The challenge facing Bitcoin start-ups

There is not doubt that Bitcoin / the blockchain is a revolutionary technology. Once implemented, the blockchain might be able to disrupt many verticals that are built around managing the transfer of ownership by replacing a centralized approach with a decentralized (and hence usually more efficient) approach.

While the blockchain can be applied to a range of verticals, from passports to wills, vacation rental keys and movie tickets, most of the start-up activity to date has focused on using Bitcoin for payments. After some initial excitement, anecdotal evidence shows that Bitcoin transaction levels are declining. This is partly due to the fact that it is not quite clear what problem Bitcoin solves for the North American consumer wanting to buy something online or in a store (credit cards actually work very well in this case), partly due to the strong existing network effects of current payment systems. Ben Thompson had a great post (The Problem with Payments) a few days ago outlining why it is so hard to build a payment solution outside of the existing system in the US.

In order to succeed in a market with existing strong network effects (such as the payment structure in North America), you need to focus on an underserved niche where your product provides something that hasn’t been possible before. Then if you get enough traction in the niche, you might be able to expand into the mainstream market over time.

PayPal is a perfect example. The company managed to succeed because it helped eBay buyers and sellers complete their transactions in a more efficient and trustworthy way during a time when P2P commerce was exploding. PayPal later went on to actually replace many credit card payments as users became accustomed to the service and had money in their PayPal wallets that they were ready to spend.

So instead of trying to replace credit cards and other established payment methods, Bitcoin start-ups should think more about where Bitcoin has a competitive advantage. Traditionally, this has been in cash-based businesses (gambling, “getting money out of China”) where Bitcoin has seen some impressive initial traction. However, more interesting areas are those where current payment fees are very high (e.g. remittances), consumers are underserved (the “unbanked”), or existing payment infrastructure is weak (e.g. in some developing countries). And the real opportunity might even lie in completely new use cases.

The block chain is a powerful technology but getting traction beyond initial excitement from early adopters might be challenging given the strong network effects of the existing structures that the Blockchain tries to replace. We all see the end goal but getting there is a tricky question. I am rooting for the entrepreneurs that will figure out how to put the blockchain into real action.

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The untapped Open Data opportunity: who will unlock government data?

I’m fascinated by the Open Data movement, particularly when it comes to government where the concept of open data hinges on the belief that data is a public asset – just like highways and parks – and should be made available to all.

We’ve already seen compelling examples of people hacking into this available data for the public good. For example, at the recent Open Data Day here in Vancouver, projects ranged from a visualization of Vancouver’s budget to an analysis of test scores at local schools. One project even took Vancouver’s open elevation data to recreate the city in MineCraft.

Making data available, discoverable, and usable will help improve the effectiveness of governments, strengthen our democracy, as well as create opportunities to improve everyone’s quality of life. Open data encourages innovation from both the inside and outside:

  • Innovation from the outside: Putting information in the hands of the public makes it possible for innovative citizens and companies to create groundbreaking solutions and improvements to some of the biggest challenges facing the community. For example, on a small scale, one website monitors and analyzes Vancouver’s bike accidents, revealing the trend that bike accidents decline along roads with bike lanes and increase where bike lanes end.
  • Innovation from the inside: When government data is accessible and easily usable, other governments and government agencies are able to compare experiences and share best practices. Although government data is public today, most state and city governments do not readily share information. The Open Data movement can unlock this data, so local governments don’t necessarily have to recreate the wheel. They can look at examples and models of what has already worked.

Where are the start-ups to take on this opportunity?

Making data publicly available is just a first step. In order for the Open Data movement to truly bring about change in government, that data needs to be searchable, discoverable, and usable. But so far companies have mainly focused on helping governments transform data (usually financial data) into actionable information. For example, there’s OpenGov, Open Data Soft, and Junar.

In addition to these players, we need applications and websites that put the data into something useful for both governments and citizens – whether by visualization, integration, or notification. We need a company that can take all the existing public datasets and make them accessible and comparable through a single platform… similar to what Clever does in education. It’s an incredible opportunity to make a significant difference: the question is who will lead the way?

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What type of market are you operating in?

When we look at investment opportunities, we need to consider the type of market that the potential investment is in. How much room is there for a market leader or leaders? Is it winner-takes-it-all or winner-takes-almost-all? Is there room for multiple potential winners?

Winner takes all

These markets are driven by network effects and only one company will win in the space. Examples of these winners include eBay (auctions), LinkedIn (professional networking), and YouTube (video). When these markets first emerged on the scene, there were dozens, if not hundreds, of companies vying for market share. Yet, only one dominant product survived.

Winner takes almost all

This market trend is happening across the enterprise where adoption is driven by end users, and not dictated from above by IT departments. In this case, a company or tool can emerge as a clear category leader, as word of mouth among satisfied users accelerates adoption across colleagues, departments, and companies. As a result, the tool can grab a large market share in a certain market segment or vertical. Think Mailchimp, Dropbox, Hightail or Unbounce for horizontal solutions or Clio, Jobber or Frontdesk for vertical products (disclosure some of those are portfolio companies). In particular, we see a winner takes almost all dynamic happening in vertical SaaS plays where word of mouth can quickly travel within one industry. For example, lawyers from different firms may work on the same case and spread exposure of favorite tools.

Multiple winners

When markets are not subject to network effects (or there’s minimal network effects/word of mouth), multiple winners can emerge. Today this type of market is mainly in commerce and enterprise IT.

The bottom line

As an entrepreneur, you need to understand what kind of market you are in order to create effective growth and fundraising strategies:

  • Growth strategy: Let’s say you end up being #2 in your market. While second place might be an enviable position for some, it’s essentially worthless in a winner-takes-all market. For this reason, you’ll need to be as aggressive as possible in the first few months after a category emerges to try to lock in the top spot before it’s too late. On the other hand, such an aggressive tactic doesn’t make sense in an e-commerce environment where there can be multiple winners. In this situation, you’re better off adopting a more conservative approach and ensuring you’ve reached product-market fit and nailed unit economics before accelerating.
  • Fundraising strategy: You’ll need to understand your market’s dynamics to know how much money to raise and how quickly. For example, in a winner-takes-all or winner-take-almost-all market, there’s a window to aggressively fundraise while the category is still open. However, once a category leader emerges, it will be hard to attract investors.

Of course, all of this is made even more complicated by the fact that it’s not always clear what the exact category is. For example, do Lyft, Sidecar, Hailo, and Uber all belong to the same transportation category or do they each define their own category? As an entrepreneur or investor, you’ll need to analyze the market and its current players to know how much room (if any) is left.

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Introducing our latest investment: Mattermark – Big Data Comes to VC

Image representing Mattermark as depicted in C...

Image via CrunchBase

Look across virtually any industry and you’ll see great examples where traditional spaces are being disrupted by software, access to data, and massive online communities. The net effect is powerful: it empowers all of us (no matter who we are or where we are) to learn more quickly, make better decisions, and operate more efficiently.

Thus, it should come as no surprise that we are now seeing Venture Capital being disrupted by these forces as well.

In the past (aka 1990’s), very little content on start-ups and VCs was publicly available. The fundraising process was closed and privileged: it all boiled down to who you knew offline. In his post The Disruption of Venture Capital, Albert Wenger described VC as “the club you had to be invited into.”

Today, the boom of information (i.e. start-up databases/networks like CrunchBase and AngelList) has led to unparalleled access to investment capital as more seed funds, angels, and syndicates emerge on the scene. People who are not traditionally in VC can now invest in startups with a higher comfort level, because CrunchBase and AngelList have made data on thousands of start-ups publicly available. In just a few clicks, you can find everything from the company’s tagline to information on founders and investors, number of employees, funding rounds, etc.

However, while we may be shifting from a closed system to a more transparent (and hopefully merit-based) environment, there’s a lot of noise being created along the way. Business data on start-ups, VCs, PE, financial markets, sales and marketing is being created at an alarming rate. Yet, most of this data is fragmented and inconsistent – making it difficult for decision-makers to leverage the information.

So, how can we use all this data to make better decisions? Or more specifically, how can we as investors better identify and find those start-ups that are primed for success?

Enter Mattermark: where “Big Data Meets Venture Capital”

Mattermark is a web-based platform that helps VCs weed through the vast amounts of data to identify potential investment opportunities and track existing start-ups and private companies. The product collects, cleans, and curates data from news sites, SEC filings, Twitter, LinkedIn, Facebook, AngelList, CrunchBase, and more. It offers custom reports, real-time updates, specific filtering, and easy organization of start-ups based on stage, vertical, geography, and Mattermark score (a proprietary index that measures momentum).

Mattermark was launched in the Fall 2013 and is led by Danielle Morrill, Kevin Morrill, and Andy Sparks. The team are alumni of Y Combinator S12 as well as Batch 5 of 500 Startups in 2012. You can read about the company’s background on VentureBeat and TechCrunch.

Why we’re excited

The Version One portfolio is full of examples where software/online platforms are disrupting specific verticals – from Top Hat (education) to Upverter (hardware development), Figure 1 (healthcare), Jobber (field service), and Clio (legal). But, Mattermark is disrupting our own industry and giving us the tools to do our job more efficiently.

For starters, Mattermark allows us to be more proactive. Like with most VCs, our inbound leads come from our network. While we greatly appreciate these introductions from fellow VCs and entrepreneurs (who are great curators in their own right), inbound leads are inherently reactive. We’re relying on others to send what they think are the right opportunities for us.

But with Mattermark, we can now leverage the vast amounts of publicly available data to identify the rising stars and compare them to other companies in their vertical. Mattermark is never going to replace our own network, relationships, and gut, but it does make us much more efficient in sourcing and researching opportunities. We’re now able to generate more outbound leads.

Danielle Morrill has said that Mattermark’s goal is to create a company that is the equivalent of Bloomberg for start-ups and Venture Capital – providing investors with the tools to discover, research, and track start-ups. We’re excited for the possibilities.

To learn more about Mattermark, visit http://www.mattermark.com or follow @mattermark on Twitter.

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The future of education: the distributed school and customized learning

Ever since my friend Albert and his wife Susan have started to homeschool their kids, I have been thinking about the best ways to make custom learning more accessible to kids, families, and adults alike.

Albert and Susan have taken an innovative approach to homeschooling (if interested, you can read more about their experiences here).  They recently devised the idea to hire individual guides for each of their three children. Part concierge, part program manager and part learning specialist, these guides are responsible for creating a learning program tailored to each child.

Guides need to explore the child’s specific areas of interest (which means finding and coordinating time with skilled experts and arranging field trips), as well as building the child’s basic skills in reading, writing, presenting, researching, and analyzing in pursuit of their interests. In this way, the guide doesn’t necessarily have to have specific expertise in the child’s areas of interest, but they need to be able to coordinate access to the right tutors, experts, and resources. This goal is to give each child a fully customized education that encourages them to grow and learn by pursuing the topics that mean something to them.

Running this level of a homeschooling program is no easy feat. Parents need to find and select the right guides; the guides need to coordinate the right tutors and experts for each child. On an individual level, it can be extremely costly and time-intensive. But what if there were a distributed school that followed the same principles? For example, a school or learning platform that gave parents easy access to available guides and tutors for their kids to create a custom education.

This school could be tied to a physical space, although it’s not necessary. It would be a mix of online and offline teaching. It could offer existing courses from other institutions if there was a fit. And to make the program more affordable, a guide could be shared by 3-4 kids, and specialized tutors could be shared as well.

The prospect of such a custom learning experience makes me very excited and I hope that somebody will build a distributed school soon. Our family would be one of the first customers.

 

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