Redeye VC

Lifecycle Messaging

I recently blogged about the importance of conducting a cohort analysis to track user retention.   A good cohort analysis helps you understand how many customers you keep and how many you lose.  So now what?

I'm surprised how little pro-active messaging/communication most Internet companies do.  And if they do send me an email, it tends to be a generic weekly promotional email that they send to all users.  One thing that I learned at half.com is the importance of lifecycle messaging -- in which you deliver different messages to different users based on where they are in their lifecycle.  Some examples:

• The average fiction book is read within two weeks of purchase.  So if you purchased a John Grisham book for $8.75 on Half.com, chances are that you will finish it within 14 days.  We decided to implement an auto-email that was sent 17 days after purchase that said "Want your $8.75 back, click here to list your Grisham book for sale".  We found that the open (and conversion) rate of that email was amazing -- and it greatly added to our ability to "turn" the same book multiple times.
• We noticed on our cohort analysis that if a first-time buyer did not make a second-purchase within 6 weeks of their initial purchase, there was a 80%+ chance that they would not return -- but that if a user made two purchases within that period of time, there was a 70+% chance they would return again.  So we created an auto-email with a personalized, limited-time coupon that was sent after six weeks.  Again, we experienced strong open/conversion rates.
• We noticed that if a buyer left negative feedback on a transaction it had a definite impact on their repeat purchase behavior -- so we created a customized email campaign towards those users.
• Like all e-commerce sites, Half.com had many "abandonded shopping carts" -- where people would put items in the cart and not check out.  We created an auto-email campaign that would merchandise the items left in the cart -- and send it out two hours after the cart was abandoned.  A very successful campaign.

And while these are examples of lifecycle messaging by email -- you can do the same thing on the site as well.  Many sites still display the same homepage for first-time and repeat users.  The leading e-commerce sites added personalized home-pages long ago -- so they can deliver different messages to new users (education, introduction, tutorials) and to repeat users (personalized recommendations, promotions).  If you'd like to see a good example, go to eBay as an existing user -- then delete your eBay cookies from your browser and return.

Conducting a cohort analysis is just the first step towards increasing user retention and activity levels.  Once you have your cohort analysis, you then should look at ways to systematically reduce churn and increase user satisfaction - by finding the key "touchpoints" which can dramatically change the course of a user's experience.  This is not rocket science, but despite the fact that Jupiter Research data indicates that lifecycle marketing campaigns generate as much as nine times greater results, few marketers are taking advantage of this strategy to deliver the right message at the right time.   

My co-founder at Half.com, Sunny Balijapalli, has recently started a new company (Zoomin.com - which was rated the #1 photo sharing and printing service in India by PC World) that First Round Capital has funded.  Not surprisingly, one of his first priorities was to put together a lifecycle messaging program.  With his permission, I've attached a copy of his program overview here.

A small digression.  The current issue of Wired Magazine discusses the "spacing effect" for human learning -- which recognizes that if a person is reminded of a fact at certain specified intervals, they are far more likely to remember the fact later.  (See chart below from Wired).  I think the metaphor can be extended to consumer marketing as well -- if you communicate with a user during certain specific intervals, they are far more likely to return to the site later.  They key is to figure out what those intervals are -- and what "triggers" you should use to drive the communication.

How to "Ask for the Order"

I just read Fred Wilson's blog post about the need to ask for the order.  I completely agree -- if you don't ask, you don't get. 

However, I believe that there are different ways to ask for the same order.  And the way that you ask can either increase or decrease the odds of a successful outcome.  Some examples:

Before we launched Half.com, we knew that we needed to have a lot of  inventory on the site -- so we reached out to dozens of used bookstores, CD stores and video shops.  We had a team of three business development people working full-time to get these sellers to agree to list on our site.  Initially, we would call a prospective seller, explain our site/model, and if they were interested, we'd "ask for the order" and send them our standard three-page seller agreement.  Despite our best efforts, we found that small retailers were either intimidated by our agreement or didn't want to spend the money to have a lawyer review it. More than 60% of the interested sellers would drop out of the process before they signed the agreement.

We then made a slight change.  Instead of sending them a three-page legal agreement to physically sign, we added a click-wrap agreement to our site.  We then asked the sellers to register online, and during registration we simply asked the seller to agree to our terms of service by clicking a box.  Instantly, we eliminated our biggest challenge in getting sellers on board.  Because in this case, users are far more willing to agree to terms on a website than they are to sign a three-page contract.  We didn't change what we asked for -- we just changed the way we asked for it.

One of my portfolio companies recently experienced the same thing.  They were talking with a variety of prospects about a big advertising deal.  And initially my company was sending out an "Advertising Partnership Agreement" -- outlining the full terms of the relationship.  They quickly learned that all  non-standard agreements had to go to legal -- which added weeks/months to the process. 

So the company decided to try a change.  Instead of sending over a custom agreement, they sent over benign looking  "Ad Insertion Agreement" which had the exact same terms of our prior agreement.  Our marketing contact had full authority to sign an ad insertion agreement -- they do that all day long -- and now my company is able to get deals signed much faster by changing the format of our "ask".

The list continues.  When TurnTide wanted to send out a free evaluation unit of their anti-spam router, they originally had a long written agreement.  When they changed the format of their agreement to a one-page trial acceptance form, they cut weeks off their sales cycle. 

Say you work at Google and you want to get a prospective partner to sign an NDA.  You can send someone your NDA document and it goes to their lawyer.  There will probably be a bunch of back-and-forth on the terms.  That's pretty time consuming.  However, why not do it the easy way?  Just invite the guy over to lunch on Google's campus. 

Because whenever anyone gets a visitor badge at Google they are asked to sign an NDA as part of their visitor badge process.   I'm sure glad everyone brings a lawyer to help them sign-in at reception ;-)

The way you ask is just as important as asking.  If you focus on reducing friction in a transaction -- and ask for the order in the right way -- you might find that you improve both your odds of success and the time needed to get a deal done...

How smart are you?

Think you're pretty smart?  Prove it.

Tomorrow night, Playcafe.com (a First Round Capital portfolio company) will be hosting Ken Jennings.  Ken is the guy who won 74 games in a row (and over $3 million) on Jeopardy.  But on Jeopardy Ken only had to beat two other players a night.  On Monday night, Ken will be playing against the world.

Playcafe is a recent First Round Capital investment that is creating the first online game show network. Traditional game shows such as "Deal or No Deal" and "One vs. 100" are among the most popular programs on TV (nine of the top 20 shows, 200 million viewers) but they weakly implement a game's two most important traits - interactivity and socialness.  PlayCafe is creating a platform to stream in-house and user-generated game shows that let every viewer be a contestant.

While I've previously written about the importance of admitting what you don't know, tomorrow night is all about proving what you do know.  Give PlayCafe.com a try tomorrow night, this Monday, April 28th from 6:00-8:00 pm (PDT).   Who knows, you might beat Ken.

On Age...

I've been thinking a lot about age recently.  As my age catches up to my rapidly graying hair, I'm realizing that I'm no longer the youngest guy in the room...

Today, Business Week released their list of "Tech's Best Young Entrepreneurs", where they highlight eleven "of the tech industry's most promising players aged 30 and under...whose ideas and innovations are likely to make the biggest impact on technology in the coming years." 

While I have always said that my fund, First Round Capital, seeks to invest in incredible entrepreneurs, I was amazed to learn that we had funded 4 of the 11 finalists.  So, while I'm still coping with the fact that I'm too old to make any "young" list myself, I can take comfort in the fact that we had backed more than a third of the finalists.

Congratulations to:

• Garrett Camp, StumbleUpon
• Aaron Patzer, Mint.com
• Matt Sanchez, VideoEgg
• Jia Shen, RockYou

1-800-FREE-411 and Pennsylvania politics

As a Pennsylvania resident, I was really surprised by today's announcement from portfolio company, Jingle Networks.  The company, which operates the country's largest free 411 service (1-800-FREE-411), recently conducted a political poll.

Now this was not your typical poll.  Typical polls contact just 500 - 1,000 people.  Because Jingle gets calls from almost 20 million callers a month, they were quickly able to poll 24,000 likely voters in Pennsylvania.  This makes it one of the largest samples ever used in a political poll -- with an error level of less than one percent.

And the results were pretty surprising.  Among those making a choice, the results show Barack Obama leading Hillary Clinton by 57 percent vs 43 percent.  These results are strikingly different from traditional polls (for example, a recent LA Times / Bloomberg poll shows Clinton ahead in PA by 5%).

George Garrick, Jingle's CEO, comments that "a key factor contributing to error in poll predictions is the undecided voter sector. In Pennsylvania, 25 percent of voters are still saying they are "undecided" and that could easily produce a last minute turnaround from one candidate to the other since the undecided sector is larger than the differences being cited in any of the polls. If the small sample size used in a typical poll does not perfectly represent the larger population, it's possible to see a very different result in the actual vote. That's why using a significantly larger than normal sample size is interesting."

It's always neat to see new technologies used in unanticipated ways...

The UNfunded

Over the last several years, April Fool's Day has been moving online – and although we’ve seen online pranks from startups, bloggers, and large Internet companies, I’ve noticed relatively few from venture capitalists.  (Insert sarcastic comment about VC’s lack of sense of humor here).  So, I thought I’d try to join in this year. 

One of the investment themes we’ve been following this past year is the rapid growth of user-generated content.  And a creative example of user-generated content in the venture industry is TheFunded.com – a site where entrepreneurs can leave anonymous feedback about their experiences with venture capitalists.  So, I thought it would be fitting to launch TheUNFunded.com for April Fools – a site for VC’s to provide anonymous feedback on entrepreneurs.  I intentionally wrote such outlandish reviews of fake entrepreneurs, and I expected everyone to immediately realize it was a joke. 

Michael Arrington “broke the story” about TheUnFunded.com yesterday on Techcrunch, and the site quickly benefited from the Techcrunch Bump.   And while my little prank surely won’t make the 100 Top April Fools Day Hoaxes of all time, the responses provided an interesting perspective on people’s attitudes (and predispositions) towards the venture industry.  While there were several people who recognized the April Fool's Day satire, I was surprised to see that many people assumed the site was real.  And their reactions on Techcrunch and blog posts were very revealing.  Heck, even VentureBeat (which covers the venture industry professionally) fell for it.  My favorite reaction comes from a del.icio.us user who tagged the site as “Funding, VC, Douchebags”.

The fact that so many smart people actually believed that such an outlandish site could be legitimate speaks volumes about the state of the relationship between entrepreneurs and venture capitalists.  Today's New York Times has a story which notes that "...recent research suggests that the experience of being duped can stir self-reflection in a way few other experiences can..."  And while I don’t want to read too much into a silly April Fool’s Day joke, I think it does shine a little light on the level of mistrust and ignorance within the VC/entrepreneur ecosystem.  I don’t know if I am more surprised by the fact that entrepreneurs fell for the hoax – or that the site received over thirty membership requests from legitimate VCs.   (Don’t worry guys, I won’t publish your submissions – just make sure you mark up my next hot deal;-)

Just to be clear, TheUnFunded was a joke.  A parody.  No actual entrepreneurs or companies were reviewed on the site.  I genuinely like TheFunded.com – and think it provides some much needed transparency in the venture industry.  No hidden message here -- just a recognition that sometimes everyone takes themselves a little too seriously...

Now that April Fools is past, I’ll be shutting down TheUnFunded.com later this week, and giving the domain to Adeo at TheFunded to use as he sees fit.  Thanks to both Michael and Adeo for playing along… 

I Don't Know...

I don't know.

Why is it so hard for people (including both entrepreneurs and VCs) to say these three words?

This past week I had two distinctly different meetings with entrepreneurs.  They both were successful serial entrepreneurs.  Both were exceptionally smart.  Both had good ideas.

The first entrepreneur, however, thought that they were expected to know the answer to every question.  There wasn't a question I asked that he didn't have a definitive answer to.  He knew what their pricing model would be.  He knew why Google would never compete with them.  He knew what their consumer churn would be three years out (despite the fact that they hadn't launched yet).  Whenever I tried to discuss the different risks in the business, he told me why they didn't exist. 

The second entrepreneur, had a different approach.  He definitively stated answers when he had them, but when he didn't know he said so.  When asked about his pricing model, he said "well, we're considering a few different options depending on the outcome of some tests we're running..."  When asked about cost of customer acquisition, he said "well we don't know what our numbers will be...but here's our model based on other comparable companies."  When asked about risks, he identified several -- and then we discussed how to reduce/eliminate them.

I've come to believe that a key investment criteria is founder credibility.  And, I think the second entrepreneur was far more credible.  No one expects a pre-launch company to have all the answers.  (In fact, we get scared if you think you have them).  As I've previously discussed, rather than have an entrepreneur sell me on why they are 100% correct, I'd much rather understand how they are attacking the different risks facing the business.

And, by the way, the same applies for venture capitalists.  I often feel that during company pitches -- and board of directors meetings -- we're expected to have an immediate opinion.  Should we double our marketing budget?  Should I hire this person?  Will this strategy work?  While it's OK to offer opinions and thoughts, I think it is also appropriate to acknowledge uncertainty.   

Why do people feel pressure to have an answer for every answer?

I don't know...

Feed Frenzy

Back in the early 90's, I co-founded a company called Infonautics that ran an online service called Homework Helper.  It operated on Prodigy and AOL -- a few years before the development of the web browser.  We ran our own data center (the Rackspaces of the world didn't exist) and staffed our network operations team 24x7.

I remember being amazed by the network operator's job.  Given the complexity of the system, the network operator would receive dozens of emails per hour, informing him of the status of the various systems and components.  Emails with subjects like "Server load at 87%" and "Query queue at 43" or "Warning: Disk space on Server43 at 95%".  Most of those emails didn't require action, but the network operator had to review them all in order to find the important ones.  In a typical day, I'd guess the netops desk received 2,000 - 4,000 email updates.

By the time I left Infonautics in 1998, the system had evolved.  Instead of the systems reporting to a human via email, we adopted a SNMP dashboard.  This was a piece of software that automatically received (and sometimes acted on) data from the different systems (such as "free memory", "system name", "number of running processes", "default route").  And this level of reporting (and the ability to act on it) eliminated the need for a night-shift network operator.

Fast forward a decade to 2008.

Over the last six months, it seems like every web site is adopting the notion of a "News Feed".  These feeds keep me informed about the status/actions of all my friends and relationships.  I have a Facebook News Feed.  I have a Twitter Feed.  I have a LinkedIn Feed.  And even more recently, a new category of products called Feed Aggregators have arrived.  These aggregators, such as FriendFeed and SocialThing, allow you to track your feeds across multiple sites.  There has even been a spoof site that aggregates the aggregators.

I love the concept of the News Feed.  I think it is an early implementation of the Implict Web, helping to break down the data silos.  However, I'm now receiving hundreds of feed updates a day.  And with the combination of (1) more users activating feeds and (2) more web sites offering them, I think that feed volume is poised to increase exponentially.  And I can sense that, just like at Infonautics in 1994, the volume will increase to a level that will require 24 hour vigilence to remain informed. 

So, the question I've been thinking a lot about lately is:  What happens next?  How does the feed concept scale -- without forcing people to hire their own netops team to watch the feed.  And I've come to two rough conclusions:

1.  Feeds 2.0 = the feed dashboard

Just like SNMP allowed us to build an automated dashboard to monitor the status of different connected devices, I think it's logical to assume that web services will develop to allow us to monitor the status of connected people.  I'm not talking about a chronological data dump of text like the current 1.0 feed aggregators.  I think there will be applications which aggregate, interpret, and act on feeds.  This dashboard will collect the thousands of feed emails, and determine which require action, which are important, and provide the user with a level of abstraction that currently is not there.

2.  Walmart wants to be your friend

As I've been thinking about the Implict Web, I've seen a variety of technologies/standards (such as APML, Microformats, OpenId, Data Portability, OpenSocial) that are intended to help webservices talk with each other -- and break down the data silos.  However, I think we might get surprised here.

I think the real challenge with respect to the implict (or semantic) web is not technical.  Rather, it has to do with educating (and empowering) the user so they understand the privacy and control issues related to cross-application data sharing. 

And as more and more applications export events into News Feeds, I think we might find that the News Feed becomes a standard for cross-application information delivery.  Rather than trying to build semantic intent into a website or webservice, could we be better off collecting it from the news feeds?  Data is structured in a fairly standard format.  And most importantly, user permissioning and privacy controls are already built into newsfeeds.  Users understand the issue/decision involved in "Bob wants to be your friend".  Is it such a big leap for people to receive "Walmart wants to be your friend" or "Amazon wants to be your friend"?

If web sites -- rather than people -- were subscribers of my news feed, that would break down a whole bunch of silos.  Amazon already knows how to take advantage of it's onsite user activity to enrich a customer's experience.  But if it can figure out how to utilize a user's offsite activity -- wow!

And privacy is still in the consumers hand -- just like how today I control (1) what goes into my feed and (2) who receives it.  If this vision comes to fruition, I think there the big opportunity is not for the company (or companies) that collects and distributes the feeds.  But rather, the big opportunity is for the company (or companies) that can turn the data into actionable, useful information.   

I'd love to hear your thoughts on this.  (And if there are any companies that are working to create the "SNMP for feeds", please contact me!)

Know anyone?

First Round Capital is looking for a Senior Associate possessing boundless energy and astounding intelligence based in either our San Francisco or Philadelphia office.  More information here and here.

FREE = Long Tail 2.0

This month's issue of Wired Magazine contains a great cover story by Chris Anderson titled "Free! Why $0.00 Is the Future of Business" 

I think Chris does a wonderful job describing the rise of "freeconomics"  -- and is a must read for people thinking of shrinking a market.

It even contains a nice summary of my "Penny Gap" post:

From the consumer's perspective, though, there is a huge difference between cheap and free. Give a product away and it can go viral. Charge a single cent for it and you're in an entirely different business, one of clawing and scratching for every customer. The psychology of "free" is powerful indeed, as any marketer will tell you.

This difference between cheap and free is what venture capitalist Josh Kopelman calls the "penny gap." People think demand is elastic and that volume falls in a straight line as price rises, but the truth is that zero is one market and any other price is another. In many cases, that's the difference between a great market and none at all.

The huge psychological gap between "almost zero" and "zero" is why micropayments failed. It's why Google doesn't show up on your credit card. It's why modern Web companies don't charge their users anything. And it's why Yahoo gives away disk drive space. The question of infinite storage was not if but when. The winners made their stuff free first.

It appears that "FREE" will be the title of Chris Anderson's new book, due out in 2009.  I'm going to place my pre-order today.