On predictions

It’s that time of year, here’s mine:

1. Kiva will break $100m in loans
2. Microsoft will buy Facebook
3. Google will buy Delicious
4. Microsoft will buy what’s left of Yahoo
5. Jerry Yang will leave Yahoo for good
6. Steve Jobs will step down as Apple CEO
7. Social networking will crack its business model
8. Google’s share of online advertising dollars will fall

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On Summers, Sandberg and Hughes

Barack Obama recently announced his economic team. The markets reacted well to the news that Tim Geithner would be the new Treasury Secretary but from the point of view of the technology world the more interesting appointment was Larry Summers as White House economic advisor.

The reason is that Summers’ chief of staff when he was Treasury Secretary in the Clinton administration was current Facebook COO Sheryl Sandberg. I’m willing to bet that ever since the election she has been dying to get back into the Washington game and this is the opportunity to do so. Summers will have known about this appointment for a while and will have been thinking about his staff. People usually like to assemble teams from others they have worked with before so the feeling is likely to be mutual. The question is whether Sandberg will jump.

As tech entrepreneurs we see Silicon Valley as the epicenter of the world. However to most people the real centre of the world is Washington DC. At this point in time with Obama about to take office and the Democrats in the ascendance on Capitol Hill that is doubly, trebly so, especially for a Democrat like Sandberg. No matter its central importance in Silicon Valley, Facebook will start to feel like a backwater to someone of Sandberg’s background.

The return of Chris Hughes

If Sandberg does leave it begs the question of who should become Facebook COO. It should be Chris Hughes. The Facebook co-founder left early to work on then Senator Obama’s nascent campaign. He revolutionised political campaigning by building a set of volunteering tools which contributed to the Obama campaign being the best organised in history.

Now with Obama elected that purpose is gone. Four years is a long time in Politics and a lifetime in technology, someone like Hughes will never be content to twiddle his thumbs for four years and I doubt the 2010 midterms will be able to match the energy and excitement of 2008. A beginning for Sandberg will be an ending for Hughes – timing and opportunity in perfect alignment.

There are two reasons Zuckerberg should bring back Hughes. First is that with the departure of Dustin Moskovitz there are none of the original founders left apart from Zuckerberg. Second the Chris Hughes that left Facebook in 2006 will not be the Chris Hughes who goes back in 2008. He spent 2 years at the epicenter of one of the best organisations, political or otherwise, and has been on an unbelievable learning curve. David Plouffe is one of the best managers in the world, judging by his achievements, and Hughes has spent the last 2 years alongside him. So if a slot does come up for Facebook COO there should be only one name on the shortlist.

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On cash

Cash management is the most important aspect of running a startup. If you don’t have cash you aren’t doing anything. As we move towards launch we are starting to look at the costs we have to meet and working out how much road we have to get to a seed round. With no full time employees we have an extremely low burn rate even if we choose the deluxe servers we have enough to continue developing the product post launch. That’s bootstrapping kids!

We have some natural advantages. Although we are not hackers we have a good spread of skills amongst the founders. I am a lawyer so I can write the agreements myself and get them checked by our law firm. This saves us a huge amount of cash and ensures all our agreements are a perfect fit with our business. We’re also lucky in that one of my friends from Bar school is our lawyer which means we get the services of a serious City law firm which would normally be completely out of our price range.

My other two co-founders are an IT consultant and a management consultant. Although the former is not a hacker he can think like one and with our developers translate our ideas into reality. As well as being great at managing the development process his background means he also sees beyond software development to what the business needs in terms of IT infrastructure and how it will be able to scale. Having this operational insight at such an early stage means we are preparing ourselves as a reliable business from day one. And having a management consultant on board means we have someone who can look at the business with the eyes of an investor when we are preparing our presentations and plans. All in all it means we can run as a proper business without many of the associated costs.

The alternative to cash conservation: more cash

I was thinking about this generally when all the ‘advice from VC’ type blog posts started flooding in a few weeks ago. They all seemed to boil down to: conserve cash. One company which is pursuing the alternative route and trying to raise more is Facebook. Arrington points out they are in a bind, they are growing fast which so their costs are scaling but without a solid revenue model their income is not. This means CFO Gideon Yu is now looking around for alternative forms of finance. The options are:

• Loans: Absolutely no chance. Banks aren’t lending to anyone right now and even if things start to thaw Facebook will be right at the bottom of the list. No banker is going to lend to a company that is burning cash.
• Leasing: Facebook already has $100m in lease finance and I’d be surprised if they could get this extended to cover the type of infrastructure they need.
• Equity: Techcrunch rumours that Yu is in Dubai pursuing this option. On the plus side the type of cash I imagine he is looking for (low nine figures) is not a bid deal to a middle eastern sovereign wealth fund. On the minus side they won’t pony up at anything like the $15bn valuation and maybe not at the $4bn recently used for the staff sale.

So what’s going to happen? I think we may start to see a lot more ads on Facebook. MySpace is making far more money simply by expanding the inventory on pages, with My Ads they have folded it out to allow more advertisers easy access to the inventory. Even still, monetising MySpace is causing problems for Google who shelled out $900m for the privilege of showing ads on that network. This is probably not what Facebook wants to do as Zuckerberg is looking for a more innovative silver bullet solution. Beacon wasn’t it but it shows something as obvious as expanding the inventory would be regarded as a defeat.

Beyond that the only real alternative is drastically cutting costs which means reducing the headcount from 700. This may not be a bad thing as it looks to me like Facebook is getting overweight. This means it starts to get all the problems of a large business – bureaucracy, infighting, slower response times – and none of the benefits – solid revenue. In the meantime the wildcard is users. Facebook’s main attraction was its clean design, if this starts to get gummed up with more and more ads they may start using the site less or even looking to another network. Add all that to discontentment with the redesign it would be very interesting to see what happened if someone launched a network today which looked like the old Facebook. Maybe this is the time for StudiVZ to launch its English version.

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On new facebook

Facebook finally bit the bullet and migrated everyone over to the new design. There has been some squawking from a small number of users and developers who are moaning they no longer have access to the profile page.

As we are developing a facebook app I’m in a good position to comment. My first thought when seeing the new design was that it wasn’t a massive deal. You still had the option to send updates to the news feed and it was my guess that the boxes page would still get a decent amount of traffic. From our perspective the greatest part of the new design is the ability to create a tab.

The trick is to design your app so people actually want to display it prominently, seek it out and tell others about it. I have been reading some books about marketing in anticipation of our launch. Stuff like Purple Cow, The Anatomy of Buzz and Beyond Buzz. I’ll spare you the dollars because they all say pretty much the same thing: products must be inherently viral, it’s not something you can slap on at the end. If you haven’t been thinking about the users from the first time you put down code then you are in trouble.

For us it guides everything we do and having that clear touchstone makes decision making far easier. Now we have different classes of users but anything we do with the app has to benefit one or more of them and cannot cause annoyance to any of them. You cannot compromise. If you start designing something with features that users have to put up with your product is not going anywhere.

The Curse of Google

I also think you have to bite the monetisation bullet early. Many web startups suffer from what I call the curse of Google. This is the idea that you can build a great product and someone else will figure out how to monetise it. Google were lucky that Bill Gross came up with paid search because in their initial paper Brin and Page baulked at the idea of advertising. Now Google implemented advertising in a better way than GoTo by separating the organic results from the ad but the basic concept was Gross’. Google doesn’t suffer from the curse but everyone trying this path after them does. I cannot think of another startup which has had a meteoric rise then cracked a solid business model down the line. I can think of a lot that haven’t. Napster was just as revolutionary as Google but without any business model it burnt pretty fast. Others like YouTube and Hotmail have managed to get bought by a larger company who could cover the costs in order to get a good position in an emerging market.

It doesn’t work for us because we are not hackers. We have to raise our own money to build the software and I wouldn’t be comfortable asking people for money, and putting my own money, behind something which does not have a clear path to revenue. Being so business model focused makes us different from other startups but we can’t afford any other route.

On business models

There are rumblings coming out of facebook that all is not well. Experienced hands are leaving at a steady rate as the company struggles to find a business model. In March they turned to the person who ran Google’s money machine AdWords to come up with one. Her latest thoughts are:

She said that after six years in advertising at Google, she believes that there’s an “unusual and extraordinary opportunity” for advertising at Facebook. That opportunity is somewhere between major brand advertising like Super Bowl commercials and the direct-response search ads that Google sells.

Sorry, no.  The basic problem is that nobody looks at the ads served on facebook because they are barely relevant. This has resulted in low conversion and smaller CPM rates. What facebook needs is a creative solution and they don’t have the right person to deliver it. Sandberg ran AdWords well but she didn’t devise the business model for search engines. In fact nobody at Google did, it was Bill Gross who came up with paid search. Google was initially sniffy but adapted paid search into AdWords which Sandberg subsequently ran.

The problem facebook has is that they need the creator, not the administrator. When they have the idea then Sandberg will be the person to grow it from a seed into an empire. But they haven’t had the idea. This was the thinking behind opening up the platform. If they couldn’t devise the business model then let someone else do it. Unfortunately so far all this has yielded so far is an army of applications none of which have got any closer to cracking the essential problem. Don’t get me wrong, I love Bowling Buddies but there is no cash in it.

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On useful advertising
On the future of social networks

Pic: Laughing Squid

On f8

I should be more interested in f8 than I am considering we’re about to launch a FB app. Yes I read the predictable Valleywag post saying how terrible Zuckerberg was. Then I watched the video and realised he was perfectly competent if slightly dull. The main news seemed to be about what didn’t happen namely FB connect and a payments system.

The real earth-shattering development will be FB connect. It’s great news for users who will be able to link up cross platform without creating a new account – this is how I understand FB connect anyway, correct me in the comments if not. It will promote competition between platforms and allow users to pick the SN which suits them best. I guess FB are doing it because they think they will disproportionately benefit as the best platform. I don’t think there’s much doubt about that right now but it won’t necessarily stay that way forever.

The lack of a payments system exercised some app developers, including the illustrious Max Levchin, who seem to think if there is a payment system people will start paying for apps. Fellow widgetmakers – I tell you now – nobody will ever pay money for a FB app. Look at Causes – people only donate on average 21c per year on things they actually support. They will not pay anything for your apps. Accept it. People pay for iPhone apps because people pay for iPhones. If they won’t pay for FB they won’t pay for FB apps.

Advertising is the game. We think we have cracked the way of getting advertisers to pay far higher rates on our FB app and we should be ready for release in the Autumn (Fall) so you can install it and judge for yourselves then.

Read more:
On friend bankruptcy
On useful advertising
On the future of social networks

Pic: phil-it

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On privacy

A combination of recent events made me think about privacy. The appearance of Google’s streetview UK vehicles was one, then the Viacom/YouTube lawsuit another and also from talking to some of my non facebook friends about why they weren’t joining.

The reason they gave is the potential for people they don’t want to find them, finding them. Now I’m aware that facebook has some kind of blocking option which renders a profile invisible to a specific user. However this feature is turned off by default. Now I’m not going to speak for people who may never join a social network no matter what but do think there is a gap opening up for a network which guards its users’ privacy better.

Other friends who do have profiles have complained about the spammy applications which is another example of startups abusing people’s privacy. One thing I am certain about when we release our FB app is that people will not be compelled to invite others. We have designed the app with a unique set of features which we hope will make users want to recommend it but it is ultimately up to them. We will never try some technical trick to spam it to their friends. If they don’t want to invite anyone so be it.

I think too many companies see privacy as something to be got around rather than embraced as a positive feature. It is far more powerful to have someone seek you out than to ram products down people’s throats at every available opportunity. Users are beginning to wonder whether they have lost control on the Internet, they have got over the novelty of many online products and are starting to look more closely at what they are giving away to get something for ‘free’. To succeed the next generation of products and companies will have to put users back in control.

Read more:
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Pic: pupski

On rock stars

LinkedIn recently announced it had raised $53m on a $1bn valuation. This comes on the back of facebook’s more recent $100m, as well as Slide and RockYou getting $50m and $35m respectively. When Marc Andreessen raised $60m for Ning he said it was to survive the ‘nuclear winter’.

Now all these companies have two things in common, big names and big VC dollars. I always found the idea of rock stars faintly absurd. Does a rock star developer go up on stage at Glastonbury and code as screaming fans egg him on? The other day I read The Talent Myth by Malcolm Gladwell. In it he argued that a culture that promotes and pampers rock stars sows the seeds of its own failure.

A few weeks ago I heard a VC who had backed a number of successful ventures bemoan the fact that rock stars were great at raising money but not at making it and that he now preferred hungry unknowns. What I find odd about all this money raising is that all the real stars of the previous generation started making money fairly early on and didn’t have to raise huge sums on massive valuations. Google took about $26m in total from an angel round and a Series A before getting a reliable revenue stream which has sustained the company ever since.

In backing these rock star encrusted ventures VCs are ignoring the lessons of their own history. Google, Apple, Microsoft, eBay, PayPal, Yahoo were all started by unknowns. All the founders were outsiders whose ideas were initially rejected but still believed in what they were doing and carried on.

It reminds me of British tennis. Every year the LTA pumps more and more money into better and better facilities, coaches, everything, ensuring that young British players have the best of everything and yet they still fail. What nobody has considered is the possibility that lavishing them with everything is what causes them to fail. They are so well tended to they have no hunger. Contrast the rise of Serbian tennis whose current crop of winners had to play on cracked courts with almost no facilities in between being bombed by Nato.

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On spray and pray
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On friend bankruptcy

In 2004 Lawrence Lessig declared email bankruptcy and I think at some stage people will start to declare friend bankruptcy.

There’s a reason you are friends with someone and a reason you lose touch. I remember when friends reunited launched a few years ago. I joined, paid my fiver and it resulted in a flurry of emails & meetups shortly afterwards. Then we never met again and I went back to my runnings, to quote Mike Skinner.

Some of my facebook contacts have 200+ friends. I spoke to one the other day and he admitted that he isn’t friends with most of his facebook friends. Facebook used to have a limit of 5000 friends which they have recently abolished. I do not know why. Folks, nobody has 5000 friends. Nobody.

My arbitrary definition of a friend is someone you have contact with outside work at least every month or so. You can be friends with someone at work, but only if you voluntarily spend time with them on a semi-regular basis. In my case that means 20 or 30 people at most. I think what is needed on a social network is a way to differentiate friends from contacts. To avoid giving offence it wouldn’t have to be apparent to the other person but it would be a good way to change privacy settings so people you know less well did not have complete access to all your information. I would also cap it at 50.

The new AltaVista

The problem for facebook is that it has no way to discern the importance of connections between people so its value as a database is diminished. I have wondered whether facebook is the new Google or not. Maybe we are still in the early days of social networks and facebook is AltaVista, the current leader but nothing that makes it truly outstanding in the way Google was. Yes facebook has a nice simple design but there is nothing inherently superior about it beyond that in the way Google was. And yes switching social network is harder than switching search engine, nevertheless the rapid adoption of Twitter (which is essentially a mobile version of facebook’s newsfeed) shows it is possible. My own feeling is that someone will design another SN with that Googlesque special sauce and, like Google, they will have learnt from the mistakes of existing networks like FB et al.

So it made me think that perhaps facebook’s vulnerability lies in its departure from its original simplicity. What are the functions people really need in a social network? I would say:

• Photo sharing
• Email
• IM
• News feed
• Favourite books/tv/movies
• Event organising

I can’t think of much more than that. Write your minimalist social network feature manifesto in the comments. All you need to do is give a list of the features you actually use, I’ll be interested to see what you think.

Read more:
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Pic: Crazy Talk

On the future of social networks

Facebook’s valuation seems to be built upon a winner takes all model for social networking. I do not think this is the way things will pan out. Everyone seems to be looking at a repeat of Microsoft and Google’s dominance as the models for the future but this is wrong.

Through brilliant strategy Microsoft was the only tech company to bet that software not hardware was the key to pre-eminence and nobody ever caught them. Other eighties PC makers like Commodore, Apple, Atari, Acorn insisted on control over both hardware and software leaving MS with a virtually open field. Google produced a search algorithm that was qualitatively better than anything else around at the time and nobody has ever caught up. There is a myth that all that Google has these days is brand but I occasionally try other search engines and they are still actually worse.

So Microsoft had a strategic advantage and Google had a technical advantage. Facebook has neither. It’s appeal over MySpace is primarily design. It was this which prompted them to tidy away the applications onto a separate page to get back to that clean, uncluttered look.

Now if they implement friend connect so someone can have an account on MySpace which shows their facebook friends they will make the barriers to entry for a new network much lower. The two things keeping people with facebook are: good design and their friends. Now if full data portability were implemented allowing people to access their friends on other networks one huge barrier to competition has gone.

In other words facebook would have done to social networks what Microsoft did to PC manufacturers: commoditise them. Unfortunately by opening up this far facebook will be commoditising itself. Then the only differentiator would be its clean design. It would be interesting to see what happened if someone launched a stripped down social network with the following features: news feed, photo sharing, personal info, wall, integration with email. No apps, no vampires, no SuperFunFunnyWalls.

Of course facebook could just turn off friend connect if they decided a worthy competitor had emerged. The risk is that the competitor has turned up some Google-style special sauce that would make them stick with them and not with facebook.

Pic: Brian Solis