Posts Tagged: YouTube

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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Why Google became so successful – reviewing Steven Levy’s “In The Plex”

Image representing Google as depicted in Crunc...

Image via CrunchBase

I just finished reading “In The Plex”, Steven Levy‘s book on Google, and can highly recommend it to anybody who wants to better understand Google’s success. While many things are not completely new if you have followed the company for a while, the systematic recount of Google’s history and the decisions they have taken along the way offers some really unique insight.

If I had to condense Google’s success to a few factors, I would chose the following 4:

  • Google’s culture: Google developed a very specific culture from the beginning on that even phrased a specific term for it: “Googly” stands for smarts, analytics, unique approaches, open communications,… and everything and everybody were measured against being “googly” enough – from the people that the company hired, to the way the office was designed to how the company communicated internally. This persistence to live a company’s culture every day and in every aspect that makes it powerful – and both founders were not only good in creating a unique culture but preserving it as the company scaled
  • Obsession with data: everybody has probably heard about Google’s obsession with data but the company has taken it further than most people can imagine. Example: Google relied heavily on academic metrics in the recruitment process, to a point that the company was asking candidates with more than a decade of work experience for their college admission test score and GPA’s
  • Pushing the boundaries: building and running your own data centres is probably not the first thing a company would think of given the large supply of cheap data centres around the world but with the rapid growth of the number of computers Google operated the company was continuously chasing for additional efficiencies that existing data centre providers could not or were not willing to provide. So it decided to build its own data centres by applying existing ideas that no one had yet put into practice, e.g. completely new ways to approach cooling. Google ultimately found ways to make it work and hence built data centres that were more efficient than the companies who’s main focus were data centres. Google’s history is full of such examples of pushing the boundaries of what seemed to be impossible at the outset and proved possible after Google tackled it.
  • Acquisition strategy: Google is probably one of the best companies when it comes to acquisitions by combining acquisition discipline (by doing a very good job thinking through how a potential acquisition can (or cannot) help the company achieve its goals) with a smart way of integration the acquired company into Google (or even leaving it as a stand-alone unit if this turns out to be the better set-up as in the case of YouTube). This smart M&A strategy is how some of the most successful Google products were born: AdSense (Applied Semantics), Android or Google Analytics (Urchin). And I hope the same thing will happen with my portfolio company Sparkbuy that got acquired by Google yesterday.

So I can only recommend you reading this book – you can get it here or here.

 

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What kind of company can you build outside of the Valley?

I often get asked by investors and entrepreneurs alike how building a startup outside of Silicon Valley is possible and I always answer that it depends on what kind of company you are trying to build. So if you are trying to create the next Facebook, Google, YouTube, Twitter, or Foursquare and your company requires a large amount of funding and needs to be close to where the buzz is (because dozens of other startups are competing with you with exactly the same idea and the winner will take it all), then a “secondary market” like Denver / Boulder, San Diego, Seattle, Boston, Montreal or Vancouver is not the best place to be. But if you have carved out a niche for your company that is a bit off the beaten track, are comfortable to do more with less money, bootstrap longer and grow your company a bit more organically, then any of those secondary locations could be the perfect place to start and build your company. You might not have the same access to money and senior talent but you usually have much lower costs of operating your company, access to great engineering talent without competing with the Google’s and Facebook’s of the world (and the salaries that they are paying) and an environment that sometimes makes it easier to focus on the real value of a product for customers compared to chasing the latest hype.

Not sure if you can create big companies in places like Edmonton, Kelowna or Victoria? Yes, you can! Take Bioware, the Edmonton-based gaming company that the two founders Greg and Ray built over a decade in a city that did not have not a single gaming company before they started their company – sold to EA for close to a billion dollars. Or Kelowna’s Club Penguin, a company that was the first to create a virtual world for kids and sold to Disney for over $750 million. Or my own company AbeBooks that got built in Victoria, BC, over more than a decade before being sold to Amazon.

Great companies are being started in these markets every day – they will perhaps not be as glamorous as the Valley startups but will still create enormous value for customers and subsequently exit opportunities for entrepreneurs and investors alike.

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