cuckoo clock, it can only list it in one place) and not true in the case of job sites (its easy to post my resume on both Hotjobs and Monster).

    Neither side’s users have special needs. If the market can be segmented then different platforms can co-exist, each serving a niche.

High definition DVDs looks like a market that fits these criteria. Blu ray and HD DVD are battling it out to be the winning platform. Typically the winner of such a war of attrition will have (i) Cost or differentiation advantages (longer play times, better image quality) (ii) Pre-existing relationships with prospective users (movie studios) (iii) Reputation for past success and (iv) Deep pockets. Often, because of the confidence of the executive teams in their products and the winner-take-all nature of these industries, competitors will choose to fight. However, cooperating can also bring benefits including a greater overall market size (when standards take longer to emerge many users delay commiting to either platform) and lower overall marketing costs.

The article also addresses questions such as when to be a first mover (and more importantly, when not to be a first mover), and how to deal with envelopment from adjacent platforms (relevant to those facing Microsoft’s “Embrace, Extend, Destroy” strategy). If your company is a platform that faces these “cross-side positive network effects”, I highly recommend reading “the article

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I’ve previously posted on the importance of distribution during the initial phase of a startups life. To be more accurate, I think that distribution is the most important factor for a consumer facing company competing in a new category.

However, I think that this is just the first act of a three act play, with a different factor being critical to success in each act.

ACT ONE: DISTRIBUTION

To summarize the earlier post; early in a category’s lifecycle, users don’t recognize that they have a particular need/problem. They don’t recognize that a category exists and so there is no demand pull. If even your own mother doesn’t know what it is you do; ESPECIALLY if your own mother doesn’t know what it is you do, then you likely face this problem!

Having the best product is neither necessary nor sufficient. Having a decent product is good enough.

You need to get to users as they won’t get to you. Hence the importance of distribution. Read the original post for flavors of distribution and how to get them, plus examples.

ACT TWO: PRODUCT

Over time, categories become established in the minds of consumers. In the case of online travel agencies it took about 3-5 years. In the case of user generated video, it took only 12-18 months. Consumers start to understand who the competitors are in an industry. If switching costs are low (as they are in both online travel agencies and user generated video), users often sample the offerings from multiple competitors. At this stage, assuming that you have done enough to get into the consideration set, product and user experience matters a lot. Distribution has become the ante, and the companies that win will win on the best product.

Having the best product means much more than having the most checks in a feature comparison matrix. It goes far beyond the technology. It can mean having the best prices, the best selection/range, the best customer service or the best community. In the early days of online travel Travelocity won on distribution through its deals with AOL and Yahoo! But once the category became established in people’s minds, Expedia slowly took market share from Travelocity on the back of a better overall user experience, one important factor being better pricing (mostly hotel pricing). [Update: Note comments below from Rich Barton, founding CEO of Expedia, on his view of why Expedia overtook Travelocity.]

Similarly, many user generated video sites claim better features than Youtube, yet Youtube never lost its lead because it had the biggest range of content (and the biggest audience for people looking to upload videos). As technologists we can fall into the trap of defining “best product” too narrowly, but our customers are not technologists and they look at the whole experience.

ACT THREE: BRANDING

As a category continues to mature, it becomes harder to maintain product differentiation. There are some exceptions; when there are positive network effects an early leader like Ebay or Youtube can often hold their leads. But if the advantages built in Act Two stem from technology, process or supply advantages, these often get whittled away as competitors copy, innovate and partner to make up lost ground. At this stage of a category’s evolution, branding is the most important factor and product has become the ante once again. (Note that I distinguish here between branding and marketing. Online marketing that is more direct response (CPC or CPA) in nature is really more a form of distribution.)

Google is sometimes presented as the canonical example of the best technology winning over time. However, as I mention in the post on distribution, Google‘s traffic only really started to climb after its distribution deals with Y! and AOL. It really did pull away from the other search engines on the basis of its better product during Act Two. But today, its not at all clear that its search results are that much better than anyone elses.

When I was at AOL a couple of years ago, we used to test search relevance from multiple engines by taking the results from all the major search engines, stripping all branding and UI, and showing the lists to users who scored the quality of the search returns. The results were surprising – all the search engines were very close to each other in relevance, with variations as to who was “best” from month to month and search term to search term. Interestingly enough, when you put the branding and UI back in, the users always rated
Google as having the best search results.

Google‘s dominant brand is now what enables it to hold and grow its search market share. And in mature categories such as online travel, you see the big players compete purely on branding ads.

In some categories, branding never matters and we never reach Act three. If your users are unlikely to transaction with you more than once (say you sell rowing machines or curio cabinets) then your category will likely never develop beyond Act One. But if you’re in a category with repeat users, whether books, DVD rentals, online auctions, or shoes, branding matters.

CONCLUSION

Distribution, product and branding, all are critical but at different times. Making sure you focus on the right factor at the right stage in the evolution of your category can help you make sure you’re fighting the next war, not the last one.

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Deciding to take outside investment from a VC firm and bring in a new co-owner for your business is a critical decision. Entrepreneurs often want to know how exactly a VC will help once they’ve invested and what could change …

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Well we were hoping not to announce our investment in Flixster until they got a PR firm engaged, but Mike Arrington at Techcrunch has his sources and broke the news tonight.

We’re very excited to partner with Joe and

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Ask the VC points to a good post by Matt Macall at his blog VC Confidential about why startup entrepreneurs should not get too focused on the issue of control and of owning more than 51%.

In a nutshell, he …

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The best part of being a ‘VC’ is meeting passionate entrepreneurs and listening to pitches about how their idea is going to change the world. Since I joined Lightspeed, I’ve found myself meeting amazing people and debating revolutionary ideas on …

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There have been a lot of posts on startups laying people off, losing founders or closing down in the last couple of months, part of the natural cycle in the valley. But what has disturbed me has been …

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I’ve been thinking a bit more about how consumers adopt “new” products online recently, in part because of a couple of recent posts I wrote in reaction to rumors of a Safari browser for Windows and questions on the value

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Todays’ NY Times article on Widgets and the blogosphere reaction brought to mind Josh Kopelman’s post last May on the 53,651.

Josh made the point that too many companies are targeting an audience of 53,651 (Techcrunch‘s audience …

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