Archive for the ‘startups’ tag
In my brief time thus far as a VC, I’ve seen entrepreneurs repeatedly screw up one key metric again and again: customer acquisition cost (CAC).
Along with lifetime value (LTV), CAC is one of the most important metrics consumer-facing businesses need to watch. But so many of them get it wrong and do so in a very dangerous way.
The entrepreneurs who get it wrong calculate CAC as follows:
CAC = Advertising Spend / Total New Customers
CAC = Advertising Spend / Total New Customers Attributable to Paid Advertising
Counting all your customers in your CAC metric – rather than just those acquired through paid marketing – is playing with fire. As an entrepreneur, I learned that the worst possible result of a test is a false positive: a result that incorrectly makes a hypothesis look correct when it actually doesn’t work. False positives will waste time, money and precious focus.
Calculating your CAC as a “blend” of all customers is just asking to be on the receiving end of a false positive. Your paid campaigns could very well be unprofitable, but you are making them appear profitable by blending in customers who found your product through organic channels – referral, word-of-mouth, organic search, or social, to name a few.
This is a huge problem since traffic from those organic channels doesn’t scale linearly with traffic from paid channels as a paid advertising budget increases. If you are spending (say) $1,000 on paid marketing and getting 20 new customers per day, it does not follow that your CAC is $50. 5 of those customers may be from paid marketing campaigns while the other 15 are from organic sources, so your CAC is actually $200. When you scale your paid budget to $2,000, you won’t be getting 40 customers per day – only 25 at best. And that’s assuming that CAC stays constant as your budget increases, which is a very optimistic assumption.
Using “blended CAC” in a presentation is a very quick way to get me to pass on an investment. When I hear a pitch, I care less about whether or not a company’s initial paid marketing tests were profitable or not. There are numerous factors that can drive campaign profitability, and there are a lot of ways to acquire customers these days. Rather, I care about how an entrepreneur uses data and thinks about key metrics. Showing a blended CAC means an entrepreneur is loose with the numbers at best and deceptive at worst. And as a company grows and the numbers get bigger, either of those are very bad things.
One of my favorite essays of all time is accomplished game designer Greg Costikyan’s account of attending the pay-to-pitch New England Venture Summit as a first-time entrepreneur raising money. Coming from the self-described subculture of “science fiction fandom”, Greg illustrates the conference as “[a] variation on that basic [subculture] motif”.
His opening observation on subcultures is worth repeating. Like Greg, I grew up as a part of a subculture. It happened to be online gaming, although the particular choice doesn’t really matter; subcultures are ubiquitous online and off. Now I’m part of a different subculture — scalable startups*. And it’s just as much of a subculture as anything else.
This isn’t just a semantic point. Lots of people casually refer to this community of entrepreneurs as the startup “industry”. But it isn’t an industry; it’s a subculture. Like any subculture, it has its own unique vocabulary, memes, and shared historical narratives and ideologies. It has its own heroes and villains, values and virtues. Healthcare, education and telecom are industries — within them they share trends and players, but from a social perspective are diverse and decentralized.
From the perspective of someone seeking a job at a startup, this distinction means that admission is granted to the startup subculture through a different means than if it were an industry. This is especially relevant to anyone who is trying to land a job at a young tech company but lacks programming or design skills. Submitting a resume will get you next to nowhere. Spending time meeting people and reading up on topics startups care about (which can easily be found on Hacker News) is a more efficient way in the door.
This doesn’t mean you need to be part of the scene. It just means you have to use different means than typical; means that may seem more analogous to a journalist wiggling into the long-haul trucker subculture than a recent college grad trying to get a job. So when someone approaches me looking for advice on getting a job at a startup, I tell them to think of the problem less like getting hired by Goldman or McKinsey and more like getting established as a writer or artist. After all, one could say that what many entrepreneurs are doing is a new kind of art.
* I specifically refer to the subculture as “scalable” startups to differentiate from, say, the affiliate marketing and lead gen world (which is a fascinating subculture in and of itself). But it’s a total different feel, with its own vocabulary and values.
[T]here are known knowns; there are things we know we know.
We also know there are known unknowns;
that is to say we know there are some things we do not know.
But there are also unknown unknowns – the ones we don’t know we don’t know.
– Donald Rumsfeld
I first heard the word “de-risked” from a Silicon Valley VC as he passed on the GoCrossCampus deal a few years ago. I’ve heard it a number of times since, always in the same early-stage investment context. It’s an odd word. It has always reminded me of the Rumsfeld quote, at once mixing political doublespeak with a certain higher-level truth and meaning.
And in a way, Rumsfeld and the venture capitalists are saying the same thing, although I think Rumsfeld said it more meaningfully. At the simplest level, de-risking has two components:
– Converting the unknown to the known
– Converting unknown unknowns to known unknowns
That is, de-risking is about taking the unknowns of a business and turning them into knowns. But it’s also about discovering what we don’t know; it’s about cataloguing the unknowns and scheduling them for future exploration.
I think this has some significant implications for the entrepreneur. I’ve found that much of the work an entrepreneur should do prior to seed funding is not simply “proving things out” but rather exploring the key unknowns that stand in the way between the entrepreneur and massive success. Said another way, I see entrepreneurs doing too much work discovering and not enough work figuring out what they should be discovering.
Doing this will enable a healthy incrementalism and structure, bringing the spirit of a scientific experiment to an otherwise qualitative exercise in guesswork. As unknowns are converted to knowns in a deliberate fashion, the business is “de-risked” and the door is opened to more significant relationships with partners and investors. Without this discipline, the entrepreneur risks wasting time exploring things that aren’t all that meaningful – or worse, will lead to the wrong conclusion about where the business should go.
And from a purely practical perspective, an entrepreneur may be surprised at how well a list of the unknowns in their business – framed as a robust list of the things that must be proven out with the money they are raising – will go over with any investor.
Jump Ramp Games founders Alex Betancur and Tony Vartanian are teaching a class on Selling to Middle America at General Assembly next week. I don’t typically blog about GA classes, but I think this is one that everyone should take. Not only are Alex and Tony great guys, but they have a rare understanding of how to craft products and marketing campaigns to appeal to Middle America. At one point, this class’s working title was simply “Schlock”, which should give you a good idea of what it’s about.
We’re teaching this for a few reasons. First, selling to Normals isn’t easy. Lots of startup folks think that appealing to Middle America is intuitive, which is totally untrue for most of us. Rather, the people who do get it typically come out of the offline direct response world — think bulk mail and magazine subscriptions. Traditionally, these have been the things that have gotten Middle America to open its wallets. But as online products get better and faster, it remains an open question to see which startups can get Middle America to buy in.
Some examples of companies that have done this well on the web include Zynga and PCH, both of which make compelling use of games to engage. And let’s not forget NYC’s least well-known successful consumer web company, PlasmaNet (where are you, Adrienne Jeffries and Alyson Shontell?)
Second, the payoffs from building a rapport with Middle America are overwhelmingly larger than serving the tech niche. Not only is the market much bigger, but it is often more willing to pull out its wallet while asking fewer questions and demanding less. It’s shocking what can work on the web with normal Americans — I was certainly blown away when I first saw the success of a coreg path from the publisher’s side.
And it’s important to note that Middle America is a diverse place with lots of different markets and psychographics. It’s easy to lump all of “Middle America” into one group — which I’ve been doing for most of this post — but even the most jaded hipster wouldn’t confuse a Hot Topic with a TJ Maxx. Understanding psychographic-specific marketing and what tactics work with what groups are critical parts of growing a mainstream business.
As a final word of warning, don’t confuse poor aesthetics with poor design. Lots of sites — such as PlasmaNet’s FreeLotto — are ugly and challenging to navigate. But they don’t look like that for want of trained designers — rather, they are compulsively driven by analytics and build what works. And in many cases, schlocky-looking stuff plays with Middle America in a way that sleek, intuitive design doesn’t.
I love seeing people join startups, and it usually makes a lot of sense for everyone. Young tech companies tend to have great cultures and incredibly smart people from which to learn. And lots of startups are very generous with salaries and options — in many cases, enough that an employee can maintain a close-to-market salary and keep the lottery ticket too. But there’s one situation in which it doesn’t make sense to join an established startup: you actually want to start your own company.
As I’ve written in the past, many people who go into startups aren’t necessarily looking for the salary, lottery ticket and cool culture, as much as they may publicly say so. They’re looking to gain independence, establish themselves as leaders and self-actualize. They’re looking for the things you get from founding your own company and believe that joining a startup as an employee will be the quickest way there. But that’s a poor strategy, especially for non-developers.
That tactic mistakenly applies a corporate model of advancement — in which one starts in low-level jobs and wiggles into a management position over the years — to entrepreneurship. You aren’t going to get promoted to founder by spending a lot of time working for founders. You become a founder by starting your own company. Yet over the past year I’ve seen a number of people fall into “the non-founder trap”, which goes something like this:
1) You decide you want to get into a startup. You don’t feel that you have enough [intelligence/confidence/experience/money/ideas] to start your own company, so you search for a job within an established startup.
2) After several months of searching, you take a job in the business development / marketing department of a 10-person company. While your last job paid you $100,000 per year, you accept $60,000 and 0.3% in options.
3) While you occasionally advise on high-level decisions, 95% of your job is emailing potential clients and taking sales meetings — the same stuff you were doing at your last job. The fundraising, investor relations, and personnel management is done by the CEO.
4) After a year or two you would like to leave, but unfortunately your $60K per year salary hasn’t let you save up enough to quit your job and start something of your own. You also don’t feel that you have a good sense of how to raise money or manage the earliest days of a startup. So you begin searching for another job at a small company and return to step (1).
There are plenty of counter-examples. I know a number of people who fell in love with startup life and founded their own companies after working as an employee of a startup. But it’s not a great path for people who really want to be founders, who will struggle to be happy at their jobs and fail to save enough to go out and build their own business. If you want to be a founder, go out and start something. The inspiration, confidence and experience will come.
When someone at a tech event pitches me on a nonprofit, I have a tendency to tune out. It’s not because I’m a terrible person. It’s because small nonprofits often combine the professionalism and scale of early-stage startups with the stakeholder motivation and agility of Fortune 500 companies.
The nonprofit model has its place. The structure works for charities, for instance, where the entity doesn’t need to do much beyond raising and distributing money. But it’s a poor fit for entrepreneurs who are trying to scalably effect social change by building a socially-motivated enterprise.
It shouldn’t be this way — after all, most founders who structure their companies as 501(c)(3) nonprofits are simply trying to change the way something works for the better. Usually they have backgrounds in large corporations or academia rather than startups. Thus, they don’t necessarily think about economic incentive — one of the most critical aspects of starting a successful company. The 501(c)(3) model removes economic incentives by eliminating stock and setting market-driven salary caps for employees and board members, preventing anyone associated with the organization from earning meaningful returns.
Sure, people are motivated by things other than money — such as the potential to do good in the world. But successful businesses are able to quantify success, and most measures of social good are difficult to quantify. The social enterprises I have seen accomplish the most are able to align their profitability with social good, which gives them a far more tangible target. They can also give their employees financial incentives for hitting targets that are aligned with the organization’s social goals, a double whammy of motivation to get things done.
Combine all this, and the nonprofit model makes it difficult for companies to recruit top-tier talent. Unlike top-quartile workers ten years ago, employees today understand equity, options and other incentives. They know the value of their time. An all-star developer might volunteer on the weekends for a nonprofit but is unlikely to choose it as a full-time job over a position at a startup or big company. The inability to score top talent is a positive feedback cycle, as a new potential hire is unlikely to want to join an organization filled with mediocre, unmotivated people.
Ultimately, companies are measured by the social good they accomplish, not their tax structure. It makes no sense for a social enterprise to let the latter limit the former.
Say what you want to about law firms, but some of them have nailed a great branding hack: they have taken a stodgy service provider offering and “startupized” it by customizing and branding their work to appeal to founders. Of course, this isn’t just a branding task, there’s often real substance behind it — a solid startup-savvy lawyer can be one of the most critical partnership decisions a CEO makes. But the mere fact that so many first-time founders understand the value of a great law firm is pretty remarkable. 83(b) elections, for instance, are now common knowledge in the startup community, and it doesn’t take most CEOs more than five minutes to track down some publicly-released template seed funding documents.
These firms aren’t simply generous — cultivating a client pool of top seed-stage startups can be a huge win down the road for a service provider when those companies get bigger and pay bigger fees. But as far as I can tell, the path that startup-friendly law firms blazed hasn’t been followed by other service providers, even ones with a similar relationship to entrepreneurs. Who is the Wilson Sonsini or Gunderson of the accounting world, for instance? There isn’t one, but funded startups still pay for outside tax and bookkeeping work. I’ve spoken with several VCs who believe that the lack of startup-savvy accounting and CFO expertise is a talent crisis only exceeded by the deficit of hackers.
This is a branding problem that certain law firms have solved and other service providers haven’t. Because some firms have established thought leadership, savvy founders –even first-time founders — know what law firm they want, and they find an intro to that firm. The discovery process for (say) accountants is totally different, as there aren’t any branded, aspirational accounting firms that appeal to founders. Rather, many founders simply use a friend of a friend or family member to do their tax and accounting work or get a poorly-researched referral from another entrepreneur. This is a huge missed opportunity for everyone, especially the service providers.
Accounting firms aren’t the only ones missing the boat. Here are a few others, although I’m sure there are more:
PEOs and Payroll Providers: I’ve never met a founder who has enjoyed working with a PEO or payroll provider. Dealing with payroll, workers’ comp, insurance, taxes, health coverage and similar headaches is a huge pain, and the PEOs and payroll providers I’ve seen have punted on every opportunity to make it easier. Rather than crafting a unique value prop for startups and charging appropriately, these firms make the mistake of treating startups as “small versions of large companies”, assume that every startup has a dozen departments, charge too little and deliver way too little.
Wealth Management: I’m writing in more detail on this topic in this week’s letter.ly. But in brief, I think wealth management organizations — despite their traditional sales-heavy tactics — are missing a huge opportunity by not developing a savvier brand that can appeal to founders. Of all the wealth management groups, I figure at least one of them would acknowledge the lessons of the Bay Area finance revolution and focus their specialization on risk mitigation and alternative asset classes like P2P lending and real estate.
Office Hardware: The traditional office copier leasing process is miserable for entrepreneurs — which is a shame, because there are a lot of benefits to leasing a machine rather than maintaining your own. Have an office with a mix of Macs and PCs or fewer than two years of tax returns? Good luck.
All of these industries are ripe to be disrupted by savvy service providers that are willing to craft brands and offerings that appeal directly to founders. It’s easier than ever to start a company, and there are far more startups and founders today than there ever have been. So who will tackle the new market?
I had the opportunity to spend Thanksgiving week in Costa Rica, which was a welcome change in scenery from Manhattan. I’m not much for hanging out at the beach, so I found some time to talk to a few people involved in Costa Rican real estate and finance while I was traveling around the country. I was particularly curious about the startup community, which seemed to be totally absent throughout the country.
The difficulty I heard from everyone in Costa Rica was the same: while the country is one of the world’s oldest democracies and most stable Latin American nations, its legal system is frustratingly unfair and unpredictable. Property laws are Byzantine, and squatters have powerful — albeit vague — rights. Costa Rican citizens are explicitly favored in all legal disputes. Tax law is complicated and seems to be made up as you go along. Despite Costa Rica being the most developed country in Latin America, the uncertainty injected into the system by needless legal complications has made technology innovation extremely difficult.
Reports of the United States’ death as the startup capital of the world are greatly exaggerated. Our embarrassing lack of startup visas, bureaucratic burdens and high cost of labor are small inconveniences in comparison to the quality of the States’s legal system, which is largely fair and — most importantly — consistent. In the United States, I have a pretty good idea of what will happen in almost any legal situation. If my company goes bankrupt, there are centuries of precedent governing what creditors can and cannot do. If I want to sue someone, I know the costs and risks. Insurance is available for everything imaginable — mostly because our legal system is so sound.
Consistency is the most underappreciated driver of success in a product or service. This isn’t just about legal structures. Great brands are built through the delivery of consistent and predictable experiences as much as PR, pricing and growth strategy. As a consumer, Apple, Starbucks, Wal-Mart, McDonald’s and dozens of other successful brands will each give me exactly what I’m expecting to get from them. I simply don’t have to worry about the risk of getting something different or unexpected. Humans are naturally risk-averse creatures, and we’d much rather take something guaranteed than something that might be 25% better or 25% worse.
By removing the uncertainty around business law, the state of Delaware has prospered, generating over $750 million in revenue in 2009 from corporate services alone. The majority of entrepreneurs I know send Delaware a sizable check every year for doing nothing other than having less uncertainty around corporate law than other states — and anywhere else in the world. If this isn’t an example of a brilliant hack, I’m not sure what is. For doing something without any fundamental cost — providing a consistent legal framework — Delaware has created a massively successful business.
Ironically, having a stable, un-disruptable legal system around our entrepreneurs gives them the power to disrupt industries and aging business models. Until other countries develop the kind of legal infrastructure that will give innovators the certainty to know that their creations and profits are protected from corrupt officials, greedy politicians, populists and nativists, the United States will continue to produce and host the vast majority of innovative, billion-dollar companies and entrepreneurs.
I hear a lot of business ideas. The uninitiated may think that there’s a great diversity in thought here, and I’m constantly being exposed to new concepts. To some extent, this is true — I meet more smart people than I’ve ever met before, for instance. But I’m also exposed to a lot of the same business concepts over and over again.
Some — like group buying or fashion e-com — are simply trendy, and winners will emerge.
But some ideas have been brought to me for years, repeatedly, as new entrepreneurs encounter the same problems and come up with similar solutions. Yet none have succeeded. Those industries are graveyards, where many have entered and none have come out alive — yet.
This doesn’t mean these businesses can’t work. How many people stumbled around the idea of building a social network before Facebook blew it out of the park? But I thought I’d share a few examples of “graveyard” businesses I’ve encountered regularly. I’m sure there are more, and I’d love to see some in the comments.
Social/Management Tools for Conference Attendees. “Idea guys” love conferences, and conferences love idea guys. In my completely unscientific experience, one thing most idea guys have in common is a huge slate of conferences they travel around attending. This is a logistical challenge, but it is fairly unique to the type of person who goes to five or more conferences per year. A fairly small market that tends to attract novice entrepreneurs.
A Portal for College Students. Like the previous concept, this one meets the need of a lot of potential “idea” entrepreneurs — in this case, socially active college students — but few others. Growing a product college-by-college is extremely problematic due to the dramatic differences between colleges and the relatively small market in each college, problems I came to know well at GoCrossCampus. CollegeOnly probably has a better model, which can’t really be described as a “portal” as much as a network or set of tools.
Cash Tournaments on Console Games. Surprisingly few people realize that chance games (such as the games played in casinos) and skill games (such as pretty much everything else) are covered by a totally different set of rules, and it is completely legal to let users bet on their performance in skill-based contests. This seems like a gold mine to many entrepreneurs. Unfortunately, this business is fraught with non-legal issues. Skill balancing is a near-impossible challenge, and it is critical for gaining new players — if a user’s first experience with your product is being badly beaten at Madden and losing $10, you’ve probably lost that user forever.
I do like what some companies here are doing, especially Playhem. Would love to see someone get this right.
Honest Hetero “Hookup” Tools: Of all the businesses on this list, I have the least hope for these. Honest heterosexual hookup apps suffer from all the problems of a double-sided marketplace — one side is a lot easier to convince to join than others. If you make the app “honest” — that is, you report an accurate assessment of the market’s characteristics — you are unlikely to succeed. Here’s a rule of thumb: If you see a man on a hookup service, he’s real. If you see a woman, she’s fake. “Hookup” apps that make money follow the (dishonest) FriendFinder model — get the men to pay, fudge the women.
Anything in the Music Industry: A bit of hyperbole here, but not much.
I’ve been stewing over this post for a while. It gets a little bit closer to being written every time I meet with an “idea guy” who is looking to find a hacker to build his or her (but typically his) dream site. Interestingly, a lot of these guys spend a decent amount of their spare time at an analogous task: picking up women.
I’ve always wondered why they don’t see the natural parallels. For some reason, the principles that apply to meeting women are a lot easier for people to intuitively grasp than the same principles applied to meeting developers. Unfortunately, most of these guys happen to live in NYC, where there are way more available women than available technical cofounders. But the same ideas apply:
Go into their world. If you’re looking for single women, you probably need to venture outside of sports bars. Go to a more female-friendly club or volunteer for a cause. Go anywhere single women congregate. Similarly, I meet way too many “business guys” who only hang out with people like themselves — other business guys — and stick around events and meetups that are dominated by folks who think pointers are the handheld lasers you use to give Powerpoint presentations. If you want to meet the technical co-founder of your dreams, you need to find the places they hang out — technology-specific meetups and user groups, Hackers and Founders, et cetera.
Understand their motivations. Or alternatively, “Don’t assume their motivations are the same as yours.” In the dating scene, this is obvious — not everyone wants the same thing from the evening’s encounter. And as many of us know, variations in motivation and interests can lead to some pretty awkward situations. Similarly, developers often have very different motivations than non-technical entrepreneurs. First of all, many (most) developers aren’t entrepreneurs. Given that entrepreneurship can be a bizarre and irrational pathology, this can make for a pretty big delta in motivations, perspectives and interests. Money, for instance, may or may not be a big motivator to an engineer — in fact, I’d say a plurality of engineers I’ve met would say that making a lot of money would be “nice, but definitely not necessary.”
This is a generalization, and above everything it’s important to understand the motivations and interests of the individuals you’re talking to, not the generalized category “developer”.
Show your value. Unemployed, balding 40-somethings have a much harder time picking up women than rich, balding 40-somethings. Truly smart, well-connected business co-founders aren’t easy to find. Be that person and demonstrate it early and often.
Speak their language. The number of “idea guys” who don’t even attempt to understand the basics of web development is hugely frustrating, both to me and most startup developers. Even if you can’t code, take some time and learn the basics. But don’t take learning the basics to mean that you actually know anything about making high-level development decisions — it just shows that you care. And like women in bars, technical co-founders appreciate it when you care.
Don’t try to fuck on the first date. Pretty self-explanatory. Get to know someone first, then seek a deeper relationship.
We need more hackers building startups and fewer writing black boxes for hedge funds, so I’m being honest when I say I hope more non-technical folks can use the skills they have to recruit talented developers into the startup world.
Most of the truly miserable people you meet in life aren’t stupid or unambitious, traits we’ve been taught to associate with an unhappy life. Rather, the unhappiest people I know are also some of the smartest and hardest-working. But they’re also martyrs, a dangerous and under-appreciated workplace pathology.
Approximately every tenth highly intelligent person I meet is a martyr. Martyrs have an addiction to making themselves miserable for the sake of others. It’s not necessary for this misery to be for anyone’s benefit — it simply needs to be understood by the martyr that they are performing a sacrifice at the feet of another person or group.
Paul Graham’s How to Lose Time and Money makes a great corollary point — specifically, that driven people rarely waste time by sitting on the couch watching TV, but by doing useless work. I’d like to take that a step further. A number of smart people are Martyrs, who draw their willpower from Sisyphean quests, enjoying difficult and painful situations for the sake of the pain endured. Their equivalent of praise is the feeling of deep guilt they can inspire in others.
Martyrdom is chronic and can impact someone’s strategic decisions. I’ve seen martyrs join organizations doomed to fail simply to have a steady stream of martyr-ready situations. Playing the martyr role is addictive, and situations in which a martryr can work extreme hours, take the blame for far-reaching problems, and prostrate themselves at the feet of bosses are their crack cocaine.
Martyrs paralyze organizations. I’ve written about the huge influence guilt has on communication, but it deserves restating. The guilt that martyrs inspire among their peers and superiors destroy organizational structure and productivity. When a colleague is going to fall on any sword within eyesight, there’s a natural disincentive within a team to hide the swords — that is, to cover up the issues and problems that arise in any organization. Martyrs inspire guilt, and guilt is a terrible emotion to inspire in a group. Guilt saps enthusiasm, sweeps problems under the rug and eliminates any willingness to take risks.
Everyone avoids the dull, the lazy and the untrustworthy. By their very definition, martyrs are none of these things — yet they should be avoided to the same degree. Martyrdom is at best saddening and at worst contagious and destructive.
We are in the middle of one of the largest and fastest macro shifts in world economic history — the development of a social capital infrastructure analogous to the financial infrastructure built over the past five hundred years. Led by the growth of social networks, the value we are building in our personal relationships is becoming more and more comparable to “true” currency. In fact, social capital is coming closer to fully adopting the three core characteristics of money:
Medium of Exchange: It is far easier to reach all of my friends today than it was ten or even five years ago. More importantly, this communication has clear, quantifiable value that I can exchange for other goods. This has never been the case without insane transaction cost in the past.
Store of Value: I can now much more efficiently build, store and display my social capital. Twitter followers do not deteriorate as quickly in value without maintenance as real-life friends.
Unit of Account: The units of social capital have become far more standardized and concrete. Ten years ago it was meaningless to say you have “300 friends”. Today, the Friend (or the LinkedIn connection or the Twitter follower) is a far more meaningful unit of account.
I had the pleasure of joining Emily Hickey and Michael Yavonditte of Hashable for a demo of their product last week. In brief, Hashable turns the transactions of the social capital economy — introductions, breakfasts, lunches, coffees, beers, et cetera — into a game. I get points when I make an introduction or log a meeting in their system, for instance.
Given its check-in and gaming features, It’s tempting to refer to Hashable as “Foursquare for people”. But I think that’s missing the bigger opportunity — a Mint.com for social capital. Social capital isn’t a game any more than my bank account is a game. Sure, it has some game-like elements — it goes up and down in accordance with how well I “play” the game of life — but ultimately it has its most significant meaning outside of the context of any game framework we put around it. And that is where the real world-changing products will be made.
The next generation of successful social products will acknowledge that our social capital is a currency. They will provide tools to enhance our social capital’s functionality as a store of value, a medium of exchange and a unit of account. They will replicate the deep feature set at our hands to deal with money — banking, tracking, exchanging, investing, et cetera — for our connections and relationships. Over the past five years, social networks and the decreasing cost of bandwidth and storage have lowered the transaction costs of social capital exchanges by orders of magnitude. Now, the race is on to provide the best tools and infrastructure around this new currency.
Putting everything in the context of a game is a good way to get quick user traction among a competitive tech community. But social capital isn’t a game, and the biggest companies in the space five years from now will have grown by providing fundamentally useful functionality that helps everyone earn, save, exchange and optimize social capital.
Special thanks to Sam Lessin for helping shape my thoughts on this stuff. If you don’t subscribe to his letter.ly, you are missing some of the most thought-provoking writing in tech today.
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