The VC Shakeout

This piece in HBR is must read, it details why there will be a lot fewer VC funds in the future.

The sky is falling on the venture capital rainmakers. Over the past 10 years their quarterly internal rate of return (IRR)—the primary measure of VC success—was dismal, hovering in the single percentage points and sometimes dipping into negative territory. Many firms have struggled to market new funds. Their main sources of profitability—IPOs of their portfolio firms—are fewer and farther between. Their backup strategy—selling their portfolio companies to other firms—is getting tougher and the prices are falling. Investments that once generated cash after just two years now take six to 10 years to reach liquidity.

[From The VC Shakeout – Harvard Business Review]

Maybe the solution is downsizing the industry (which is happening anyway) or going back to basics or rethinking how we capitalize and manage venture investments… I really don’t know the answer. The easy part is identifying the problems, the hard part is figuring out what to do about them when the problems are structural in nature.

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Accept Software – Innovation is No Longer a PowerPoint Bullet

I was on vacation last week with my family and did not post anything but I have been wanting to write about a meeting I had with Accept Software a few weeks ago so I went through my notes and refreshed myself on the conversation, which was interesting in many dimensions.

First let me give you some background on how this came about. I received an email from the PR contact for the company that mentioned the BP oil spill in the Gulf and the process of idea collection on the web they were undertaking. It was a good hook but one that opened up a whole new dimension that I don’t think they anticipated, but one which led to a really interesting conversation with Christine Crandell, SVP of Marketing for the company.

Accept has built a set of products for “innovation management” and while I reflexively gag at the word “innovation” when applied to large companies, I actually think Accept has the right approach for delivering a solution to the problem of connecting customers with product development. The four products that Accept offers as part of their innovation suite are:

  • Ideas: A classic ideation offering, non-employees can submit and vote on ideas.
  • Portfolio: A product portfolio management workbench that analyzes the portfolio investments you are making in your products with the goal of aligning those investments where you are achieving the most reward.
  • Requirements: Product manager that builds product plans and optimizes execution across multiple teams.
  • Agile: Manages the product engineering methodology according to Agile or hybrid principles.

There are a lot of companies offering pieces of this suite but the market has largely existed as a best of breed market rather than a suite offering, and except for IBM’s Jazz offering I am not familiar with other products that are a full overlay to Accept.

The ideation component is particularly interesting to me as I have been spending a lot of time looking at social CRM recently and there are at least 6-7 credible companies doing ideation. However, I have a fundamental conflict with the notion that customers can lead innovation and I made a point of speaking with Christine about this.

Innovation and openness are used by big companies in an interchangeable way and the fact is that most companies are neither innovative nor transparent, but the real point is that even if they were… so what? Let’s look at 2 companies that are widely acknowledged to be the most innovative brand companies in the public consciousness, Apple and Google. Both companies operate rather secretively and not informed by what customers or competitors are doing, in other words, they create their own oxygen and bend the market to their visions. Apple is perhaps the most extreme example of this, heeding the wishes of one person and one person only in their product planning, yet nobody would suggest that Apple isn’t tremendously innovative.

I would not suggest that there is no benefit to being open and conversational with your customers, in fact I have 2 examples of companies that regularly top customer satisfaction surveys, Amazon (and by extension now, Zappos) and Southwest Airlines. With the latter the evidence is made much stronger by the fact that the airline industry as a whole ranks so low in terms of customer sat so Southwest’s lead in this category speaks to something much bigger than just a statistic.

Here’s the real point I am making, when we talk about innovation and transparency for companies what we are really talking about is strategies that better position companies to satisfy their customers and from that achieve ancillary benefits, like retention, upselling, and “loyalist” behaviors that turn customers into promoters. All of this is good, indeed essential in today’s marketplace but instead of using innovation and transparency these companies should be talking relentlessly about customer satisfaction as the business objective they are chasing.

When it comes to ideation I think the most powerful benefit a company can achieve from opening up the R&D process to the public is the derivative product opportunity and to fail fast with new ideas. The fail fast is self evident, companies often go through repeated product definition and prototyping exercises only to still deliver a loser, the customer involvement up front can often short circuit fatal flaws early on and result in a more efficient R&D process.

Derivative products are, as the name would suggest, product opportunities that result from tweaking existing products to create new categories or offerings. Here’s a great example, do a search on “Timbuk2 diaper bag” and you will find a blog post on Timbuk2’s site titled “diaper bag hack kit“. The blog post, which details how you can make your own diaper bag from an existing Timbuk2 bag actually came from a Get Satisfaction idea submission that laid out what was needed for the hack kit. A derivative product identified and defined by customers yet promoted by the company.

Let’s talk about the BP example that Accept used to hook me into the call… I actually think it’s a really bad example. Here’s the background, BP has a site for the Deepwater Horizon Response and through this site you can download an application and submit an idea. Now I think I’m a reasonably intelligent person and could probably think up some clever methods for extracting oil from water or capping a well (still like the nuke option) but I’m not an engineer with expertise in this field, or any related field for that matter, so why should I think my idea has merit (I am reminded of something @shitmydadsays tweeted recently). More glaringly, BP has collected 35,000 ideas that filtered out to 700 credible ones but 2+ months after spill the well is still spewing out oil and the coastlines are still taking the brunt of the oil leak! I just don’t see how you use BP’s ideation example as a credible and successful one to highlight.

Whatever your views on ideation or related topics, I’d suggest you take a look at Accept Software. Led by CEO Bryan Plug, who I know well from my SAP days and later was the CEO of one of our portfolio companies before taking the reins at Kintana, the company raised $17m in funding just last year and has built up a deep management team of experienced people. They have 70 customers who are using all or part of their suite as an on demand or on premise solution… they are a company to watch.

Community Management and Community Managers

The community manager position in marketing organizations across all industries is one of the hottest gigs and it’s been that way for a few years now. The role is attracting people because of the opportunity to drive new processes and build professional brand equity for the individual as much as the company, and it doesn’t hurt that big brand companies are paying top dollar to fund these operations in a time when they are paring back across the board on everything else.

I wrote about community managers over 2 years ago in a post that referenced something Chris Brogan, a leading authority on the subject, had posted and Chris replied with a few words on the importance of metrics. The lack of performance metrics for community management is one reason why the position is so sought after, simply put we have not been measuring performance for this role because few people really understood where to look in the organization for the points to measure success and failure on when it came to community management; we’ve been stuck in this “we know it when we see it” mentality.

The above is why I got interested in a post that Radian6 put up on their blog about the subject. This company, better than most, understands what community management is supposed to drive in terms of business benefit, after all it’s what they are selling in the market, and in one post they have succinctly captured some of the key business processes that are impacted by the community management role. When you have the business processes defined it becomes much more achievable to define metrics upon which the community management function is to be measured.

Once upon a time, managing a community meant hanging out in an online location – be it a forum or a chat room – and moderating chat. Approving comments. Handling some support issues. Dealing with trolls, helping people with questions. That kind of thing.

But community management, at least the way we approach it, isn’t just online issues management and discussion moderation anymore. It’s a far more fundamental business role, one that ties together responsibilities from a number of different places, both online and off.

[From A Different Look at Community Management « Social Media Monitoring and Engagement – Radian6]

In the words of the recently deceased John Wooden, “don’t mistake activity with achievement” and when it comes to community management wiser words have never been said. Every business function has to demonstrate through objective measure why it should continue to exist, the much talked about community management function inside an increasing number of marketing organizations is no exception.

Journolist, Confidentiality, and Pageviews

Last week there was a minor scandal involving the Washington Post and a blogger on their payroll who was covering conservative political issues for the Post. The short short version of the story is that the blogger, Dave Weigel, resigned after inappropriate and disparaging comments about the very people he was hired to cover were revealed on a private email listserv called Journolist, which is run by acknowledged liberal Ezra Klein, who by the way also acknowledges that he only invited center (more likely center-left) and liberal journalists into the group.

That was the theory behind Journolist: An insulated space where the lure of a smart, ongoing conversation would encourage journalists, policy experts and assorted other observers to share their insights with one another. The eventual irony of the list was that it came to be viewed as a secretive conspiracy, when in fact it was always a fractious and freewheeling conversation meant to open the closed relationship between a reporter and his source to a wider audience.

[From Ezra Klein – On Journolist, and Dave Weigel]

This ended up being a problem for the Post because it confirmed a criticism regularly leveled at the traditional media, which is that they are incapable of covering conservative political issues objectively, a point acknowledged by their ombudsman today.

Weigel’s exit, and the events that prompted it, have further damaged The Post among conservatives who believe it is not properly attuned to their ideology or activities. Ironically, Weigel was hired to address precisely those concerns.

There are two aspects to this story that I find fascinating, the first of which is that the Post, like other newspapers, have dramatically expanded their coverage of news and events in their online offerings to also include opinion. The point of this is obvious, in the online world where advertisers pay on actual pageviews rather than just a sampling (as is the case with print) the requirement to amplify online reach with sensationalized and dramatic opinion writing is absolute, it’s what gets linked to and spread virally.

When you take into account the demands that online media presents to publishers and the shifting nature of what they publish, well you really have to look at the foundation of news and current event journalism and I think it’s reasonable to conclude that it is fundamentally changing not just in the way that it is presented but what it is actually presenting. For all of the disparaging commentary that traditional news outlets heap on cable news, the fact is that they are becoming much more like them than they would care to admit.

Secondly, in an online world such as the one that Weigel and Klein found themselves in with Journolist, it should be accepted as fact that anything written, even under the assumption of confidentiality, can eventually find it’s way into the public domain. Scott McNealy was absolutely correct when he said (in 1999!) that you don’t have any privacy anymore so “get over it”. Everything you write becomes part of the permanent record unlike in years past when conversation only happened in realtime and the spoken word vanish into the thin air immediately upon being spoken.

When we started the Enterprise Irregular listserv 6’ish years ago we had a sense of the importance of this issue. The public website is just that, public, but the email list is private and when anything is posted to that group with a <noblog> or <noattribute> tag the meaning is understood and absolute. It is understood that violating either tag impaired not only your personal integrity but that of the entire group. The interesting group dynamic that this exposes is that when confidentiality is breached it acts like a gash in an ship with causes the ship to sink, whether in minutes or days it doesn’t matter… it sinks.

Klein did the correct thing by shutting down Journolist as once the understanding of confidentiality was breached it was never going to return. What is amazing to me is that any reasonably intelligent person wouldn’t understand that disparaging and incendiary comments written even in a private forum would not come back to cause damage to them. It is also somewhat ironic that it wasn’t Twitter or Facebook exposure that brought down Weigel (there were some Tweets but he could have survived those) but rather one of the oldest internet technologies that exist… a listserv.

Was Einstein “bright”?

I read this and thought about the industry I have called home for 21 years:

Mr. Katz was echoing Feynman’s thought when he pointed out: “And yet, brightness has become its own virtue. We’re impressed by candidates who appear ‘bright.’ I think this reflects the fact that this is the age of the college graduate, the age where ‘brightness,’ or the suggestion of intellect, is considered a fundamental requirement for even getting up in the morning. In order to be taken seriously, one must show the kind of mental agility popular with college admissions officers.”

[From Power Line – Frank Tipler: Was Einstein “bright”?]

Are we overvaluing brightness? Yeah, I think without a doubt we are.

We all work with a wide range of people on a daily basis who by any measure are considered bright but that perceived brightness does not translate into outsized success, financial or otherwise. We use our perception of brightness as a proxy for leadership and eventual success without acknowledging the success and leadership are not proportional to intellect.

Big institutions are stocked to the gill with bright intellects yet big institutions are exactly where monumental failures are most pronounced… government at all levels, and banks and Wall St. more broadly are just two examples of failures of epic proportions. As Richard Feynman would say, these people are all working with the same toolset because they never had to invent their own.

The technology business appears to be an exception in that we have a lot of “bright people” but consistently disrupt the status quo, the large company mindset, out of necessity because the status quo devolves to “the same toolset”. I suppose it makes sense to use this as an example of Schumpeter’s creative destruction in action and it’s precisely why other parts of our economy are failing with no real recovery in sight… we have intervened to sustain entities that should have been broken down into economic compost to fuel a new generation of companies and ideas.

CrowdCast Brings Game Mechanics to the Enterprise

Last week I caught up with the folks at CrowdCast, a provider of Q&A marketplaces for enterprises. CrowdCast secured a $6m follow financing round led by Menlo Ventures in addition to a $3m series A round this time last year.

CrowdCast is interesting for me because it intersects a number of topics I have covered for many years now, the first being the evolution of marketplaces inside of an enterprise and secondly the adaptation of game mechanics like badging, achievement, and competition for business systems which benefit from the adoption of crowdsourcing principles.

Where CrowdCast appears to have departed from previous efforts to implement crowdsourcing inside the enterprise is that rather than being an ideas-like site where anything can get posted and then promoted/demoted by community members, they are building games that are designed to reveal outcomes. In other words, they form every interaction around a tightly focused question that requires an answer and through virtual currency create competition in the form of betting that narrows the result to what is considered the most probable outcome, which is then measured according to what actually occurs over time.

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I was a little skeptical about the notion of “social BI” but after talking with the team and seeing a demonstration of the product I am converted. My enthusiasm is tempered by the knowledge that large hurdles, cultural and technical, obstruct CrowdCast from massive adoption in the absence of a lot of missionary selling but I am enthusiastic nonetheless.

The big problem that I see is that enterprises talk about alternative models for acquiring knowledge but actually have a pretty poor track record at implementing them. The introduction of game mechanics no doubt is a big boost to onboarding and making productive participants in this effort but the use cases are still narrow… strategic planning, marketing, and executive level applications.

The last ideological concern I have is that the entire system has a degree of anonymity to encourage negative bets (short sellers which in most markets trend to honesty with regard to a particular valuation position, at least more so than the longs). The problem I have with this approach is that identity and recognition are powerful motivators for people operating within an enterprise context and while anonymity would encourage negative bets they also deprive the participants of the recognition that spurs continued participation. This is either a big concern or a small one, I don’t know but it is a concern nonetheless.

CrowdCast is much more interesting than I originally anticipated and I congratulate the team on building a very unique application and for raising a good amount of capital to grow the company with.

Just What is Social CRM?

Is social CRM a product category or a collection of strategies that social media consultants and analysts are pushing? That is the question I have been spending much time considering as of late.

Clearly there are product components, most notably the customer community pieces that vendors like Get Satisfaction and UserVoice are offering (notice the Feedback widget to the left, I started my own VC community on Get Satisfaction!). There are many analytics and monitoring tools, on the latter there are at last count over 100 products in the social media monitoring business. The core customer community offerings take over where forums and wikis stop, and in the case of forums I can’t imagine a traditional product category more primed to be wiped out than this one.

The analytics pieces are much more complicated because they attempt to analyze social graphs to derive authority and reputation, with the ultimate goal of identifying fans, friends and followers who are acting as unpaid promoters of your products and services. Among many outcomes for analytics, perhaps no measure is more important than raising your company’s net promoter score (NPS), which is in simplistic terms a measure of the potential word of mouth advantage you enjoy in the marketplace. Lithium says they have deep analytics capabilities but whenever I read their stuff I get a headache, it’s pretty big brain stuff and not entirely clear what it does for me beyond discerning authority in my brand’s social graph.

Ideation is an interesting set of features that are often embedded into social CRM products, in a nutshell these are idea submission and voting components that crowdsource product ideas. I’m on the fence about the value of ideation as a product category but only because it’s a seems like a bandaid for a bigger problem that companies often have which is that they do not understand their customers well, however it could equally be argued that the entire point of social CRM is to better understand your customers. A number of companies are offering ideation, from IdeaScale to Salesforce Ideas.

Consumer product and services companies are concerned about review and rating sites but my intuition tells me that the market has compartmentalized review sites. What I mean by that is that there are two aspects to review sites that cause us pause, the first being the integrity of the site in light of the well publicized controversies around Yelp but maybe that’s an inside baseball thing that the broader market isn’t concerned with. The second issue is a big one and it’s structural, which is how do I know the people who are reviewing products and services care about the same things that I care about… in other words are they like me?

The issue of affinity, which is the ability of a review site to group me with other people who are like me and offer reviews tailored to their likes and dislikes is a very interesting one to consider. I organize the concepts of identity, reputation, and affinity like this:

– Identity are my attributes.

– Reputation is what other people think about me (my authority).

– Affinity is my relationship to other people who are like me and our collective relationship to other groups.

As it relates to social CRM strategies that any company is employing to target messaging and promotion to their marketplace these definitions are incredibly important. Companies have employed identity based targeting for decades, it’s called demographics and to some degree pyschographics, and while it’s tempting to say that these are affinity group techniques the fact is that they are not because in social CRM the notion of affinity and reputation are intertwined. Forward thinking companies have moved beyond demographics and are attempting, with the help of social CRM tools, to accommodate reputation in their interaction strategies but the whole notion of affinity is a wide open opportunity.

As it relates to review sites I’m not sure that these remain as relevant and valuable in the years ahead as we have assumed them to be in recent years. However, they are not going anywhere and some interesting products like Huddler are offering to integrate them along with wikis and other user generated content forms.

Q&A sites are hot, I’m particularly impressed with Quora and see much potential for this as a valuable augmentation to social CRM suites. Fixya is another site that is Q&A organized for the purpose of technical support, and it’s probably only a matter of time before offerings like this are integrated into service and support ticketing applications like Zendesk and Parature. The service and support vertical is about $3b a year just in the U.S. so integration and extension of traditional CRM with these newer offerings as well as outright replacement in some cases is an attractive market scenario.

I have touched on a number of related market segments and companies however by no means have I provided a comprehensive look at the market, for that I would suggest you get Altimeter’s Social CRM report which does a good job of laying out the market.

Lastly, one thing that is very clear to me is that social CRM is an extension of two very large markets, the enterprise collaboration and content market and the CRM market. Successful social CRM products and services will co-exist with these markets and not attempt to displace them, although for some companies it may make more sense to eschew the traditional CRM suite offerings for best of breed with light integration.

Being Open and Authentic With Your Customers

I buy kitchen stuff from an online store on Amazon that, I think, is run by a woman out of her home. Whenever I get the stuff I order I curse the manner in which it is packed because I have to cut through layers of tape and cut up pieces of Tyvek packaging.

Today I had one of those episodes upon retrieving from the mailbox the latest thing I ordered and I happened to read the paper she inserts with every order, among other things it says:

“I realize I have some radical packaging methods and I love to recycle when I can. I work hard to keep shipping costs down. I pack to protect the items inside so that it gets to you undamaged.”

I actually felt kind of bad about getting frustrated with this, it made me feel like I was being petulant but through that I realized an enormous customer service lesson that is best described as authenticity. Through the simple act of acknowledging the packaging quirk and being open as to why it is done this way this merchant instantly deflated the only customer service issue that I would have raised following the buying experience I had.

More importantly, I now see the thing that previously frustrated me as an asset that I admire. We humans certainly are complex creatures…

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Techdirt Saves* Journalism!

Techdirt is hosting an event focused on new models for journalism. The event will be held on June 16th in Mountain View is like the Greenhouse event they host, a few presentations to kick things off and then everyone breaks out into workshops organized around specific themes to debate various user generated ideas.

I am going, it’s a great event and Mike always brings together really interesting people.