by John Smith-Ricco
Despite the obvious duplicability of its business model, Rent the Runway has aggressively protected its position as first-mover through investment in technology and operations management. Providing women with the “Cinderella” moments that accompany wearing otherwise inaccessible designer dresses may be Jen and Jenny’s mission, but their company’s expertise lies in the less sexy areas of inventory management, quality control and maintaining high utilization rates of each garment.
Rent the Runway was the case I anticipated the most as a student in Launching Tech Ventures. The RTR story is wonderfully hopeful, a feel-good MBA cautionary tale on the type of success risk-averse capitalists might miss out on by taking the safe route [insert finance/consulting/CPG career path here]. Rent the Runway has the potential to democratize the world of luxury ready-to-wear. However, in order to maintain the “magic” and keep would-be competitors at bay, RTR must avoid becoming TJ Maxx for the Netflix generation.
Technology is not enough
Hyman appropriately acknowledges that technology is at the core of the company. This poses a problem if a competitor were to enter the space with better technology in the form of faster turnarounds, better size matching, etc. So far this threat is unrealized, but one can imagine there are retailers and other players in the fashion ecosystem whose current expertise might overlap with and surpass that of RTR.
Fashionistas are fickle
The technological advantage that Rent the Runway currently enjoys may undermine its appeal among its most discerning customers. The business model is such that higher utilization of dresses yields more profits. In class, I opined that dresses are seasonal and therefore not utilizable year round, but learned that a significant fraction of inventory did not follow seasonal pattern. Furthermore, RTR purposefully leaves out dresses’ release dates (e.g. Fall 2010) so that dresses can be used year after year as trends start in New York and drift from the coasts to the heartland, thus spreading fixed costs even further.
While a Marchesa gown from a three-year old collection may be fine for the consumers in middle America, the 25 year old Manhattan PR girl may not be so impressed. Since RTR’s original focus groups included “it” girls and “almost it” girls from Harvard an Yale, I suspect this discerning consumer still comprises a sizeable portion of sale and it would be a disservice to alienate her. Doing so will commoditize the service and invite competition on the basis of technological execution rather than the elusive Cinderella wow.
Relationships matter
Ultimately, I’m still quite optimistic in my outlook on RTR. They have a head start on technology and by maintaining strong relationships with key design houses the team can keep the “it girl” consumer engaged. The key will be to avoid profitable shortcuts that will damage the brand in the long term.
There’s nothing wrong with being the TJ Maxx for the Netflix generation; TJX (the holding co. for Marshalls and TJ Maxx) has an impressive $30Billion market cap and its stock has outperformed the market over the last two years. However, if Rent the Runway is to be a premium service it must continue to deliver cutting edge fashion while using technology to make the overall operation more profitable.
Showing posts with label Early adopters vs. mainstream users. Show all posts
Showing posts with label Early adopters vs. mainstream users. Show all posts
If the Customer is King, the Product Manager is Regent
On Not Bending to Customers' Whims
by Katharine Nevins (blog: http://katharinenevins.posterous.com/)
The goal for any startup (or product manager for that matter) is to build a product which customers need and love. It’s easy to call yourself or your company customer-centric, but actually doing what is best for customers isn’t always straightforward or intuitive. There are two main reasons why listening to customers doesn’t inevitably lead to good products. Firstly, not all customers need or want the same thing. Secondly, customers often do a poor job of knowing or articulating what they want. Fortunately, both of these problems are addressable.
For most products, different customers will have different needs. Power users have different needs from new users: Sarah Dillard points out that Quora’s integration of feature requests from its power users have led to a bewildering experience for new users. Different user segments may also have conflicting needs. Natasha Prasad gives a great example of the trouble Digg had appealing to its original “geek” segment while trying to attract more mainstream users. While working on Quickbooks, I saw a constant tension between adding features for power users or new verticals vs. upholding our reputation for ease-of-use. Creating new SKUs for power users (e.g. Premier edition) and verticals (e.g. non-profit edition) helped, but maintaining too many separate versions of a product is not ideal for a lean startup.
The most elegant “lean startup” solution I’ve seen to this problem is to use partnerships and open APIs to extend functionality. Eventbrite, for example, allows third-party developers to build features or niche solutions such as an event check-in app through its apps showcase. Eventbrite remains lean by allocating its resources to only the highest-impact new features. Its customers all benefit by getting a simple but powerful product with an option to add only the extras they really need.
This API-based approach has famously worked for products such as Salesforce (with the AppExchange) and Apple’s iPad/Pod/Phone (with the App Store). Social products relying on user-generated content can make this approach work as well. Apps built by Twitter’s developer community allow different customer types to use Twitter as a marketing platform, a news feed, or a social tool as they prefer. The (potential) challenge for newer companies such as Foursquare and Quora is that they’ve already built their products for an early-adopting niche. Now, they need to remove or change the early adopters’ favorite features so the product can be used by Normals. Is there an elegant way to roll out a “Krunk-badge”-free version of Foursquare to soccer moms while keeping the existing, bar-hopping user base happy? I’m not sure. Thoughts?
Misleading or nonexistent customer input is even more unintuitive to deal with than conflicting customer feedback is. Even within a specific customer segment, customers often can’t or won’t tell you what they really need. Customers often ask for features they wouldn’t actually use. Watching focus groups talk about their personal finances from my side of the one-way glass at Intuit, it seemed to me that their well-intentioned requests for better personal finance tools would in no way change their actual spending behavior, and therefore the tools would probably not be used even if we built them well. Other users don’t ask for features they would use. Prof. Piskorski’s research suggests that one of Facebook’s biggest uses is by men looking at pictures of women they don’t know. However, these men probably wouldn’t have asked Facebook’s product managers for a better way to check out girls, and it’s possible they wouldn’t admit to this behavior if asked by a researcher or product manager. Finally, customers are limited in the solutions they think to ask for. A customer who didn’t know about email wouldn’t ask for a BlackBerry.
Separating what the customer needs/ wants to do (the job) from how the customer will do it (the product) is the key to addressing this issue. The customer often knows what job he wants to do. If he can’t articulate it well, then observing his behavior as IDEO does will help the product manager figure it out. The goal of the product manager or startup founder is not to tell the customer what to do, but to identify how to help the customer do something he wants to do anyway. Customer statements of how they want to achieve their goals should be taken with a grain of salt. In the year 2001, I would have asked for a faster Napster when what I really wanted was Pandora (though I didn’t know it yet). To identify the best how (product), the product manager should come up with a few alternatives to test on users, then use their input to decide. In this way, she can create a product even better than what users would have asked for themselves.
by Katharine Nevins (blog: http://katharinenevins.posterous.com/)
The goal for any startup (or product manager for that matter) is to build a product which customers need and love. It’s easy to call yourself or your company customer-centric, but actually doing what is best for customers isn’t always straightforward or intuitive. There are two main reasons why listening to customers doesn’t inevitably lead to good products. Firstly, not all customers need or want the same thing. Secondly, customers often do a poor job of knowing or articulating what they want. Fortunately, both of these problems are addressable.
For most products, different customers will have different needs. Power users have different needs from new users: Sarah Dillard points out that Quora’s integration of feature requests from its power users have led to a bewildering experience for new users. Different user segments may also have conflicting needs. Natasha Prasad gives a great example of the trouble Digg had appealing to its original “geek” segment while trying to attract more mainstream users. While working on Quickbooks, I saw a constant tension between adding features for power users or new verticals vs. upholding our reputation for ease-of-use. Creating new SKUs for power users (e.g. Premier edition) and verticals (e.g. non-profit edition) helped, but maintaining too many separate versions of a product is not ideal for a lean startup.
The most elegant “lean startup” solution I’ve seen to this problem is to use partnerships and open APIs to extend functionality. Eventbrite, for example, allows third-party developers to build features or niche solutions such as an event check-in app through its apps showcase. Eventbrite remains lean by allocating its resources to only the highest-impact new features. Its customers all benefit by getting a simple but powerful product with an option to add only the extras they really need.
This API-based approach has famously worked for products such as Salesforce (with the AppExchange) and Apple’s iPad/Pod/Phone (with the App Store). Social products relying on user-generated content can make this approach work as well. Apps built by Twitter’s developer community allow different customer types to use Twitter as a marketing platform, a news feed, or a social tool as they prefer. The (potential) challenge for newer companies such as Foursquare and Quora is that they’ve already built their products for an early-adopting niche. Now, they need to remove or change the early adopters’ favorite features so the product can be used by Normals. Is there an elegant way to roll out a “Krunk-badge”-free version of Foursquare to soccer moms while keeping the existing, bar-hopping user base happy? I’m not sure. Thoughts?
Misleading or nonexistent customer input is even more unintuitive to deal with than conflicting customer feedback is. Even within a specific customer segment, customers often can’t or won’t tell you what they really need. Customers often ask for features they wouldn’t actually use. Watching focus groups talk about their personal finances from my side of the one-way glass at Intuit, it seemed to me that their well-intentioned requests for better personal finance tools would in no way change their actual spending behavior, and therefore the tools would probably not be used even if we built them well. Other users don’t ask for features they would use. Prof. Piskorski’s research suggests that one of Facebook’s biggest uses is by men looking at pictures of women they don’t know. However, these men probably wouldn’t have asked Facebook’s product managers for a better way to check out girls, and it’s possible they wouldn’t admit to this behavior if asked by a researcher or product manager. Finally, customers are limited in the solutions they think to ask for. A customer who didn’t know about email wouldn’t ask for a BlackBerry.
Separating what the customer needs/ wants to do (the job) from how the customer will do it (the product) is the key to addressing this issue. The customer often knows what job he wants to do. If he can’t articulate it well, then observing his behavior as IDEO does will help the product manager figure it out. The goal of the product manager or startup founder is not to tell the customer what to do, but to identify how to help the customer do something he wants to do anyway. Customer statements of how they want to achieve their goals should be taken with a grain of salt. In the year 2001, I would have asked for a faster Napster when what I really wanted was Pandora (though I didn’t know it yet). To identify the best how (product), the product manager should come up with a few alternatives to test on users, then use their input to decide. In this way, she can create a product even better than what users would have asked for themselves.
Do Founder/Users Expand Moore's Chasm?
7:52 AM
Chasm, Early adopters vs. mainstream users
by Jonathan Enav
In many LTV classes we discussed Geoffrey Moore’s Chasm and whether it is a benefit or a hindrance through the lens of startups following the lean methodology. However, we never discussed what can make the “chasm” shrink or expand. Moore’s theory is that there is a “chasm” that separates the innovators and early adopters of a new technology from the mainstream, and that technology companies often find it hard to cross this chasm and grow beyond their core user base to become a widely adopted medium.
Crossing the chasm is not easy and often requires pivoting your product away from your core early adopters towards the mainstream. The lean methodology offers guidelines to achieve this; pivot early, pivot often, form a hypothesis, test it, pivot again until you find product/market fit. So why do so many startups fail at this stage? The lean methodology tries to make crossing the chasm easier by effectively making the chasm smaller. However, some founders seem to, unknowingly, make it bigger. Why does this happen and can they steer away from this pitfall?
Fred Wilson from Union Square Ventures said that his favourite founders were those that use the technology that they are building. This makes perfect sense. If a founder makes a startup for travelers, you want him to be a frequent-flyer as much as you want the founder of an online nappy distributor to be a new parent. The founder of a startup must be passionate about his technology, believe in its benefits, and be a peer of the early adopters. The founder can then follow his intuition and be hunch-driven when there are not enough customers and not enough resources to be data-driven. If a founder is his company’s own best customer, one can expect him to think like one. So what’s the problem?
This founder/user is great at rallying early adopters. He thinks like them, blogs to them, already has a reputation amongst them, which helps the startup grow at the early stage. But when it comes to crossing the chasm, is he able to alienate these peers and pivot away from how he envisioned the product and redesign it into one that his mother would want to use? As he follows the lean methodology, and tests his hypothesis with his customers (remember, all his first customers are early adopters), they will confirm the hypotheses to pivot deeper into the obscure and away from the mainstream, thus expanding the chasm! Since our founder/user has a vision that is confirmed by hypothesis testing, the lean methodology does nothing but entrench him further from his goals.
How can a founder/user avoid this? By listening to external advisors like VC’s and board members. The advisors must sober the visionary with a stiff dose of reality from the mainstream, hopefully dampening the “reality distortion field” clouding the startup. This can be in the form of a different hypothesis, e.g. “Dropbox is too hard to install, I had to call my son to help me install it,” which must be tested with a peer group completely dislocated from the early adopters. Still, for the founder, abandoning his early users and peers is easier said than done. Being called a “sell-out” is never easy, especially by people you respect.
The Grass is Often Greener on Your Side of the Chasm
by Natasha Prasad
A few weeks ago, Fred Wilson and Jeff Bussgang supplanted our usual LTV class with a fireside chat on lean startup methodologies, monetization and VC value-add. A Fred idea I found particularly compelling suggests that entrepreneurs should be “hunch-driven”, rather than “data-driven” in the early days of a startup. Indeed, if Jack Dorsey and Mark Zuckerberg hadn’t stuck to their hunches, Twitter would never have gotten past 1000 users and Facebook’s newsfeed wouldn’t exist.
Hunches, however, can only get you so far: most successful startups will at some point face the excruciating transition from early adopter glory to mainstream success. Founders like Dennis Crowley, who admit to having built products for their own friends, are now struggling to gain momentum with the mass market. If users outside of NYC, LA and San Francisco lack the vanity-driven penchant for public bar and restaurant hopping, how can Foursquare possibly grow beyond its 6 million strong userbase? It probably merits some sort of pivot (sorry, at least I held it in till the second paragraph).
Market pivots are painful. Not simply because you need to get your engineering team, company culture and external investors behind a new vision but because any significant product change can alienate the fanatical userbase that got you off the ground in the first place. When social news site Digg launched a slightly less geeky version of its product last summer, its nerd powerbase turned hostile, flooding the newsfeed with rival Reddit submissions and quitting en masse. In fact, any site that crowdsources its content is especially vulnerable to this kind of scale/product quality tradeoff.
So, is it possible to live in the chasm?
Power users tend to be highly engaged, passionately vocal and valuably prescient in vetting hunches; you really don’t want to push them out. But, barring the success of Second Life, living off a tiny group of loyalists and generating positive cash flow really isn’t easy. How can you balance these competing tensions?
- Seed your site with high quality users: Quora has done an impressive job in nurturing an informed and prolific community of contributors as well as encouraging self-governance through norms. If mainstream users can derive value from “read” rather than “write”, scaling need not lead to deterioration in product quality. On Wikipedia, for instance, 20,000 users contributed 80% of the content.
- Know what kind of market you want to serve when you grow up: Product Market Fit is a fantastic milestone, but the pursuit of this legendary goal tends to emphasize “Product” over “Market” as the active lever; the sooner we recognize the other side of this equation, the easier it will be to pivot in the direction of longer-term alignment.
- To each his own: Facebook, Twitter and even Foursquare to some extent hold huge appeal in that they are different things to different people. The versatility of each platform enables users to derive value however they see fit. Supporting the creation of sub-communities of users based on different use-cases and consumption patterns is one way of ensuring power/mainstream user harmony.
Hiding in Moore’s Chasm
9:52 AM
Chasm, Early adopters vs. mainstream users
by James Matthews
Early on in our Launching Tech Ventures course we had the privilege of a visit from Eric Ries to our classroom for a Q&A session. Eric is a leading proponent of the lean start-up methodology; he has written extensively on the subject and has coined much of the terminology of the (increasingly formalized) discipline.
One particular point that Eric made stood out to me that day. He made the argument that Moore’s Chasm is a benefit, not an obstacle to the lean start-up. Geoffrey Moore’s seminal book, “Crossing the Chasm,” describes a major problem faced by many technology companies: there is a chasm in the product lifecycle between early adopters (or “visionaries”) and the early majority (or “pragmatists”). One fundamental difficulty in crossing the chasm is that your early adopters are not good referees for the mainstream – even if these “visionaries” love your product, the rest of the world does not trust them. Moore observed that many companies failed when crossing this chasm, even if they had a technologically viable and useful product.
Eric’s addendum to this theory is that for a lean start-up, the chasm will in fact shield you from your early mistakes. In its early stages, a lean start-up deploys early and deploys often, testing and learning what it can from its early adopter user base. Eric posits that the chasm allows you to move quickly, potentially making mistakes that annoy or even harm your early user base, but that this will not hurt you in the long run as their referrals to the mainstream are not heeded.
While this argument was compelling to me at the time, as we have studied more and more lean start-ups over the course of the semester I have come to the conclusion that this concept is far from generally applicable – in fact, it may only apply to a few specific situations.
Firstly, we can rule out applying it to start-ups that sell to businesses, either as their only customers or as part of a multi-sided platform. David Skok of Matrix partners gave us an excellent talk on the marketing/sales funnel for businesses that sell to other businesses, and here it was clear that in this limited pool of customers your reputation is a very precious commodity. It is still true that there are early adopters and mainstream adopters, but references are your most powerful selling tool. Companies, even early adopters, can have low tolerances for ‘mistakes,’ and while positive references may have difficulty crossing the chasm, negative references from early customers are a product killing red flag.
Secondly, there is an entire class of consumer-facing businesses where the subject matter of their product is just too important to have early failures. From our course we’ve seen Dropbox’s handling of their early adopters’ personal files, Cake Financial’s processing of sensitive financial information and Predictive Bioscience’s cancer detecting tests as examples where you wouldn’t want to make ‘learning mistakes’ with an active user base.
Lastly, we have seen businesses where the primary growth strategy was to develop a strong service reputation amongst a specific demographic – here Chegg, the college text-book rental company, stands out. While I’m sure you can split the student population into ‘early’ and ‘mainstream’, in truth Chegg’s reliance on word of mouth acquisitions to get ahead of competitors really meant they had to get it right the first time.
So, which companies have we studied where I am convinced the shield applies? Certainly for Eric’s own start-up, IMVU, where the shield allowed him to experiment and pivot freely amongst his early adopter teenage user base. It may also be relevant for ‘nice to have’ services such as social Q&A facilitator Aardvark.
However, if I were running or working for a business that was still pre-chasm, I would be very reluctant to assume I had a reputation shield. While there are clear benefits to frequent product experimentation, the shield argument presents too black and white a picture. In reality, for most companies, there is always a tricky balancing act between experimentation and reputation.
Early on in our Launching Tech Ventures course we had the privilege of a visit from Eric Ries to our classroom for a Q&A session. Eric is a leading proponent of the lean start-up methodology; he has written extensively on the subject and has coined much of the terminology of the (increasingly formalized) discipline.
One particular point that Eric made stood out to me that day. He made the argument that Moore’s Chasm is a benefit, not an obstacle to the lean start-up. Geoffrey Moore’s seminal book, “Crossing the Chasm,” describes a major problem faced by many technology companies: there is a chasm in the product lifecycle between early adopters (or “visionaries”) and the early majority (or “pragmatists”). One fundamental difficulty in crossing the chasm is that your early adopters are not good referees for the mainstream – even if these “visionaries” love your product, the rest of the world does not trust them. Moore observed that many companies failed when crossing this chasm, even if they had a technologically viable and useful product.
Eric’s addendum to this theory is that for a lean start-up, the chasm will in fact shield you from your early mistakes. In its early stages, a lean start-up deploys early and deploys often, testing and learning what it can from its early adopter user base. Eric posits that the chasm allows you to move quickly, potentially making mistakes that annoy or even harm your early user base, but that this will not hurt you in the long run as their referrals to the mainstream are not heeded.
While this argument was compelling to me at the time, as we have studied more and more lean start-ups over the course of the semester I have come to the conclusion that this concept is far from generally applicable – in fact, it may only apply to a few specific situations.
Firstly, we can rule out applying it to start-ups that sell to businesses, either as their only customers or as part of a multi-sided platform. David Skok of Matrix partners gave us an excellent talk on the marketing/sales funnel for businesses that sell to other businesses, and here it was clear that in this limited pool of customers your reputation is a very precious commodity. It is still true that there are early adopters and mainstream adopters, but references are your most powerful selling tool. Companies, even early adopters, can have low tolerances for ‘mistakes,’ and while positive references may have difficulty crossing the chasm, negative references from early customers are a product killing red flag.
Secondly, there is an entire class of consumer-facing businesses where the subject matter of their product is just too important to have early failures. From our course we’ve seen Dropbox’s handling of their early adopters’ personal files, Cake Financial’s processing of sensitive financial information and Predictive Bioscience’s cancer detecting tests as examples where you wouldn’t want to make ‘learning mistakes’ with an active user base.
Lastly, we have seen businesses where the primary growth strategy was to develop a strong service reputation amongst a specific demographic – here Chegg, the college text-book rental company, stands out. While I’m sure you can split the student population into ‘early’ and ‘mainstream’, in truth Chegg’s reliance on word of mouth acquisitions to get ahead of competitors really meant they had to get it right the first time.
So, which companies have we studied where I am convinced the shield applies? Certainly for Eric’s own start-up, IMVU, where the shield allowed him to experiment and pivot freely amongst his early adopter teenage user base. It may also be relevant for ‘nice to have’ services such as social Q&A facilitator Aardvark.
However, if I were running or working for a business that was still pre-chasm, I would be very reluctant to assume I had a reputation shield. While there are clear benefits to frequent product experimentation, the shield argument presents too black and white a picture. In reality, for most companies, there is always a tricky balancing act between experimentation and reputation.
Figuring Out foursquare
8:10 AM
Early adopters vs. mainstream users, Early monetization, Scaling challenges, Vision vs. feedback
by Jeff Bussgang, republished with permission from his blog
I had the pleasure of teaching a new case at HBS yesterday on foursquare that I co-authored with Professors Tom Eisenmann and Mikolaj Piskorski as part of Tom's new course "Launching Technology Ventures". Foursquare executives Dennis Crowley, Naveen Selvadurai and Evan Cohen were kind enough to allow us to interview them in preparation for the case, which framed some of their current key strategic issues and looked back on the choices they made in the early days to draw pedagogical lessons of lean start-up best practices, building a platform business, network effects and running monetization experiments.
The foursquare team was consumed this week with SXSW preparations, but we were fortunate to have as class guests Charlie O'Donnell, who wrote the original blog post on foursquare that got many in the community excited about the company, and Andrew Parker, who was an associate at Union Square Ventures at the time of their Series A investment.
As I did with the class a few weeks ago when Fred Wilson visited, I asked the students to pull out their phones and tweet throughout the class. You can see the rich "dialog behind the dialog" here, using the Twitter hash tag #hbsltv. Here were some of the takeaways I had from the class discussion framed around three major questions I posed to the students:
1) Why did foursquare succeed as compared to the same founder (Dennis) in a similar venture (Dodgeball) in a different era and as compared to other teams pursuing LBS services in the same era?
The students concluded that the context around a venture matters tremendously - that smart phones, the explosion of apps and social networking all were important enablers that allowed foursquare to succeed at this particular moment in time. At the same time, the foursquare team was incredibly skilled at applying lean start-up best practices, specifically:
- Product-obsessed founders: both Dennis and Naveen were consumed with the product. Always interacting with users in bars and over Twitter, thinking less about strategy, analytics and monetization and focusing more on a great user experience.
- Hunch-driven: they had deep domain knowledge and didn't need outside studies or market research to guide their prioritization. One of the key takeaways that both Charlie and Andrew emphasized to the students was to be power users in whatever area of focus they choose to develop those instincts.
- Minimum viable product: they didn't wait years and years to perfect the product but instead got it out there to solicit user feedback.
- Modest burn: the company only raised $1.35 million in its series A financing and kept the burn rate at less than $100k per month to make he money last. Dennis wrote a great post at the time of the financing that showed just how product obsessed he was, even after taking the seed money. There's no bravado or BS - just a list of the great features they're going to roll out as a result of having the extra capital.
2) What was the magic of the foursquare system that drove rapid adoption that so many other consumer Internet companies fail to achieve?
- Game mechanic - students really honed in on the playfulness of the service, both the entertainment value and the addictive nature of competing for badges and mayorships.
- NYC launch - the fact that the service started in such a perfect venue gave it great advantage - a highly concentrated, very social community.
- VC validation - having Fred Wilson invest and promote the company helped provide it credibility with an insider crowd that may have provided some strong tailwinds.
- Win-win for all constituents - unlike many services, the students understood a key insight about foursquare: the local merchants make the service. The fact that merchants are so incented to promote, discuss and reward consumers creates a positive feedback loop that transcends the power of a consumer-only service.
- Online - offline combination. Another aspect of the magic of foursquare is that it is not an online only service. In fact, the ability to drive consumers to actually walk into local venues is a special dimension of the service. As one student pointed out: "Facebook tells me what my friends are doing. foursquare tells me where they are and where I can meet them." This is a unique and powerful aspect of the service.
3) Once a company achieves product-market fit and starts to scale, how do their priorities, and burdens, shift?
- Raising money, scaling the team. A rich discussion ensued about what it means to raise big money. When foursquare took $20 million in venture capital at a reported valuation of $100 million, suddently they had transformed the company from a lean, product-obsessed start-up to a company that would need to generate tens if not hundreds of millions of dollars in cash flow to justify a billion dollar valuation. A product-obsessed management team suddenly had to transition to become an operational scale management team.
- Monetization. Consumer Internet companies have to decide when they begin to monetize - as part of the lean start-up experimentation or only after they achieve enough scale to attract partners and advertisers. But it's not a binary decision. Foursquare has run monetization experiments from the beginning, but to justify the big valuation they will have more pressure to show real financing results, perhaps at the expense of the user experience. It takes a strong founder to resist that temptation (think Jesse Eisenberg playing Mark Zuckerburg in "The Social Network", sneering: "No advertising. Advertising isn't cool.")
- Vision/Becoming a platform. What does the company want to be when it "grows up"? To be a generation-defining company and enter the ranks of Facebook and, arguably, Twitter, foursquare needs to evolve from a great application into a platform. But becoming a platform company requires a whole different approach and set of priorities. Do you build out your own features or expand your APIs and invest in supporting third party developers to build applications to your platform. One of the students had coincidentally tried to work with the foursquare API to develop an application and complained that it was very rudimentary and limiting relative to the Facebook and Twitter API.
The verdict? I ended the class by polling the students - who would buy foursquare stock at a $200-250 million valuation (my very rough estimate of the current trading on the secondary market) and who would sell? One third of the students were buyers at that price at the end of the class. Two thirds were sellers. One student pointed out in a tweet that the voters were unfairly negatively biased because only 10% of their classmates had even tried the application and, besides another tweeted, 3/4 of HBS students apparently wanted to sell Amazon short in 1998! Another student tweeted that if there was even a 3% chance that the company could be a $10 billion company, it was worth buying at $200 million. Now there's a future venture capitalist in the making!
Thanks again to the foursquare team for letting us write the case and adding to the HBS community's intellectual capital.
The Early Show vs. The Late Show: Designing for Early Adopters vs. Mainstream Consumers
by Ernesto Humpierres
The first person that ever told me about BitTorrent was my father; he is a good example of how a previous generation is more tech savvy than the younger one. If you had been there when he first mentioned BitTorrent you would have thought not only did he like the technology, but also that he was selling it. He mentioned all the awesome things you could do with it and how many hours he was spending every night playing with it. But then came the demonstration, he opened something called Azureus (now Vuze) and started talking about seeding, tracking, leeching, share ratio, and other terms. By the end of his presentation I was lost, I had no idea how to use torrents and I really didn’t feel like understanding it anyways (to this day I’ve never used any BitTorrent client). All I really wanted was an uncomplicated Google style search bar.
My behavior in this situation is typical of a mainstream consumer, we really like what technology does, but we want it simple and polished. My father, on the other hand, is the archetype of an early adopter of web technologies. For an early adopter, how cumbersome or unfriendly the technology is less important than what it can let him do. One could argue how mainstream or not torrents are right now, but it’s definitely a technology that is not used by the majority of Internet users.
This difference in user behavior has important implications for the launch of new technology ventures. The first implication is that whenever an entrepreneur has an idea for a new tech solution, he can focus resources on the backend of the new software rather than the frontend, and still have a guaranteed audience (if the idea is relatively good) in the form of the early adopters. The second implication is that any new solution can be tested, improved, and retested many times with the early adopter audience without fear of tarnishing the venture or product’s brand. While early adopters are using the technology and tearing it apart, the mainstream consumers stay away, and will stay away until the technology becomes friendlier. This separation is what Moore calls the chasm in technology innovation. We can assume that it takes a non-trivial effort to grow your user base from an early adopter into a mainstream consumer base.
The advantages of pitching new products solely to the early adopters, thanks to the existence of the chasm, are well aligned with the lean startup philosophy. The chasm allows entrepreneurs to come out with a minimum viable product and do fast iterations that allow pivoting while at the same time limiting downside risk from excess exposure. But this has a downside; the feedback that is collected from the early adopters about the product might not be representative of real product/market fit. This is the case because the needs and opinions of early adopters may differ substantially from those of the mainstream consumers, in which case the shielding provided by the chasm can be detrimental to the software development process. A successful product in the early adopter community can become a total failure when launched into the mainstream. The chasm can be both an opportunity and an obstacle, and it is up to the entrepreneur to make the best use of it.
The first person that ever told me about BitTorrent was my father; he is a good example of how a previous generation is more tech savvy than the younger one. If you had been there when he first mentioned BitTorrent you would have thought not only did he like the technology, but also that he was selling it. He mentioned all the awesome things you could do with it and how many hours he was spending every night playing with it. But then came the demonstration, he opened something called Azureus (now Vuze) and started talking about seeding, tracking, leeching, share ratio, and other terms. By the end of his presentation I was lost, I had no idea how to use torrents and I really didn’t feel like understanding it anyways (to this day I’ve never used any BitTorrent client). All I really wanted was an uncomplicated Google style search bar.
My behavior in this situation is typical of a mainstream consumer, we really like what technology does, but we want it simple and polished. My father, on the other hand, is the archetype of an early adopter of web technologies. For an early adopter, how cumbersome or unfriendly the technology is less important than what it can let him do. One could argue how mainstream or not torrents are right now, but it’s definitely a technology that is not used by the majority of Internet users.
This difference in user behavior has important implications for the launch of new technology ventures. The first implication is that whenever an entrepreneur has an idea for a new tech solution, he can focus resources on the backend of the new software rather than the frontend, and still have a guaranteed audience (if the idea is relatively good) in the form of the early adopters. The second implication is that any new solution can be tested, improved, and retested many times with the early adopter audience without fear of tarnishing the venture or product’s brand. While early adopters are using the technology and tearing it apart, the mainstream consumers stay away, and will stay away until the technology becomes friendlier. This separation is what Moore calls the chasm in technology innovation. We can assume that it takes a non-trivial effort to grow your user base from an early adopter into a mainstream consumer base.
The advantages of pitching new products solely to the early adopters, thanks to the existence of the chasm, are well aligned with the lean startup philosophy. The chasm allows entrepreneurs to come out with a minimum viable product and do fast iterations that allow pivoting while at the same time limiting downside risk from excess exposure. But this has a downside; the feedback that is collected from the early adopters about the product might not be representative of real product/market fit. This is the case because the needs and opinions of early adopters may differ substantially from those of the mainstream consumers, in which case the shielding provided by the chasm can be detrimental to the software development process. A successful product in the early adopter community can become a total failure when launched into the mainstream. The chasm can be both an opportunity and an obstacle, and it is up to the entrepreneur to make the best use of it.
