Category Archives: Internet Business Models

Uber Valuation

The valuation is defensible:

$2 billion in rides, $400 million in net revenues, so valued at 45X revenues, in line with valuations of AirBNB, Dropbox, etc.

Even if you think that’s a bad comparison because there is a general bubble out there, it’s doubling every 6 months (so 400% growth every year), so the valuation seems defensible on its own terms.  i.e., if you hold valuation stable, in a year, revenues would be $1.6 billion and it would be trading at a mere 11X revenues.

It could be a bust investment — but in vc the game is that most of your investments will be bust, salvaged by the few winners — but doesn’t seem to be a crazy investment.  My guess is that the Fidelity types led the investment because they have lower return expectations than a late-stage VC shop.
Let’s all get back to work building our companies.

 

Now versus Then

The difference between the last time in 1998-1999 and now by Scott Kapur of A16Z:

Why is that? My partner, Marc Andreessen, likes to recount a simple stat that sums it up quite nicely. When his company Netscape was sold to AOL in 1998, the total size of the browser market was roughly 55 million users, nearly all were accessing the Internet via those ear-screeching dial-up connections.

Fast-forward to today, largely as a result of broadband penetration and the growth of smartphones and tablets, and there are 2.5 billion people with virtually ubiquitous Internet access. And that number is likely to exceed 5 billion in short order.

Is it really any wonder then why so many of the 1999-2000 bubble-era Internet companies failed? The markets into which they were selling were simply too small compared with both the costs of acquiring customers and the costs of the technology infrastructure (remember that $50,000 box called a Sun server?) required to support these customers.

By contrast, not only are the end-user markets today vastly bigger, but the technology costs required to support these markets (think Amazon Web Services, open source software components, etc … ) have plummeted. The economics finally work.

Hiding Your Business Model

There is a logic to: “if you know where the gold is buried, play it cool, until you can secure it.”  Andreessen is reminiscent of Thiel on this point:

There are the ones where everybody thinks they don’t know how they’re going to make money but they actually know. There’s this kind of Kabuki dance that sometimes these companies put on where we’re just a bunch of kids and we’re just farting around and I don’t know how we’re going to make money. It’s an act. They do it because they can. They don’t let anyone else realize they have it figured out because that would just draw more competition. Facebook always knew, LinkedIn always knew, and Twitter always knew.

They knew the nature of the valuable product they were going to be able to offer and they knew people were going to pay for it. They hadn’t defined it down to the degree of being ready to ship it, or they didn’t have a sales force yet, so there were things that they hadn’t yet done. But they knew. They had a high level of confidence and over the passage of time we discovered they were correct.

Now, there are other companies that honestly have no idea. Like, they really honestly have no idea. You need to be very cautious on these things because one of the companies that had no idea how it was going to make money when it first started was Google.

Lower Startup Costs and Franchise Creation

Marc Andreessen in the WSJ:

The costs of building an Internet company today are far lower than they were in the late ’90s. In the ’90s if you wanted to build an Internet company, you needed to buy Sun servers, Cisco networking gear, Oracle databases, and EMC storage systems. And those companies would charge you a ton of money even just to get up and running. The new startups today, they don’t buy any of that stuff. They don’t buy literally anything from any of those companies. Instead, they go on Amazon Web Services and they pay by the drink and they’re paying somewhere between 100x and 1000x cheaper per unit—per unit of compute, per unit of storage, per unit of networking, per unit of software.

In retrospect, it’s a miracle that anything worked in the late ’90s given how limited the market was and given how expensive it was. It’s a miracle that eBay worked, it’s a miracle that Amazon worked.

The devil’s in the details. It’s really up to each company to demonstrate that it’s going to be a franchise company and demonstrate over time that it can monetize appropriately. The ones that make it work are going to be enormously valuable. This is a time of very big franchise creation. The people who say it’s all like the ’90s and it’s all going to come crashing down just don’t know what they’re talking about.

Motivation

From non-economic to economic actors.  This is from Chris Dixon today:

It is true that many early Bitcoin proponents were libertarians. But it is also true that almost every significant computing movement had early proponents who were ideologically motivated. The developers of the first personal computers were closely aligned with the 60s counterculture movement. Open source software was originally created by people who believed that all software should be available for free. Early advocates of blogging and collaborative systems like Wikipedia were trying to democratize the production and dissemination of information. This isn’t coincidental: broad-based technology movements have depended on non-economic participants early on since it often took years for commercial participants to get involved.

The Threat and Opportunity in Transparency

Low prices are very important, but they are not the only thing.

Consumers also gravitate toward value and fairness, even if its at a higher cost. See Uber for example.  The relative importance of price, of course, differs by customers, but this is generally speaking.

One way of looking at the Internet is transparency into whether a business is adding value.  Where it is (and it produces value and it is fair), customers are willing to pay up.  Where it is not, customers rebel and the Internet helps them do so.  This framework resonates in Marc Andreesen’s comment from his interview with Andy Server below:

Jeff Bezos has this line where he says there’s really two kinds of businesses in the world: those that try to charge consumers more, and those that try to charge consumers less, or try to save consumers money. I think about that more broadly. I reframe it as: There are businesses that have the mentality of adding value, and businesses that have the mentality of extracting value. And the Internet, I think, is an enormous benefit to the model of adding value, and it’s an enormous danger to the model of extracting value.

I think you see that across the economy today. The music industry is a classic case in point. The whole piracy boom of music on the Internet really arose when music buyers essentially rose up in protest and said, “I want one song. Why am I being forced to pay $16 for the entire CD when all I want is one song that I can listen to online.” That’s when you had an earthquake hit the music industry. It was when consumers viewed the pricing to be fundamentally unfair.

Car dealers are going through another version of this. Carbuyers have never liked the process. Maybe a few have, but most carbuyers have not liked the process of having to go in and really get raked over the coals by a car dealer who takes advantage of the fact that consumers have no idea what the wholesale price of the car is. Now, after a little research online, you can walk in armed with a car’s complete wholesale information and get a much better deal.

In traditional business circles that kind of transparency gets viewed mostly as a threat. I think that’s unwarranted. I think the opportunities are just as large and probably larger, especially for businesses that have this view that their role in the world is to add value, is to bring consumers benefits.

Ideas Versus Problems

From Eric Paley:

So are ideas worthless? I wouldn’t go that far.

Every company needs a starting point. I encourage entrepreneurs to focus more on falling in love with the problems they want to solve rather than their initial ideas. As founders dig deeply into that original hypothesis, they will learn, adapt, hit walls, adapt again, and build critical expertise that they never considered when starting out.

PC Tectonics

The launch of Windows 8 — after a half-decade or so of tablets and smartphone — failed to arrest and, indeed, accelerated the major drift that was happening away from a WinTel world.  The FT reports the biggest ever drop (14%) in PC sales in the first quarter, noting in a quote by Bob O’Donnell, an IDC analyst:

“At this point, unfortunately, it seems clear that the Windows 8 launch not only failed to provide a positive boost to the PC market, but appears to have slowed it. The radical changes to the [user interface], removal of the familiar Start button, and the costs associated with touch have made PCs a less attractive alternative to dedicated tablets and other competitive devices.”

In essence, Windows is playing too far off its own turf now to catch up.

Like the effect of continental breakup and the resultant effect on evolutionary diversity of birds and mammals, I think Levie gets its right today when he tweeted:

The effect of a drop in PC sales is far-reaching: less PCs -> less MS dominance -> more heterogeneity -> more startup opportunity

Paul Graham: Start With Something A Small Number of People Want A Large Amount

Paul Graham charts an epic trail to where good ideas and bad ideas emerge and diverge.

I hope to expand on some of his points over the next few weeks, but in the meanwhile here are some excerpts.  It’s definitely worth going back to the original piece, because different parts are relevant to different potential founders.  These excerpts are most relevant to me:

The very best startup ideas tend to have three things in common: they’re something the founders themselves want, that they themselves can build, and that few others realize are worth doing. Microsoft, Apple, Yahoo, Google, and Facebook all began this way.

….

Why do so many founders build things no one wants? Because they begin by trying to think of startup ideas. That m.o. is doubly dangerous: it doesn’t merely yield few good ideas; it yields bad ideas that sound plausible enough to fool you into working on them.

When a startup launches, there have to be at least some users who really need what they’re making—not just people who could see themselves using it one day, but who want it urgently. Usually this initial group of users is small, or the simple reason that if there were something that large numbers of people urgently needed and that could be built with the amount of effort a startup usually puts into a version one, it would probably already exist. Which means you have to compromise on one dimension: you can either build something a large number of people want a small amount, or something a small number of people want a large amount. Choose the latter. Not all ideas of that type are good startup ideas, but nearly all good startup ideas are of that type.

….

Nearly all good startup ideas are of the second type. Microsoft was a well when they made Altair Basic. There were only a couple thousand Altair owners, but without this software they were programming in machine language. Thirty years later Facebook had the same shape. Their first site was exclusively for Harvard students, of which there are only a few thousand, but those few thousand users wanted it a lot.

….

But while demand shaped like a well is almost a necessary condition for a good startup idea, it’s not a sufficient one. If Mark Zuckerberg had built something that could only ever have appealed to Harvard students, it would not have been a good startup idea. Facebook was a good idea because it started with a small market there was a fast path out of. Colleges are similar enough that if you build a facebook that works at Harvard, it will work at any college. So you spread rapidly through all the colleges. Once you have all the college students, you get everyone else simply by letting them in.

Similarly for Microsoft: Basic for the Altair; Basic for other machines; other languages besides Basic; operating systems; applications; IPO.

….

So if you can’t predict whether there’s a path out of an idea, how do you choose between ideas? The truth is disappointing but interesting: if you’re the right sort of person, you have the right sort of hunches. If you’re at the leading edge of a field that’s changing fast, when you have a hunch that something is worth doing, you’re more likely to be right.

Being at the leading edge of a field doesn’t mean you have to be one of the people pushing it forward. You can also be at the leading edge as a user. It was not so much because he was a programmer that Facebook seemed a good idea to Mark Zuckerberg as because he used computers so much. If you’d asked most 40 year olds in 2004 whether they’d like to publish their lives semi-publicly on the Internet, they’d have been horrified at the idea. But Mark already lived online; to him it seemed natural.Paul Buchheit says that people at the leading edge of a rapidly changing field “live in the future.” Combine that with Pirsig and you get:

Live in the future, then build what’s missing.

That describes the way many if not most of the biggest startups got started. Neither Apple nor Yahoo nor Google nor Facebook were even supposed to be companies at first. They grew out of things their founders built because there seemed a gap in the world.

And when these problems get solved, they will probably seem flamingly obvious in retrospect. What you need to do is turn off the filters that usually prevent you from seeing them. The most powerful is simply taking the current state of the world for granted. Even the most radically open-minded of us mostly do that. You couldn’t get from your bed to the front door if you stopped to question everything.

Just as trying to think up startup ideas tends to produce bad ones, working on things that could be dismissed as “toys” often produces good ones. When something is described as a toy, that means it has everything an idea needs except being important. It’s cool; users love it; it just doesn’t matter. But if you’re living in the future and you build something cool that users love, it may matter more than outsiders think. Microcomputers seemed like toys when Apple and Microsoft started working on them. I’m old enough to remember that era; the usual term for people with their own microcomputers was “hobbyists.” BackRub seemed like an inconsequential science project. The Facebook was just a way for undergrads to stalk one another.

At YC we’re excited when we meet startups working on things that we could imagine know-it-alls on forums dismissing as toys. To us that’s positive evidence an idea is good.

….

The clash of domains is a particularly fruitful source of ideas. If you know a lot about programming and you start learning about some other field, you’ll probably see problems that software could solve. In fact, you’re doubly likely to find good problems in another domain: (a) the inhabitants of that domain are not as likely as software people to have already solved their problems with software, and (b) since you come into the new domain totally ignorant, you don’t even know what the status quo is to take it for granted.

Because a good idea should seem obvious, when you have one you’ll tend to feel that you’re late. Don’t let that deter you. Worrying that you’re late is one of the signs of a good idea. Ten minutes of searching the web will usually settle the question. Even if you find someone else working on the same thing, you’re probably not too late. It’s exceptionally rare for startups to be killed by competitors—so rare that you can almost discount the possibility. So unless you discover a competitor with the sort of lock-in that would prevent users from choosing you, don’t discard the idea.

You don’t need to worry about entering a “crowded market” so long as you have a thesis about what everyone else in it is overlooking. In fact that’s a very promising starting point. Google was that type of idea. Your thesis has to be more precise than “we’re going to make an x that doesn’t suck” though. You have to be able to phrase it in terms of something the incumbents are overlooking. Best of all is when you can say that they didn’t have the courage of their convictions, and that your plan is what they’d have done if they’d followed through on their own insights. Google was that type of idea too. The search engines that preceded them shied away from the most radical implications of what they were doing—particularly that the better a job they did, the faster users would leave.

A crowded market is actually a good sign, because it means both that there’s demand and that none of the existing solutions are good enough. A startup can’t hope to enter a market that’s obviously big and yet in which they have no competitors. So any startup that succeeds is either going to be entering a market with existing competitors, but armed with some secret weapon that will get them all the users (like Google), or entering a market that looks small but which will turn out to be big (like Microsoft).

Finding startup ideas is a subtle business, and that’s why most people who try fail so miserably. It doesn’t work well simply to try to think of startup ideas. If you do that, you get bad ones that sound dangerously plausible. The best approach is more indirect: if you have the right sort of background, good startup ideas will seem obvious to you. But even then, not immediately. It takes time to come across situations where you notice something missing. And often these gaps won’t seem to be ideas for companies, just things that would be interesting to build. Which is why it’s good to have the time and the inclination to build things just because they’re interesting.

Live in the future and build what seems interesting. Strange as it sounds, that’s the real recipe.