Entries Tagged 'software' ↓

50% Off Loaves and Fishes…

Every few years a company emerges that grows so swiftly that it manages to define the zeitgeist and often helps to inflate a bubble that defies any rational explanation. Often these businesses are driven by new, disruptive ideas that take the market by storm and create a real shift in how people do things. Amazon (and online shopping), Google (and the search business), and Apple (music, smartphones, and touch computing) fall into this category. They created real, thick value.

For every one of these, there are others that grow, get tremendous buzz, and then seem to dissipate as quickly as they emerged. Or they settle into a kind of staid middle-age, their torrid teen years long forgotten. Think about 90′s darlings like IOmega, Boston Chicken, eBay, and Home Depot. It can be difficult to predict which businesses will stick around and which will fall away (or become low-growth, boring enterprises).

Groupon has emerged as the “Jesus Startup” of 2010-2011. The industry always needs one, and they tend to conform to an archetype and have a mythical story: the visionary CEO (Marc Andreesen, Evan Williams, Mark Zuckerberg) who experiences a remarkable rise to greatness. For this story and for these 15 minutes, we have Andrew Mason, the humorous and self-deprecating everyman who declares of the fledgling Groupon, “We could still fuck this up.”

The implication is that they’ve done something to “ace” it so far. But the truth is that they are just regular guys that started out doing something else (some kind of social mission charity stuff – blech – don’t talk about that, it’s not compatible with the visionary myth). And after executing on their original idea and experimenting a bit, they found themselves in the middle of a new exploding business model. Kudos for that. But as is the case with most “Jesus Startups,” there’s been a notable lack of critical thinking about what happens next.

Here’s where I think Groupon is weak.

1. Over-reliance on hypergrowth.

Groupon has posted some crazy huge numbers as they push through massive expansion into new markets. When you are turning up a new major metropolitan area every few days, gross revenue numbers are going to grow very quickly as businesses rush to be part of something that’s got so much buzz. As their geographic footprint stabilizes, top-line revenue will start to level out. When that happens, the business becomes much less interesting and has a lower upside (see Home Depot, Gap, Boston Chicken, Microsoft). This is why a push to IPO while this hypergrowth is happening seems to be a priority for the company.

2. Customer fatigue.

If you have been using Groupon, Living Social, GILT, HauteLook, or any of the countless other sites that rely on daily emails to get their message out, I’ll bet your experience has been something like this: at first you reviewed the emails every day; you bought a few things; you are now buying almost nothing; now, you may not look at the emails at all; you still have unused Groupons. Time is money, and people have too much crap. Eventually, people are not going to take the time with this. And when Groupon has exhausted all the “easy hits” that drive people to buy, then what? Besides, I thought email was “dead” and for “old people.” Right? Or did I miss something? (Sure, the deals spread through Facebook or whatever social channels, but email is a huge part of the business model.) As younger folks steer away from email, it’s an open question whether the current “daily deal” model can be sustained.

3. Business fatigue.

Businesses are tripping over themselves to be part of the latest new thing and expose themselves to thousands of customers at a shot. And sure, a Groupon deal can be a great opportunity for some businesses. But many businesses (some say up to 40%) have found that doing a Groupon deal can be a costly mistake that actually damages their business. The economics of the deals deliver a fraction (typically 25%) of the face value, which often does not cover their costs. While there is some breakage (unused deal revenue that can offset losses), this still may not cover the cost and hassle the promotion entails. Additionally, businesses that undertake in smart advertising can promote themselves all year round. A business can do a Groupon deal at most once every few months – otherwise the deal just doesn’t seem “special” enough. Groupon is a great novelty that can help some businesses become better established, but I really wonder if many businesses would participate more than once or twice, when compared to ongoing targeted marketing initiatives.

4. Scale as the only barrier to competition.

There are now thousands of competitors to Groupon (Living Social is the largest). There will be thousands more. The reason why both companies have received such massive investments to date is that they need to get big to create a local sales force in every market in the world, which is obviously an expensive proposition. If they can get sufficiently big, they can build a sustainable business that will dissuade new market entrants simply because any competitor would have to build a worldwide localized sales force. And if you’ve ever had to run a local sales force, you know that it’s a very expensive, messy, people-driven business. The business that Groupon will eventually most resemble structurally is the Yellow Pages. With sales teams in every city, the major directory publishers were able to exert a near monopoly control over the interface between local businesses and consumers, and Groupon is going after the same market. The difference is in Groupon’s use of technology and use of social. Otherwise, the two businesses are nearly indistinguishable. The assumption is that Groupon’s scale will prevent competitors from gaining a foothold, but I don’t see any real reason a focused local competitor couldn’t develop a sustainable business.

5. Tone-deaf on China.

Groupon has undertaken a massive push to expand into China. That sounds great, and any US investor would likely salivate over such an aggressive, prescient-sounding move. Ah, that Mason guy, he really knows his stuff. But my friend, China-expert Christine Lu tells me that Groupon’s Berlin office has recruited 1,000 new hires for China in the last three months – many recent college graduates. But here’s the thing. I’m currently getting a daily deal from a site in Shanghai called Wufantuan that’s indistinguishable from Groupon. (50% off Mexican food in Shanghai was one recent deal.) If you know anything about the Chinese market, you know it favors locals and cloning is part of the culture. To expect Groupon to be able to achieve anything meaningful in China is wishful thinking. Google got run out of the country on a rail. You expect the powers that be there to allow a US firm to “split” revenues with Chinese businesses to provide its budding bourgeoisie with deals on burgers, skydiving, and cupcakes? Um, yeah. OK. If there’s a business there, it will be Chinese. The entire Groupon strategy with China is theater, designed to show investors that they’re “paying attention to that market” while they ready the IPO.

So, the real deal of the day is for Groupon itself. The question is whether there’s enough upside in the model – and enough “bigger suckers” out there for the average Joe to make any money on the offering before the business model settles out and becomes the next eBay, Home Depot, or Gap. These are fine, sustainable businesses, to be sure, but all are way less sexy than they once seemed. (Yes, for about 6 months in 1995, Gap was incredibly sexy.)

Before you decide that Groupon’s the next hot young thing, it’s worth asking whether you want to jump on this model right now. I believe there’s a really nice, long term, but ultimately very boring business in there that should pay a nice dividend. Meantime, the visions of hypergrowth are likely much exaggerated.

I certainly can’t criticize the trajectory that Andrew Mason and company have managed to carve out for themselves. It’s an incredible story and it’ll be fascinating to see how it unfolds. The expectations are so high, they really can’t be met.

My bet is that they will need to move on to more sustainable forms of year-round marketing for businesses and away from the aggressive 50% discount model. That’s a much less sexy place to be and it will require some real creativity to carve out a niche there. But I just don’t buy the idea that they can continue to build a business based solely on deals of the day at such aggressive discounts.

The Groupon model right now is based primarily on creating new relationships between businesses and customers. They’ll be on to something really interesting when they can help to nurture and sustain those same relationships profitably.

From my friend Christine Lu (@christinelu):
Thanks for the mention Dave. I think they’re hiring 1K in the next few months. As in currently in the process of. Things over there have just sounded a bit weird to be a sustainable market entry strategy so I think it’s all a nice way to have a China story to prop up the IPO. The elusive vision of 1.3 billion people using Groupon. Nevermind that clones are already saturating the market and they’ll have Alibaba’s Taobao to deal with. Anyways, we discussed it a bit on Quora.

From my friend Vivian Wang (@vivwang):
The JV is a positive differentiator for both companies and will accelerate market consolidation. There are 1686 other group shopping sites as of December, yet only 29 sites have CIECC licenses to legally operate. Some believe there are only 10 serious contenders that can attractively compete. The real threat is Alibaba and Taobao, so a more international footprint into China seems warranted. One of the smarter things Groupon did was buy Mob.ly back in May, which has been developing on all mobile platforms. For a sector that’s already doing about $79B in transactions, I think the risk seems worth taking.
…
Hope something truly uniquely innovative comes out of this that the world has yet to see. I’d personally love to see Tencent migrate from selling a $1B of games & virtual goods to some seriously tangible merchandise. The foolish side of me actually thinks they’ll have a fair shot at it. Should be fascinating.

And from my friend Francine Hardaway (@hardaway):
I believe all this bargain stuff, especially in the US, is part of the recession and will go away when it is over and we all relax. I agree with you 100% on Groupon’s model; I am done buying stuff I don’t need, even at half price. All the people I know who love coupons (I never have) are armed with sheaves of them, and all that happens is the merchants are in price wars with one another in a race to the bottom. Sites like Groupon and Haute Look might be marketing front ends, but they are also margin-shavers for the people in the businesses they market. This HAS to be unsustainable at the end of the day, whether China is successful or not (and I bet it won’t be, because of all the people who, when we were in China, got up and said they would clone our products in half an hour).

What do you think about Groupon?

Firesheep is a startling plugin that allows anyone to easily impersonate the login credentials of others for dozens of sites. It works on any unencrypted WiFi connection and is stupid-simple to setup. It can be done by anyone in a matter of minutes.

Just to illustrate how easy it is to setup, I was on Virgin America flight VX67 from Washington to San Francisco yesterday.

All I had to do to get going with Firesheep was download Firefox (onto my new MacBook Air) using the in-flight WiFi, and then download the Firesheep plugin for Firefox. Just drag the plugin into Firefox and it installs. Reload Firefox and you’re ready to go.

Click “Start Capturing” and you are instantly snooping on every interaction occurring on the WiFi network. In my case yesterday, that meant snooping on everybody who was using the WiFi on my flight.

What’s At Risk?

Within just a couple of minutes, I was able to impersonate 3 people on Facebook (updating their status, exploring friends, doing anything I wanted to – of course I didn’t). Twitter is also at risk. So is Gmail. And so is Amazon.

Access to Amazon is perhaps the most worrying. Once I realized I was in under someone else’s Amazon account, I quickly shut down Firesheep: this is some scary stuff. What if I had changed the shipping address for the account and done a one-click order on a $10,000 watch or a $2,000 plasma TV?

This was all at 37,000 feet in an airplane (and way more entertaining than SkyMall). Like taking candy from a baby.

Even More Shocking…

Later in the afternoon I was at one of the Internet Industry’s high-profile events: Web 2.0 Summit produced by O’Reilly. There on the hotel’s WiFi, which was setup to serve the summit, I ran Firesheep. Within seconds I had compromised about 25 accounts, including the Twitter accounts of O’Reilly Media and TechCrunch writer Alexia Tsotsis. Change passwords, tweet-as-them, friend and de-friend people? No problem. Here’s what I saw. (Note that my accounts were vulnerable as well.)

How It Works

I have not studied this exploit carefully enough yet to explain it in full detail, but my understanding is that on an open WiFi network, it’s trivial to capture in cleartext all of the web interactions of the users around you on the same IP network. Once you can do that (something Firesheep achieves using the pcap library, capturing port 80) then you can sniff for credential information specific to particular websites. Firesheep supports a couple of dozen out of the box, including all major social networking sites (Facebook, Twitter, Gmail, Gowalla, Foursquare) but also some more obscure sites relevant to coders (Github, Pivotal Tracker). Ouch. It even has an “import” function so others can write exploits for sites that Firesheep doesn’t know about yet.

The bottom line is that these sites all need to enforce the use of HTTPS (secure HTTP) rather than HTTP *before* the login handshake occurs. This will force some emergency changes by many sites over the next few days.

This is not a new exploit – it’s always been possible to do this; Firesheep just makes it stupid easy.

A Note On Passwords vs. Encryption

You’ve encountered WiFI networks that require WEP or WPA encryption passwords. These are secure from Firesheep’s reach. However, there are a lot of WiFi networks that require “passwords” (such as those at coffee shops, hotels, etc) that are in fact open networks. Many do not even require you to login to them to exploit them via Firesheep. To put it in perspective, every Starbucks location is vulnerable to attack.

The only for-sure ways to stay safe from Firesheep for now are to 1) use only encrypted WiFi networks (that use WPA or equivalent), 2) use wired networks that you trust. Any open WiFi network can and will be vulnerable to this attack until vulnerable sites switch to using HTTPS for all authentication. Be very careful out there, folks.

So, it’s a real dilemma. No one seems to be sure how to really address it other than to eliminate or curb the use of open networks, which is probably where it’s going to end up. So open WiFi is now basically over. Expect places that had been using it to post publicly available WPA passwords, which solves the problem.

Occasionally we here in the burgeoning tech community in Baltimore have paused to take stock about how far we’ve come, and what would be good to do next. About a year ago, Mike Subelsky made some suggestions on the BaltTech blog, and he’s recently identified some awesome emerging leaders who have made a real difference in the last year. Many of the ideas he identified are ones that people have taken up and run with.

In my travels in the last year, I’ve come across several ideas that are working in other places that we should consider pursuing here – in no particular order.

• Startup Weekend – Bring together a bunch of startup-minded people on a Friday, form groups, and build something entirely new from scratch by Sunday. Demo it on Sunday afternoon. I had the chance to attend StartupWeekend Seoul this summer and it was a great experience. Lots of relationships were formed and some truly great ideas were unearthed. We need a big-ish place where folks can hang out for 3 days straight and someone to take the lead.
• Girls In Tech – This organization is a global group of women who are making a real difference in the tech community. Some have griped about the name, and I agree it’s somewhat problematic – however to their credit they are trying to do their best to attract young women involved in tech and create a culture that is at least somewhat fun and edgy. Behind the scenes, its founders and main movers and shakers are some of the most intelligent and connected emerging women leaders in the tech world; with strong leaders in China, New York, and San Francisco. I promise you that a Girls In Tech Baltimore chapter would find good connections worldwide.
• Founder Dating / Find-a-Cofounder – These events have been popping up in San Francisco, Seattle, and New York in various forms. The idea here is that if you can bring together a ton of people who all have a clear intent to want to form a startup – if they can find good partners to work with – maybe something will come of it. This seems like a great way to unearth “startup-curious” folks in boring jobs and pair them up with ambitious entrepreneurs who just need a strong partner. And every other combination. Worth doing. (And it looks like a meeting may be happening next week to start the conversation!)
• Hacks and Hackers – Baltimore has the critical mass to support a chapter of this group that aims to connect journalists and tech/developer people. And entrepreneurs. News here is horribly broken and it’s going to take an entrepreneurial mindset to fix it. The sooner we can get journalists and smart startup people to get to know each other better, the sooner a new model will be discovered. Get on it.
• TEDxBaltimore – I helped pull together TEDxMidAtlantic in 2009 and 2010, and TEDxOilSpill this summer. TEDxMidAtlantic aims to throw a spotlight on a wide range of creative thinkers in and around our entire region. Mel Brennan from YMCA of Central Maryland and Open Society Institute have been discussing a potential collaboration to help produce TEDxBaltimore, which would have the opportunity to focus on Baltimore and its future potential. I strongly support this and anyone who would like to step up will find support from YMCA, OSI, and TEDxMidAtlantic. Contrary to some recent tweets, no date has been set.
• Entrepreneurs Unplugged – This event in Philadelphia features an entrepreneur on stage to discuss their story, successes, and failures. As long as they can keep from lying on stage I think this could be an extraordinarily powerful format. GBTC has had a Face2Face program for several years, which avoids the tendency that entrepreneurs have to whitewash over failings and details by pulling together a very small group over dinner. Both are awesome.
• Reverse VC Pitch Party – My friends Larry Chiang and Dave McClure have been dreaming this one up, so VC’s can do “outreach and education and stimulate deal flow.” I think it’s a great idea and I’d love to see groups like my own Baltimore Angels as well as some of the VC firms in the region get up on stage and talk about the deals they like to see, the reasons startups should seek them out, etc. A great way to turn the tables and share perspectives that are all too often misunderstood.
• CityCamp – In the spirit of BarCamp and SocialDevCamp (both of which could use folks to take the charge for updated events – we’ll all help!), CityCamp is a catalyst and a forum for talking about what’s working and what still needs to be done from an Open Government / Gov 2.0 standpoint. It’s what Baltimore City’s well-intentioned “Data Day” this summer perhaps should have been. There’s a lot of potential for involving folks from the design, architecture, and foundation community here too.
• Junto & Salons – Ben Franklin convened a regular gathering of smart folks in Philadelphia, many much older than himself, to discuss ideas of the day and to trade notes about what businesses had gone bankrupt and the like; he called it a Junto. Lately I’ve noticed an increasing number of evening salon conversations about politics, startups, tech and the like. Our friends in Philadelphia revived the Junto tradition a couple of years ago, with awesome results. We’ve discussed doing it here but it hasn’t happened yet. Are you the charismatic leader?
• Bootstrap Baltimore / Mosh Pit 2.0 – For the last two years Jared Goralnick has put together Bootstrap Maryland at University of Maryland’s College Park campus. This is a great event, and we could use something here in Baltimore that is aimed at drawing out the amazing quantity of entrepreneurial talent here in Baltimore’s many universities. A few years ago, GBTC hosted an event called MoshPit – a business plan competition for college students. We need to revive this program and meld it with something like Bootstrap. And we especially need to reach out to students in engineering, science, and the arts – not just business students.

Go ahead and steal these ideas. There are plenty more where these came from. Borrowing working ideas from other places means they have a much higher chance of success than trying to design a totally new event format from scratch. Plus, it gives the potential for direct exchange with organizers elsewhere.

If you are interested in pursuing any of these ideas, ping me – I can put you in touch with the originators of these events. And thanks again to everyone who has stepped up to make a real difference here. We are changing this city one mind at a time.

Today Twitter CEO Evan Williams announced he would be stepping down as Twitter’s CEO. Dick Costolo, presently the firm’s COO, will take over that role.

As is its custom, Twitter (the site) exploded with the news, as geeks everywhere speculated, double rainbow-like, What does it mean?

The answer is that they’re simply tending to their business. The myth that founders somehow have mythical vision and deserve important sounding titles like CEO is really mostly garbage. Founders are mostly like everyone else, except for one important difference.

Founders try things. They seek new markets and ideas where others don’t. But they seldom have all the answers. Sometimes they are even visionary, but that doesn’t always make a good CEO from a day-to-day build-the-business standpoint.

Fact: Twitter was not Evan Williams’ idea. It was Jack Dorsey’s idea. And in fact Jack was CEO of the company from 2007 til late 2008 when Williams, a co-founder and early funder of Obvious Corp, took over. (Jack, a great guy and a big dreamer, went on to found Square.)

Fact: No one at Twitter had any idea where it might go when it was created. Seriously – neither Dorsey nor Williams predicted this outcome. I’ve talked to them both about it and the fact is they were just regular guys who tried something new. They had enough resources and drive to make sure it could grow, but they really had no idea where it might lead.

The whole idea that folks like Evan Williams, Jack Dorsey, Biz Stone, Mark Zuckerberg, or Kevin Rose are well-suited to actually run the businesses they have created is pretty much a myth. But yet it’s one people seem to like to believe.

Founders have a very different personality from the sort of person required to build, operate, and grow a business financially. The sooner we can all get over the celebrity CEO complex, the better off we’ll all be.

People need to understand exactly what it takes to found a startup, and Eric Ries has gone so far to say that entrepreneurs actively lie to promote the visionary founder myth – and I agree with him.

Costolo is a genius at building a new-media business like Twitter. Williams is a persistent guy who’s willing to break new ground.

Two. Different. People.