@andrewchen

Do you live outside of Silicon Valley? Watch this video
For all the startups and entrepreneurs outside of Silicon Valley, I want to direct you to this incredible summary by Naval Ravikant of AngelList and VentureHacks on the anatomy of a fundable startup.

This video is a much more comprehensive and detailed version of what I often talk to non-Valley entrepreneurs and startups about. It’s part of the “grooming” process that startups out here get to become fundable and to focus on the right things to get there. People spend a surprising amount of time on things that will contribute little or no value to getting them to a seed round, and this talk is the best I’ve seen in terms of presenting the issues in its entirety.

Naval broke down the 5 main qualities of an “exceptional startup,” in the following order:

1. Traction
2. Team
3. Product
4. Social Proof
5. Pitch/Presentation

And while all these qualities are important, Naval explained, the most important thing is to understand that:

“Investors are trying to find the exceptional outcomes, so they are looking for something exceptional about the company. Instead of trying to do everything well (traction, team, product, social proof, pitch, etc), do one thing exceptional. As a startup you have to be exceptional in at least one regard.”

(via Founder Institute)

Anyway, please watch it all the way through and enjoy!

7th Founder Showcase – Naval Ravikant Keynote from Founder Showcase on Vimeo.

Does anyone care about your new product?
A question every entrepreneur asks is, if I build it will they come?

You can have a cool idea for a new product, but how do you know if anyone cares about it? And for a consumer product, how do you know that tens of millions of people will care about it?

One of the key points that I argue in my 2011 blogging roadmap is that tapping into a large market with pre-existing demand makes things easier. More discussion here. This means going after markets where users are already familiar with with your product category, the different options, and you build a product that is better against some competitive axis.

This post is about one way to figure out if anyone cares about your product.

Innovating on product execution vs. Creating a new product category
Some of the Valley’s best companies, like Google, Facebook, and Apple’s mobile products, entered their respective markets late in the game and effectively competed with differentiated products to win. They competed by executing great products in pre-existing categories rather than creating brand new categories. At first I resisted this point of view, since it’s more fun to paint on a blank canvas and do something that is completely new and innovative. Yet over time, I’ve come to believe that “blank canvas” ideas may be superficially innovative, they are much riskier and “first mover advantage” is wildly overrated, especially when there’s ample room to innovate in existing product categories. And for ideas in spaces with lots of competition, if you are able to get to scale and differentiate along some key dimensions, ultimately your traction lets you do all sorts of fun innovative stuff later on.

It’s easier to reinvent something to invent it.

The reference example of this is Apple, which has created amazing and differentiated products in huge pre-existing categories like computers, laptops, MP3 players, phones, etc., and only occasionally go for new product categories (like the Newton and iPad). When Apple picks an existing category, they can take something that’s OK but fragmented, and take it to an entirely new level on design- and they can do this without the risk that the market is zero.

So these days, as I meet new startups, I like to think about the new/risky stuff in their product as part of a careful and coherent strategy to tap into pre-existing markets, rather than trying to create new categories. One of the key tools that you can use here is the Google Keyword Tool.

Introducing the Google Keyword Tool
The GKT was created for advertisers looking to buy Adwords- in fact, some of the best market research tools on the internet are designed for ad buying, so that advertisers can actually understand how much inventory is available to buy. I’ll do similar writeups for Google’s Ad Planner tool, Quantcast, the Facebook ad buying UI, and others when I have time.

The GKT lets you do something very simple - Plug in some keywords, and it’ll tell you:

• How many searches are happening on those keywords
• Related keywords to what you put in

Here’s a screenshot:

You can use this for a lot of different scenarios, but my favorite use cases are to validate how mainstream a product category is, make sure you are using customer-centric wording to describe your product, and to identify nearby product positioning options.

Here’s an example of how I might use the tool to research a movies site:

1. Go to Google Keyword Tool
2. Plug in “movies” and sort by searches
3. Notice that some words, like “film” or “theater” are related, and add them to the search
4. Repeat, to collect a large collection of related keywords
5. Start scrolling through the results (again, sorted by searches)

Based on a GKT search like this, you find all sorts of interesting things, which let you both validate pre-existing demand and make sure you’re speaking the same language as your customers.

Validating pre-existing demand
First off, the # of searches is a pretty interesting. If you plug in keywords related to your business and find very low numbers, it might mean you’re using wording that mainstream users don’t understand or don’t care about. This happens commonly when a phrase is used to describe the product to other entrepreneurs and to investors, and includes abstract/strategic notions of what the product encompasses, but not what end-users are actually doing.

One practice I might suggest would be:

Steer your product towards a category with millions of pre-existing consumer searches – this shows mainstream understanding and demand for your product category

In fact, this is an easy way to define a new versus existing market that only applies to consumer internet products:

If people are searching for products in your category then you are in an existing market.

I personally find this a very nice and clear-cut way to figure out where you are is in the spectrum of new versus existing markets, and how much consumer behavior risk a product takes.

Are you using the words your customers use?
One of the best uses of the GKT is for finding the right words to describe your product. Oftentimes people like to use “X for Y” descriptions, which are convenient, and the Google Keyword Tool can help you refine that thinking.

If you plug in your high-concept pitch and you get millions of searches back, then you’re in good shape. For example, it turns out tens of millions of people are looking for “free movies,” so if you can do that legally, you’re all set. But sometimes you plug in a term and it falls flat. For example, imagine a startup that self-describes as “a marketplace for whatever” – in this case, “marketplace” is the X and the “whatever” is the Y. If you look up “marketplace” in GKT, what you’ll find that is that there are very few searches for that keyword, and there may be better options for the product positioning. Why does “marketplace” get so few searches?

My theory is that a “marketplace” is an abstract, businessy description for a startup’s strategy, whereas consumers likely only care about 1) selling stuff, or 2) buying stuff, and they are only in one mode at a time. As a result, I’d argue that as a marketplace startup might want to consider one of the following strategies for positioning their product:

• Targeting primarily one audience (buyers usually?) and have some secondary UI/flows to bring in sellers
• Picking a clearer attribute for what’s being listed, like “free” “collectible” or “upscale”
• Using colloquial terms “buy and sell” vs more abstract terms like “marketplace” or “exchange”

This product position then informs how you describe the product through all of your marketing channels. You’re probably better off buying ads or having site invites that say, “sell your useless junk online” rather than describing it as a marketplace.

Don’t build what your customers are asking for, says Henry Ford
An important reminder for this type of exercise, which is so dependent on what customers are searching for, is that what you build and how you describe it are two very different things.

There’s a famous Henry Ford quote:

If I asked my customers what they want, they simply would have said a faster horse.

This is absolutely true, and of course we’re all fortunate that Henry Ford ended up building a car. Yet at the very beginning, remember that they ended up calling cars “horseless carriages” so that the product could be anchored against something consumers already understood. Horseless carriage hints at many things – how it’s used and why it’s valuable, most importantly, and also the primary axis of differentiation. It’s horseless but still gets you from X to Y!

So maybe an addendum to the quote would be:

Build a car, not a faster horse, yet start by describing as a faster/better horse until people understand what cars are. Afterwards, build on that term.

Research potential segments of a market
Once you have a big juicy market to go after, the other interesting question is how you’re going to segment it. Basically, what is your product going to do that’s better/different than what’s already out there? Steve Blank has written a bunch of interesting content on this, including this post and this slide deck.

The Google Keyword Tool can also help with this – when you do a GKT search for a big “X” like “movies” you find all sorts of interesting modifiers to that phrase. Just glancing at the results, you see potential subcategories focused on:

• free movies
• imdb
• movie times
• movie quotes
• movie trailers

Beyond these, you’re starting to get to very few searches per month. Looking at this, if a startup had a really compelling product for one of the above scenarios, I’d certainly be really excited about them.

(One of the reasons I’m optimistic about the new YC startup Hellofax.com is knowing how many searches are online for easy and free email-to-fax services. Just search for “email” and you’ll see what I mean).

When you search for these keywords on Google.com, sometimes there’s already great products that cater specifically towards this group. For example, there are a ton of cheap airfare ticket sites. But sometimes, you find millions of users searching for something that doesn’t exist- that’s pretty awesome, and a great opportunity if you can execute a really compelling product there.

Google Keyword Tool product research checklist
If you already have a product in mind, here’s a quick list of things to think about:

• What’s your “high-concept pitch” for your product? (Often an “X for Y”)
• Are you using terminology that millions of consumers actually understand and know how to search for? Or do only other smart hackers or social media douchebags know what you’re talking about?
• Along what dimensions does your product compete with substitutes? (hopefully only 1 or 2 axes)
• Are there millions of consumers who care about that competitive axis?

And again, to repeat the observation re: the Henry Ford quote, have a vision for your product, and execute against that. Invent and build cars, but market it as a horseless carriage so that people know what they’re buying and why.

Is this too conservative?
Short answer: Yes, if followed too strictly.

Remember that the Google Keyword Tool test can validate an idea, but I’d be hard pressed to use it to invalidate an idea. Sometimes people will use things, and be passionate about it, but not search for it. Or maybe the product is mostly on mobile or Facebook and the searches are happening there, not Google. Either way, it’s a conservative tool, that’s to be sure.

I think there’s a spectrum of risk on introducing new products- the safest thing to do is to execute the hell out of a product design for a huge pre-existing product category and a competitive axis that people care about. Ideally you could validate that this market was already pre-existing and the competitive axis was an important one.

Yet most startups aren’t started this way, and instead take some risk in either picking a new category, or a market segmentation that’s driven by intuition. Ultimately I think it’s still important to try this out, when your entrepreneurial intuition says it’s the right way to go- but remember that you might have to go through a step of cleaning up the marketing and messaging around your product to slot it into something consumers understand.

Credit for inspiring this post
I have to give credit to Sean Ellis, who inspired me with a coffee conversation a few years ago to think about using search data to identify new versus existing markets. He was describing his consulting stints at Xobni versus LogMeIn as “demand creation” versus “demand harvesting” and using Google SEM as a test of which mode you’re in. Hopefully he will blog about that comparison with more nudging sometime

There’s been some excellent Groupon analysis
Since the S-1 has come out, there’s been some incredible analysis done – two of my favorites are Rakesh Agrawal’s Quora answer on “What are some notable aspects of the Groupon S-1?” and also Yipit’s analysis on the deterioration of fundamentals in Groupon’s oldest markets. I would highly encourage everyone doing anything in daily deals or the (misnamed) “social commerce” space to check those out. Additionally, please comment if there are some other great blog posts that I’m missing.

“There’s no tech! Anyone can do it!”
One of funny things that you used to hear about Groupon is how easy it is to start a clone, and how any startup could do it. A lot of people, especially developers, also say the same thing about product like Twitter, which are easy to code v1.0s for. That’s often a critique of consumer internet companies because what they do seems deceptively simple- there’s often no tech and no “barriers to entry” that a lot of the more B2B/enterprise investors like to see.

After all, let’s look at something like Groupon:

• Technology: Trivial, it’s just a mailing list and a landing page
• Market: Trivial to enter, because it’s huge and fragmented
• Sales: Trivial, you need 1 sales guy/gal initially who can sell some local deals

Seems like there ought to be tons of successful local daily deal sites right? And yet Groupon and Livingsocial control the vast majority of the market, and I have no idea who the #3 is? In fact, the most interesting competition ends up being other huge companies with big established userbases, like Yelp, Google, Facebook, Amazon, etc.

Email subscriber costs
The real reason is that there was a temporary arbitrage in buying tons of demographically targeted ad inventory that no longer exists. The Yipit blog post referenced earlier has this handy diagram:

That’s a huge increase from 2010 to 2011.

So if you think about it, this is one of the key bottlenecks to getting a Groupon clone actually started- if you want to build a list of 100,000 users, that’s actually going to cost you $3M right off the bat.

The backend is scary too
Furthermore, to even be able to monetize to break even, you start to need to contort the backend of your business to get there. This means that you have to be comfortable with things like:

• Extended time periods before your LTV catches up to your CAC (for example, 12 month breakeven on your LTV)
• Large # of deals per week at high margin
• To support the # of quality deals, a high-quality sales team

If you need 5 deals per week, every week, for 12 months to break even, then you’ll need a great sales team for that. Then you’ll need someone to optimize your ad spend, a bunch of customer support people, and all of a sudden it doesn’t look so easy.

Getting to scale, let’s say to 1M or 10M email subs, costs gobs of money that very few people in the world would be able to raise in venture capital. That’s why I imagine the most successful Groupon “clones” start in other geography where the arbitrage still looks like <$5 and not $30, or where it’s a high-end niche with some built-in distribution to get the first 10k-100k on board.

The same is true for viral products too
I wrote this post originally about Groupon, but it’s important to note that the same is true for viral marketing channels as well. As with other marketing vehicles, users get “inoculated” over time to the same approaches. Getting an “invite” was a big deal in 2003, so addressbook importers were super effective. Banner ads used to get 10% clickthrough rates, and now they’re 0.1%. Over time, marketing channels naturally become saturated and that creates a built-in defense against new entrants in the market.

Thus, even if something looks easy to build, you better do it quick otherwise you may never be able to catch up. A corollary to this is that if you discover a new marketing channel or some new viral mechanics, you’ll have a huge advantage early on since your response rates will be great.

Send me any other interesting analyses of their S-1 or others!
As all of these S-1s are coming out, I’ll try to stay on top of any interesting analyses, but feel free to email any that I might be missing. Just shoot me a note or comment on this post.

UPDATE: A post drilling down into how Groupon defines “customer” and ratios in their oldest markets (via Dru Wynings). Also, Yipit did a great followup post called “Reports of Groupon’s Death are Greatly Exaggerated“.