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Sales and Marketing

#CountDown: 3 Days to #TNYSCM04 – Supply Chain & Artificial Intelligence

March 11, 2018 by Brian Laung Aoaeh

A cross-section of the audience at #TNYSCM #02, January 2018.

We’re now less than a week from The New York Supply Chain Meetup’s fourth gathering. The purpose of this post is to outline our plans for that event, and preview what we expect to do between now and June 2018 . . . We’re still in the early days of building this community, so much of this is subject to change, especially as we go through the process of recruiting sponsors.

Our Mission

To nurture and grow the world’s foremost open, global, multidisciplinary community of people devoted to building the supply chain networks of the future – starting in NYC.

Become a coporate sponsor. Email me at: brian@tnyscm.com for more details about our vision, and the team that’s working behind the scenes to build this community.

The New York Supply Chain Meetup is powered by Particle Ventures, a seed-stage fund based in NYC that invests in Supply Chain & Industrial Intelligence. Particle is built by the same team that launched KEC Ventures.

Logistical Details: #TNYSCM #04

  • Date: Thursday, March 15, 2018.
  • Time: 17:30–20:30
  • Location: SAP America, 10 Hudson Yards - 48th Floor, New York, NY. An organizer will be downstairs, at the security counter.

#TNYSCM #04 combines a Lightning Talk, a "Fire-Side" Chat, and a Showcase. It is sponsored by SAP.iO and co-hosted by The New York Supply Chain Meetup and the New York City Bots and Artificial Intelligence Meetup.

SAP.iO helps innovators inside and outside of SAP build products, find customers, and change industries.

REGISTER HERE!

Agenda

5:30 PM - 5:55 PM: Pre-event Networking
5:55 PM - 6:00 PM: Welcome Remarks (#TNYSCM, NYCBAI, SAP.iO)
6:00 PM - 6:30 PM: Lightning Talk (15 Minutes), Q&A (15 Minutes)
6:30 PM - 6:50 PM: "Fire-Side" Chat (15 Minutes), Q&A (15 Minutes)
7:00 PM - 8:00 PM: Showcase (10 Minutes, with 5 Minutes of Q&A, each)
8:00 PM - 8:30 PM: Closing Remarks, Post-event Networking

Lightning Talk: Evolution & Use Cases of Artificial Intelligence in Supply Chain, From An Industry And SAP Point of View

David Judge (@DHJudge) is Vice President of Predictive Analytics and Machine Learning products at SAP. He guides product strategy and drives increased market awareness for SAP Leonardo.

Geoff Maxwell (@geofflm) is Global Head of Business Strategy and Execution Analytics and SAP Leonardo. He is responsible for go to market strategy for SAP’s portfolio of Leonardo solutions.

Fireside Chat: The Future of AI-Driven Transformation in Retail Supply Chains, and in Government Agencies.

José P. Chan is VP Business Development for Celect, a predictive analytics firm founded out of MIT, which helps retailers optimize their inventory portfolios in stores and across the supply chain. Previously, he worked internationally in retail for over two decades with LVMH, Richemont and Roberto Cavalli. José has held senior management positions and has extensive experience in buying, marketing, merchandising, planning, and has run retail store networks. He holds an SM from Massachusetts Institute of Technology, an MBA from University of Rochester, a BS from Cornell University and an AAS from the Fashion Institute of Technology.

Sameer Anand is a Partner with A.T. Kearney’s operations practice with over 16 years of experience in management consulting. He advises clients on large scale transformations to drive step changes in productivity with an underpinning of analytics and digital across CPG, retail, industrial products, and high tech industries. His areas of expertise include consumer products, manufacturing, supply chain planning, sourcing, bracket pricing, logistics, and advanced analytics. Prior to joining A.T. Kearney, Sameer worked at Deloitte and American Airlines.

REGISTER HERE!

Showcase Presentations

At #TNYSCM #04 we'll have 3 startups talk about the artificial intelligence-driven products they are building for the supply chain logistics industry. They will appear in the following order;

ClearMetal (@ClearMetalInc): Founded in 2014, and based in San Francisco, CA, ClearMetal provides predictive data and analytics for the supply chain logistics industry, enabling its customers to unlock increased efficiencies in global trade as ClearMetal enables them to solve complex problems using a data-driven approach. According to CrunchBase and CBInsights ClearMetal has raised $12M over two rounds of financing, most recently raising $9.0M in its Series A financing which was led by Innovation Endeavors. SAP.iO is an investor in ClearMetal.

Wise Systems (@goWiseSystems): Founded in 2014, and based in Cambridge, MA,  Wise Systems develops route-optimization software that schedules last-mile delivery truck drivers while considering multiple constraints like customer time windows, traffic, and service time. Wise automatically dispatches schedules to drivers and the software recalculates and updates schedules in real-time as things change in real-time. According to CrunchBase and CBInsights, Wise Systems has raised $1.1M in seed capital. Dynamo Accelerator is an investor in Wise Systems. Santosh Sankar, a co-organizer of The New York Supply Chain Meetup, is also a co-founder & director of Dynamo.

Optimal Dynamics: Based in Princeton, NJ, Optimal Dynamics brings AI to the trucking industry based on over 30 years of academic research and development centered on the use of Computational Stochastic Optimization and Learning in solving problems related to dynamic assignment problems in transportation and logistics. Optimal Dynamics recently raised an undisclosed amount in pre-seed funding.

REGISTER HERE!

Preview — #TNYSCM  in April, May, June

Here is what our team of organizers is working on, between now and June.

  • April 26: A panel discussion and keynote presentation, focused on the issues that have kept blockchain and other distributed ledger technologies in the lab and out of the real world. The keynote presentation is by Silvio Micali, he will talk about his work creating Algorand. THIS IS GOING TO BE BIG!
  • May 24: A showcase of startups in Fashion, Apparel, and Retail supply chain. THIS IS GOING TO BE BIG!
  • June 21: A Sourcing 101 workshop for startups building physical products.

Other "Upcoming" Supply Chain Events

  • TPM2018: Is now behind us. It was awesome. Read my blog post about it here: #TPM2018: The Woodstock Of International Container Shipping & Logistics
  • Maritime Global Technologies: Reverse Pitch on March 15, 2018 from 09:30–12:30. MGTIC is an initiative of SUNY Maritime College to build a global maritime technology innovation hub by bringing together all that the New York City metro-region has to offer entrepreneurs building software for the global shipping and maritime logistics market. I’m a member of the advisory board and have previously blogged about it here and here. I will be there. Say hello, if we've never met before
  • Transparency18: This is the flagship event series started by the founders of the Blockchain in Transport Alliance. It follows BiTA’s Spring Symposium, a members only event that occurs on May 21, 2018. I will attend both days of Transparency 18 May 22 and May 23.

Filed Under: #TNYSCM, Co-Founder Stories, Communities, Customer Development, Entrepreneurship, Investment Themes, Investment Thesis, Sales and Marketing, Shipping, Supply Chain, Technology, Trucking, Venture Capital Tagged With: #TNYSCM, Business Models, Business Strategy, Community Building, Early Stage Startups, Entrepreneurship, Innovation, Logistics & Supply Chain, Logistics and Supply Chain, Startup Communities, Strategy, Technology, Venture Capital

#CountDown: 5 Days to The New York Supply Chain Meetup #03

February 17, 2018 by Brian Laung Aoaeh

A cross-section of the audience at #TNYSCM #02, January 2018.

We’re now less than a week from The New York Supply Chain Meetup’s third gathering. The purpose of this post is to outline our plans for that event, and preview what we expect to do between now and June 2018 . . . We’re still in the early days of building this community, so much of this is subject to change, especially as we go through the process of recruiting sponsors.

Our Mission

To nurture and grow the world’s foremost open, global, multidisciplinary community of people devoted to building the supply chain networks of the future – starting in NYC.

Become a coporate sponsor. Email me at: brian@tnyscm.com for more details about our vision, and the team that’s working behind the scenes to build this community.

The New York Supply Chain Meetup is powered by Particle Ventures, a seed-stage fund based in NYC that invests in Supply Chain & Industrial Intelligence. Particle is built by the same team that launched KEC Ventures.

Logistical Details: #TNYSCM #03

  • Date: Thursday, February 22, 2018.
  • Time: 17:30–20:30
  • Location: Work-Bench, 110 5th Avenue, New York, NY, 10011.

This event will combine a Workshop, and a Panel Discussion. Our MC for this event is Brian Lindquist, a member of our team of organizers.

Agenda

  • 17:30–17:55: Pre-event Networking
  • 17:55 PM – 18:00 PM Welcome Remarks
  • 18:00 PM – 19:00 PM Workshop, Q&A
  • 19:00 PM – 19:45 PM Lessons From The Field – Panel Discussion, Q&A
  • 19:45 PM – 19:50 PM Closing Remarks
    19:50 PM – 20:20 PM Post-event Networking

Preview — Workshop: Going From $0.00 To $1,000,000 – Towards Product-Market-Fit For The Non-Sales B2B Pre-Seed and Seed-Stage Startup Founder (aka Going From Zero To One – Sales and Marketing Tactics For The Non-Sales B2B Pre-Seed and Seed-Stage Startup Founder)

Our instructor, Victor Adefuye, will walk through simple, inexpensive tactics that early stage startup founders can employ as they try to start building sales and generating revenue. He is the Founder & CEO of Dana Consulting, a firm that functions as an outsourced VP of sales for technology startups and other small business. He also acts as a management consultant to Dana Consulting’s enterprise clients as they try to bring new products and services to market.

While this event is being organized primarily for members of #TNYSCM, the workshop is ideal for anyone running a small business that seeks to grow. It is also useful for angel investors, venture capitalists, and startup advisors who do not have a sales and marketing background, but who nonetheless might find themselves trying to help a startup win its very first customers, and grow revenues over time.

The workshop will last about 50 minutes, with roughly 10 minutes of audience Q&A to follow.

Bring pens/pencils and a notebook, because Victor will be sharing practical tactics you can start implementing the very next day. I know – I sat through one of his workshops in July 2017, and I got ideas that I started using at work the very next day.

You’ll get completely worthless bonus points if you bring a cool mechanical pencil and show it to me with pride during one of the networking sessions – assuming I am not running around trying to make sure everything goes well.

REGISTER HERE!

Preview — Panel Discussion: Lessons From The Field

After delivering the workshop, Victor will speak with three founders who have successfully grown sales in order to extract insights and lessons, and also to weave those lessons with concepts he discussed during the workshop. This should help the founders in the audience think about how to allocate time, effort, and resources between trying to grow sales, and all the other things they must do in the very early days of a startup’s existence.

Our panelists are;

Suuchi Ramesh (@Suuchi_madeforU), CEO & Founder, Suuchi Inc; Suuchi Inc. is a design & manufacturing partner for innovative American apparel fashion brands and Fortune 1000 companies. Powered by advanced design software & manufacturing automation, Suuchi Inc’s vertically integrated supply chain replenishes inventory in as quickly as 5 days. Suuchi has bootstrapped her company to a 7 figure 2017 revenue, and hopes to reach an 8 figure revenue number in 2018. Suuchi Inc. earned its first revenues in April 2016, and grew its 2017 revenues to 5x its 2016 revenues. You heard her describe her business at our launch – at which she was a hit with the audience. Here, she’ll talk about how Suuchi Inc. has gone about growing revenues.

Steve Pike, CTO, SevenFifty; SevenFifty is modernizing wholesale beverage alcohol, a massive but technologically antiquated industry with a status quo dating back to Prohibition. SevenFifty offers a web platform that connects over 50,000 on- and off-premise licensed buyers with wholesale distributors to provide them with fast and efficient access to information about products available in their local wholesale markets. Steve was SevenFifty’s first hire and as CTO is responsible for building new products and managing the engineering team. He’s been with the company since 2011, when he built the platform working out of a bar in Manhattan called the Tippler. He too will fill us in on how they grew sales in those early days.

Willem Sundblad (@oden_tech) CEO & Founder, Oden Technologies Ltd.; Oden is a B2B SaaS company combining industrial hardware, wireless connectivity, and big data architecture into one simple platform so all manufacturers can analyze and optimize their production, from any device. Manufacturing has long been an analog world, but Oden is trying to change this by introducing the power of IoT and cloud analytics to factory operations. Willem too will talk about how they have grown sales in a legacy industry that is thought of as insular and unwelcoming to outsiders.

REGISTER HERE!

Preview — #TNYSCM  in March, April, May, June

Here is what the team of organizers is working on, between now and June.

  • March 15: A showcase of startups applying artificial intelligence to supply chain. Co-hosted with NYC Bots and Artificial Intelligence Meetup.
  • April 26: A panel discussion and keynote presentation, focused on the issues that have kept blockchain and other distributed ledger technologies in the lab and out of the real world. The keynote presentation is by Silvio Micali, he will talk about his work creating Algorand.
  • May 24: A showcase of startups in Fashion, Apparel, and Retail supply chain.
  • June 21: A Sourcing 101 workshop for startups building physical products.

Other Upcoming Supply Chain Events

  • TPM2018: TPM, part of IHS Markit is the world’s largest container shipping and logistics conference, 18 years old this year having attracted 2,300 in 2017 representing cargo owners, container carriers, forwarders/3PLs, railroads, ports, marine terminals, equipment lessors and various others. It is one of the three main annual regional container logistics organized by JOC including the Container Trade Europe event in Hamburg and TPM Asia in Shenzhen China. The programs are developed with editorial independence by the JOC team of veteran transportation journalists. I’m attending for the first time this year to moderate the Innovation Jam on Tuesday, March 6.
  • Maritime Global Technologies: Reverse Pitch on March 15, 2018 from 09:30–12:30. MGTIC is an initiative of SUNY Maritime College to build a global maritime technology innovation hub by bringing together all that the New York City metro-region has to offer entrepreneurs building software for the global shipping and maritime logistics market. I’m a member of the advisory board and have previously blogged about it here and here.
  • Transparency18: This is the flagship event series started by the founders of the Blockchain in Transport Alliance. It follows BiTA’s Spring Symposium, a members only event that occurs on May 21, 2018. I will attend both days of Transparency 18 May 22 and May 23.

 

 

 

Filed Under: #TNYSCM, Co-Founder Stories, Communities, Customer Development, Entrepreneurship, Founder Stories, Lean Startup, Management, Sales and Marketing, Supply Chain, Uncategorized

How Studying Bankruptcy And Working On Two Turnaround Assignments Prepared Me To Become An Early Stage Venture Capitalist

August 1, 2015 by Brian Laung Aoaeh

The Chinese Character for Crisis; Danger + Opportunity (From The Ten Strategies For Leading At The Edge)
The Chinese Character for Crisis; Danger + Opportunity (From The Ten Strategies For Leading At The Edge)

 

When I started business school at NYU Stern in the fall of 2005 my plan centered on taking every class in Bankruptcy & Reorganization, and Distressed Investing that I could. I took 3 elective classes in that area; Bankruptcy & Reorganization with Prof. Ed Altman, Case Studies in Bankruptcy & Reorganization with Prof. Max Holmes, and Investment Strategies: Distressed Investing with Prof. Allan Brown.

By my logic, if I learned how to assess and invest in dying companies, and then nurse them back to health, analysing, valuing and investing in healthy companies would seem easy by comparison. I was so sure of this that I also tried to turn my Equity Valuation elective into a pseudo Bankruptcy & Reorganization course too, by opting to value a bankrupt company for my final group-project. I do not recommend trying that.

I was still in business school when the economy began to falter. I moved from UBS to Lehman Brothers in late March 2007. A few days later New Century Financial Corp. filed for Bankruptcy. I was let go from Lehman Brothers a year later, on March 12, 2008. Bear Stearns collapsed and was acquired by JP Morgan Chase on March 16, 2008. I graduated from Stern in May, 2008. On September 7, 2008 Fannie Mae and Freddie Mac were taken over by the federal government. Lehman Brothers collapsed on September 15, 2008. On September 16, 2008 the Fed bailed out AIG.

The rest of 2008 was a bloodbath.

It was in that environment that I joined KEC Holdings, KEC Ventures parent company, in December 2008. I was employee #2. I had been hired into a new role that had not existed before at the company. My responsibilities encompassed any direct and indirect investments the company had made, or might make in the future.

Most notably, the company had already made 2 private equity investments; one in a private jet charter company and another in a fine-dining restaurant group – they were struggling to stay afloat given the economic environment. My first order of duty was to “make sure they don’t die” and “help them come out of this mess stronger than they were going into it.” There would be no financial engineering gimmickry. No tried and true business school textbook “indiscriminate” cost-cutting shortcuts. I had to roll up my sleeves and work with each company as intimately as necessary to achieve the objectives.

This post is about how we navigated that period. It is also about what that period between December 2008 and August 2013 has taught me about the challenges startups face, and my role as a venture capitalist.

Every day is a journey, and the journey itself is home. - Matsuo Basho
Every day is a journey, and the journey itself is home.
– Matsuo Basho

Further Background

Both companies were generating top-line revenues in the range of $20,000,000 – $30,000,000 per year. Both had fallen short of budgetary expectations in 2008, but the aviation company had a more prolonged string of losses than the fine-dining restaurant, partly because the restaurant was a more recent investment at that point. I functioned as an “external management consultant”; I was not a full-time employee of either company, but I worked with employees across the hierarchy of both companies. The restaurant company employed between 400 and 500 people while the aviation company had between 30 and 40 employees after several previous rounds of downsizing.

Both companies had watched as some of their competitors ran into strong headwinds, and subsequently shut down operations because the economic environment was so bleak.

Lesson #1: Understand The Business

Once a company is in financial distress investors have to decide if it is worth saving, and they also have to answer the accompanying question; can it be saved given current known constraints? The only way to do this is to develop a deep understanding of the business, and the context within which it is operating.

Between 2008 and 2012, confidence in the economy was very low. People simply were not splurging on expensive meals or luxury jets. An economist would say that private jet charter and fine-dining both have a high elasticity of demand.

I had no prior experience working at, let alone helping to run a restaurant or a private jet charter company. So I decided to spend the first six months in learning mode. I studied everything I could about both markets while I helped the executives and managers at both companies deal with day-to-day nuts-and-bolts issues.

This was important if I was going to build personal credibility, and if I wanted to win buy-in for my ideas from the executives and managers later on. I had to be able to influence them into doing things they probably did not believe in at the outset, and I had to do this with little real influence.

How this applies to early-stage startups: Today, I look for founders who embrace their expertise, and demonstrate a knowledge of their business that surpasses mine. However, the founder also has to demonstrate an ability to assist me learn enough about their industry to make a decision, and act as a useful sounding board for decisions that have to be made in the future.

Lesson #2: Understand The People

During those six months, I also tried to understand the protagonists in each situation. I relied on a technique I had learned in my Literature in English classes during secondary school in Ghana; character analyses.

A character analyses involves performing an in-depth study of the key characters in a drama, and trying to figure out each character’s story; What motivates that person? Why is that person who they are? What is the person afraid of? What drives that person? How does that person communicate? How does that person respond to pressure and stress. What does that person gain the most satisfaction from? What’s the state of that person’s family life? How does that person perceive me? How do I perceive that person? Does that person buy into the need for a turnaround? Is that person willing to commit to the turnaround? What biases does the person exhibit that I can identify? How does that affect things?

I had to be honest, and to contend with the pleasant and the unpleasant, especially around the perceptions other people had of me at the outset.

I took copious notes, and added to them until I felt I had a decent understanding of each of the people with decision-making authority that I would be dealing with most often; executives, managers, and front-line employees.

Perhaps an important, but often overlooked insight is that an investor should strive to understand the people within the context of the business. For example, is this person a leader or a manager? The distinction matters because it can spell the difference between beating about the bush with no results to show, or getting to the heart of the matter and fixing the problems that need to be solved at a tactical and granular level. Fred Wilson writes about this problem in: Leaders and Executives.

How this applies to early-stage startups: We make seed stage and series A investments. That early in a startup’s life, the people make all the difference. The market is important, so is the product. However, at this stage the future is still so nebulous and difficult to envision that the team that has decided to embark on that journey matters more than anything else. So, I have learned to focus on questions like; How did this team come together? Do the founders take responsibility for outcomes, or do they have a habit of passing blame? Do they have the intestinal fortitude to withstand the difficulties they are bound to face as individuals, and as a team on this difficult path they have chosen or will they wilt under pressure? What evidence do I have to support my answer to this question. What is their approach to learning, as individuals and as a team? Have they faced crises together? How did they fare when the going got tough? I will not ask most of these questions directly, but I will be processing every interaction, every bit of information I get, to determine answers to questions along this line of reasoning.

Lesson #3: Create A Sense of Urgency, But Provide Hope

Unlike a startup, a company in financial distress already has a product that it has sold successfully in the past, it also has a sense of who its customers are and where to find them. It is easy for the people within the company to succumb to status quo bias. This is identifiable by statements such as;

  1. “Everything will be fine, we just need to close this one sale.”
  2. “I feel confident it will happen, we have this sale in the bag.”
  3. “They are not our competitor, they do not do what we do!”

In the face of incontrovertible evidence that “they are up shit’s creek without a paddle” people will still choose to do what feels comfortable.

It was my responsibility to shake them out of that rut. As John P. Kotter says in Leading Change: Why Transformation Efforts Fail; 75% or more of a company’s management has to buy into the need for change, otherwise the chance that the change effort will fail is unacceptably high.

How did I do this? In both cases I did not shy away from asking questions that I expected to generate conflict. Indeed, on several occasions I had to have unpleasant and difficult conversations with the top managers and executives in both companies. I did this even if it appeared that I was “meddling” in areas where I had no business poking around. Of course, the idea that there was a part of either company’s operations that I “had no business” exploring was a fallacy only someone keen on maintaining the status quo would believe.

The message, delivered by the investors and the board, and reiterated by me during my frequent field trips, was simple; “The status quo is unacceptable, and failure for lack of effort is out of the question.” We had one chance to get it right, and we had to make the most of that chance even if it meant discomfort some of the time. We could get there with or without conflict. It was entirely up to us to make that choice.

How this applies to early-stage startups: The time for the whole team to start thinking about the Series A Round of Financing is the night before the Seed Round closes. Some one on the team should always be thinking about what it will take to raise the next round.

The time to start thinking about revenues is yesterday, even if you do not implement those plans immediately. Always have a plan. Always test your plan.

Lesson #4: Investors Have Ideas, But Management Runs The Business

Investors will always have ideas about how a business should be run. Sometimes investors know more about a certain topic than management. It is okay for investors to make suggestions, and to offer ideas to management. However, responsibility for choosing which ideas to accept and which to reject has to rest on the shoulders of management, and management has to accept accountability for the outcomes.

There are a number of ways this aspect of the relationship between investors and management might unfold;

  1. Investors can dictate to management what investors think management should do, or
  2. Investors can teach management how and why things should be done a certain way.

I chose the latter. That approach takes more time, but it is also more likely to lead to permanent change in behavior than the former. Also, once the lessons had taken root that approach allowed me to gradually pull back my involvement without jeopardizing the progress that management was making in improving results. It is an approach that builds self-sufficiency.

As part of the process, we cultivated the practice of communicating:

  1. Why a certain goal or strategic initiative was important for the company’s near term goals and long term vision.
  2. What had to get done in order for that goal or strategic initiative to be successfully executed.
  3. Who specifically was primarily responsible for seeing that it got done, and which executive they could go to as often as necessary in order to navigate what ever obstacles they might encounter.
  4. How it would get done, not in excruciating detail, but in broad terms. For example; Which teams needed to collaborate with one another in order to make it happen?
  5. When the team expected to be able to report back periodically on their progress, and importantly, when the project needed to be complete.

To do this successfully, I had to focus on asking questions and encouraging deeper levels of inquiry than was the custom beforehand. Asking probing questions helped us cut out the “bullshit” of conventional wisdom that is seductively easy to accept.

Each time I heard; “You do not understand, that is not how it is done in our industry.” I would ask; “Why?” That would lead to an examination of the assumptions behind the choices that had been made in the past. Often there was no good reason to refuse to try something different even if it seemed out of step with accepted industry convention.

How this applies to early-stage startups: I am looking for founders at the seed or series A stage whose judgement I can trust enough to feel they do not need me to opine on every decision they ever have to make. That does not mean I am passive. It means I need to trust their decision-making skill and maturity enough to feel confident they will consistently make the right choices for all the startup’s constituents without the need to run everything by investors.

From the investors’ perspective, a policy of “show, don’t tell” goes a long way. To paraphrase the oft quoted saying; “Give a founder a fish and . . . . ” If I feel there’s something a founder ought to learn, I’d rather provide a guide to enable that founder learn the applicable frameworks and how to apply them in day-to-day decision-making situations.

Lesson #5: Create Internal Value By Increasing Organizational Capacity

The way we defined it; Organizational capacity is the harnessing of a company’s human, physical and material, financial, informational, and intellectual property resources in order to enable the company to continually perform above expectations and strengthen its competitive position.

In difficult times especially, it is important that companies do not lose sight of the need to continue to find ways to increase organizational capacity.

One way we did this, in both cases, was to shift both companies off MS Exchange Server and onto Google Docs for Work. This was not easy because of cultural attachments to MS Exchange and fear of having to learn something new. Both companies made the shift, eventually. The immediate benefit they experienced was a dramatic reduction in the costs they incurred for IT assistance. A more important, though less tangible benefit was that both businesses could then afford to give every full-time employee a corporate email address and access to a corporate intranet portal. The benefits were enormous; easier collaboration, easier information transfer and sharing,  and increased security of corporate information and trade secrets. Quicker turnaround on tactical decisions because people could now communicate by chat.

Given the improvements in tools for collaboration, we encouraged the formation of cross-disciplinary teams to tackle some of the problems that each company was dealing with. This allowed people from one area of each business to interact more closely with their colleagues from another area of the business. They developed a better understanding of one another, and of the challenges and constraints that they each faced in trying to execute their day-to-day responsibilities. In turn this fostered a more collaborative relationship across the entire organization. It also enhanced the learning environment for all employees.

How this applies to early-stage startups: It does not take a lot by way of resources to create an environment that is rich in opportunities for cross-functional collaboration and learning. This comes in handy during due diligence because every member of the team will be able to speak knowledgeably about the startup’s immediate and long term plans.

Lesson #6: Direction Must Be Set From The Top, But Engagement Must Begin at The Bottom

We started working on trying to develop a strategic plan for both companies in summer 2009. Before this time, neither company had previously had a coherent strategy.

In consultation with the executives in each company, the board of directors set out the broad areas that the strategic plans ought to cover; Finance, Operations, People, Demand Creation, and Expansion.

Once those had been agreed on, it was my job to meet with front-line employees as well as managers in the field in order to obtain data and insight about how the strategic plan would have to be set up in order to function effectively for them given what each company was trying to accomplish.

That sounds easy. It is not. It took multiple meetings, of several hours each. The restaurant had multiple locations in NYC, one location in NJ and another in CT. I did not visit the location in Chicago, the CFO held discussions with them during his quarterly visits. I had to sift through everything I heard during those meetings, and I had to extract broad themes. Then I had to reconcile that with the strategic framework established by the board. Finally, I had to interpret that information from the perspective of the competitive landscape for each of the two companies. Finally, I had to synthesize it all into digestible chunks for the board, the executives, the managers and rank-and-file employees.

The goal of spending so much time on having these meetings with people across all ranks in each company was to ensure that once the strategy was developed and implemented, there would be complete alignment behind the vision embodied in the strategy, and just as important that every employee would be engaged in and committed to executing the tactical initiatives required to make the strategy succeed.

How this applies to early-stage startups: The founder creates the vision that investors and the startup’s team buys into. The team executes to turn that vision into a living, breathing, growing reality. Investors hopefully act as a positive catalyst to help the process unfold more quickly.

Lesson #7: Do Not Ignore The Soft Issues, Emphasize Both Hard and Soft Issues Simultaneously

My experience might as well be called The Tale of Two Turnarounds. In one company leadership admitted things were awful. They also admitted that they could use whatever help I could offer. They readily admitted their limitations as a team. We had many instances of conflict, but starting from a position of optimism and a willingness to try, the process moved along slowly, but steadily. We created a survey that we administered twice a year to get a sense of how employees were feeling, data that might not be captured in the key performance metrics we monitored weekly, monthly, quarterly, and annually.

We launched the strategic plan in January 2010 after 9 months of work specifically focused on that task. A year later the company made its first ever payments from a new profit-sharing plan that we had created as part of the new strategy. The payments were not huge, but they were evidence that the team’s hard work was paying off. It also created a feedback loop about how actions by employees affect the bottom-line performance of the company.

In the other company the founder, who was also the ceo, was grumpy and relatively uncooperative with investors. To cut a long story short, we launched the strategic plan in April 2010, after about 9 months of work specifically focused on that assignment. Within 6 months 75% of the managers with whom we had worked to develop and launch the strategic plan had left the company or had been fired. It was a classic case in which we would take two steps forward only to take four steps backward.

Morale dipped ever lower. The founders incessant talk about “a vision” and “a mission” became the butt of jokes among rank-and-file employees. It became clear that employees were becoming disillusioned with what the company stood for. While the company fared better than it would have if there had been no attempt at executing a turnaround and developing a strategy, it continued to perform well below its potential.

At a board meeting one day, the founder/ceo went into a vituperous rant about all the areas where the company was falling short. This was in early to mid 2012. I had to burst out in laughter. He might as well have been reciting problems whose solution formed the core of the strategic plan we created in 2010. Implementing that plan would have started the process of solving those problems he was so exercised about that day. We had lost two years for no good reason.

No amount of emphasis on key performance metrics made a difference. Without the founder’s full embrace of the strategic plan, nothing else mattered. I should point out that he had been intimately involved in crafting the strategic plan. This was not a plan that was forced down on him “from on high.” It became clear how badly things had deteriorated when a long time employee quit, this individual was the only employee at the company who had been there as long as the founder.

How this applies to early-stage startups: I am of a firm belief that the team is really important at the seed and series A stage, or at least until uncertainty around product market fit has been largely eliminated. So, I need to develop a sense that a founder is someone I can work with over the long haul . . . Actually, the kind of founder I am happy backing has to be someone I could envision myself working for if circumstances were different. Age, race, gender, religion . . . That is all irrelevant. Early in my process for assessing a startup I focus almost entirely on soft issues.

In one example, I sensed something amiss about the body language between 2 Spanish co-founders pitching a startup to my partner and I in 2013. I decided to tune out what they were saying in order to better observe their body language. There was something about their body language towards one another that did not align with what they wanted us to believe, in my opinion. We passed on their seed round, and decided to watch them till we could get more data about the relationship between the co-founders. That was nearly 3 years ago. I have heard no reports to suggest we made an error in that case.


Let chaos reign, then reign in chaos.

– Andy Grove, Only The Paranoid Survive


Lesson #8: Be Prepared For Chaos; Harness, Focus And Direct It, Empower People

Once employees understood the strategic plan as well as the tactical initiatives that accompanied it, they began developing ideas related to the various functional areas in each company and making suggestions to managers and excutives.

At first this was overwhelming . . . Managers had to do their own work, manage the work of the groups of people that they managed, and now . . . . They also had all these ideas being thrown at them from “left, right, and center.” The initial knee-jerk reaction was to try to “make it stop.”

That would have been a mistake. Among the deluge of ideas were some real gems.

For example, a maintenance department team member at the aviation company noticed that the company could cut down on its electricity usage by changing all the bulbs in its main hangar . . . No one had thought about that over the years, but our discussion about the strategic initiative around improving the product while reducing costs prompted him to take another look at the company’s hangars in search of opportunities to reduce operating costs. Thanks to improvements in technology over the years this was now a measure that could be implemented relatively easily.

In another instance, the team at our restaurant in CT had observed that on certain days of the week large groups of Chinese tourists visited the casino resort in which they are located. They had been thinking of a way to capture some of that business, but had assumed the corporate office would object to the menu changes they thought they had to make in order to execute that plan. As part of our implementation of the strategic initiative around increasing revenues, I suggested they conduct an experiment, analyze the outcome, and then seek assistance from the corporate office if the results looked promising. They did that, and saw a jump in revenues on two days of the week when business would otherwise have been slow. The corporate office gave its blessing, and assisted in making that practice more entrenched by using corporate resources to give it the polish required for company-supported initiatives.

How this applies to early-stage startups: A startup stops being a startup once its search for a repeatable, scalable, and profitable business model is complete. While that search is in process it is important that every member of the team feels empowered to contribute to the discovery of that business model. It can’t be the job of only some members of the team, it has to be part of everyone’s job. The faster a startup gets through the discovery process the better.

Lesson #9: The Turnaround Should Be Its Own Reward; Incentives Should Reinforce Change Not Drive It

It was nice to be able to make payments from the profit-sharing plan that we instituted. The payments were relatively small, yet they were tangible evidence to the employees, managers, and executives that they were collectively well equipped to make it through the ongoing turbulence and correct the mistakes of the past.

The sense of accomplishment employees felt translated into a number of things, among them;

  1. Newfound and increasing pride in being associated with a company that was succeeding where many of its rivals had failed.
  2. High levels of morale and optimism about the future of the company, and their place at the company. Less stress about employment security.
  3. A greater willingness to take the initiative in situations where the possibility of generating business for the company exists.

Basically, every employee was empowered to function as a salesperson on the company’s behalf. We arranged training sessions to equip every employee with the vocabulary they needed to understand in order to do that effectively. We also developed simple tools that they could use. They did not replace the company’s professional salespeople . . . They became an auxiliary sales force.

How this applies to early-stage startups: As startups grow, founders and early team members need to get better at the art and science of “managerial leverage” . . . What is managerial leverage? It is the process by which a manager creates output that far supersedes that manager’s input by using all the resources at the manager’s disposal to influence the work that is done by the group of people whose on-the-job effectiveness and work-output is affected by interactions with the manager.

What is a manager’s output? According to Andy Grove, co-founder and former CEO of Intel “The output of a manager is a result achieved by a group either under his supervision or under his influence.” Great managers create positive output that far exceeds expectations. Below average managers create output that fails to meet expectations given superior resources. Average managers? The team’s output would not be any different if the manager were absent.

The art of managerial leverage is in determining; how to apportion time, where to pay more attention, where to pay less attention, who to pay more attention to, who to pay less attention . . . . etc etc. The science of managerial leverage is in determining; what to measure, when to measure it, how often to monitor what is being measured, where bottlenecks are most likely to occur and why, and how to eliminate them . . . . etc etc.

Managerial leverage drives output. Output drives results. Results are measured and reflected in the KPI’s that founders and investors measure. Getting that order right is critical to a startup’s success.

Lesson #10: Learn To Listen, And Communicate Effectively

It is amazing how many problems can be solved relatively quickly if people would communicate more effectively internally and externally. Communication involves two actions; first listening actively in order to understand what is driving the actions of other people. Second, responding to what other people have said in a way that gets to the root cause of the problem being discussed.

During one of my field visits, I spent 8 hours on my first day listening to the executives talk about all the problems they each perceived, and how they felt the issues ought to be tackled. I spent that day with the CEO/President, the CFO, the Head of HR, and the Head of Sales. I encouraged open disagreement and debate.

On my second day I spent about the same amount of time speaking with the middle managers; again we discussed the problems they each perceived, and how they each felt the issues ought to be tackled.

On the third day I brought both groups together, and moderated an all day discussion about the problems the company was facing. Once again, I encouraged open disagreement and debate. Also, I put the inter-personal issues and conflicts that I had uncovered on the table. Things often got heated. It was my job to function as a pressure-release valve during those episodes. It was not pretty.

For example, I explained to the entire group how the CFO who was disliked by a large number of people within the company had made payroll on too many occasions by dipping into his personal 401(K) savings for example. The irony, the folks who disliked him routinely failed to provide the finance team with the data they needed in order to collect on accounts receivable from the company’s customers.

The outcome of this exercise was that;

  1. Everyone felt they had been given a chance to speak and be heard by the rest of the leadership team, and
  2. We discussed expectations in a fair amount of detail, enough so that more work could be done laying them out in adequate specificity rather than vaguely wondering what people could expect from one another, and finally
  3. Created an environment in which each member of the leadership team contributed in creating a communication framework against which they agreed to be held accountable

Our goals for the communication framework were that;

  1. Every employee should know what is expected of them, as individual team members,
  2. Every employee should know what to expect from every other member of the team,
  3. Employees should know what to expect from executives and managers, and lastly
  4. Accountability should be about improving team and company performance, not punishing individuals.

As Rosabeth Moss Kanter says in Four Tips for Building Accountability; “The tools of accountability — data, details, metrics, measurement, analyses, charts, tests, assessments, performance evaluations — are neutral. What matters is their interpretation, the manner of their use, and the culture that surrounds them. In declining organizations, use of these tools signals that people are watched too closely, not trusted, about to be punished. In successful organizations, they are vital tools that high achievers use to understand and improve performance regularly and rapidly.”

How this applies to early-stage startups: Startups typically have to move quickly, especially if they have taken in capital from institutional venture capitalists. A culture of blame, lack of cohesive teamwork, and a lack of organization-wide accountability is an insidious tumor that will eventually lead to failure. The founders who are most successful in the long run are those who do not shift responsibility when things are difficult, but instead serve as a model that other team members can emulate.

Closing Thoughts

Executing a turnaround and getting a startup through the phase of discovering a business model are really just two sides of the same coin. That experience has led me to the belief that it is when things seem bleak that great early stage investors prove their worth.

Further Reading

Blog Posts, Articles, & White Papers

  1. The Psychology of Change Management
  2. Motivating People: Getting Beyond Money
  3. The Irrational Side of Change Management
  4. The CEO’s Role in Leading Transformation
  5. The Role of Networks in Organizational Change
  6. All I Ever Needed To Know About Change Management I Learned at Engineering School
  7. Changing an Organization’s Culture, Without Resistance or Blame

Books

  1. High Output Management
  2. Only The Paranoid Survive
  3. How Did That Happen?
  4. HBR’s 10 Must Reads on Change Management
  5. HBR on Turnarounds

Filed Under: Behavioral Finance, Business Models, Entrepreneurship, Finance, Innovation, Investment Analysis, Key Performance Metrics, Operations, Organizational Behavior, Private Equity, Sales and Marketing, Startups, Strategy, Team Building, Uncategorized, Value Investing, Venture Capital Tagged With: Behavioral Finance, Business Models, Business Strategy, Competitive Strategy, Early Stage, Early Stage Startups, Leadership, Management, Persuasion, Strategy, Turnaround, Venture Capital

A Note On Viral Marketing – Part IV: Examining The Widely Used Skok-Reiss Virality Model

July 27, 2014 by Brian Laung Aoaeh

 

Viral growth in users, over time. The virality formula is attributed to Stan Reiss by David Skok.
Viral growth in users, over time. The virality formula is attributed to Stan Reiss by David Skok.

This post is the fourth in a series I am devoting to the examination of viral marketing. ((Any errors in appropriately citing my sources is entirely mine. Let me know what you object to, and how I might fix the problem. Any data in this post is only as reliable as the sources from which I obtained them.)) I tried to define the term in Part I, and examined how Hotmail and Dropbox each grew, in Part II and Part III respectively.

The formula in the image above is widely used to model the growth of users of a website or an app. It has been popularised through a series of posts by David Skok. ((For example: The Science Behind Viral Marketing, Sep. 15th, 2011 and Lessons Learned – Viral Marketing, Dec. 6th, 2009. Accessed online on Jul. 23rd, 2014. )) Kevin Lawler explained how the formula is derived. ((A Virality Formula, Dec. 29th, 2011. Accessed online on Jul. 23rd, 2014.)) Furthermore, Andrew Chen and others, investors and entrepreneurs alike, have written several blog posts about virality and viral marketing that build on this formula.

In this post I will state the problem that one is trying to solve when one sets out to model viral growth. Then I will examine this formula within that context. Valerie Coffman has already done a great job of examining the flaws in this formula. ((4 Major Mistakes in The Current Understanding of Viral Marketing, Jan. 17th, 2013. Accessed online on Jul. 24th, 2014)) For the most part I will reiterate points that she has already made in her post.

The modeling problem: The fundamental research questions one wants to answer by modeling the viral growth of an app, website or some other digital product are these: ((Adapted from Vynnycky, Emilia; White, Richard (2010-05-13). An Introduction to Infectious Disease Modelling (Kindle Locations 930-931). Oxford University Press, USA. Kindle Edition.)) If one person in a population of potential users adopts a product, how will the average number of users of that product change over time? How large could that user base ultimately become? What factors influence the growth of the number of users over time?

The model above, which I will call the Skok-Reiss Virality Model, uses the following variables in modeling viral growth; t represents time, the function U(t) represents the number of users at a specific time and U(0) is the number of users at the outset, K represents the viral coefficient, p represents the cycle time, the amount of time it takes a new user to try a product and then send out invitations to other potential new users, I represents the number of invitations each new user sends out, and C represents the rate at which people who receive a new invitation convert to become actual new users of the product. The quotient t/p represents the number of invitation cycles that occur within each unit of time. ((For example a monthly unit of time represents 4 cycles if the cycle time is one week.))

A key variable in the Skok-Reiss Virality Model is the viral coefficient, K. The best definition of that variable as it is applied in viral marketing is given by Eric Ries:

Like the other engines of growth, the viral engine is powered by a feedback loop that can be quantified. It is called the viral loop, and its speed is determined by a single mathematical term called the viral coefficient. The higher this coefficient is, the faster the product will spread. The viral coefficient measures how many new customers will use a product as a consequence of each new customer who signs up. Put another way, how many friends will each customer bring with him or her? Since each friend is also a new customer, he or she has an opportunity to recruit yet more friends. ((Ries, Eric (2011-09-13). The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses (Kindle Locations 3008-3012). Random House, Inc.. Kindle Edition. ))

The Skok-Reiss Virality Model has a number of limitations.

First, the model does not specify the size of the market. Phrased another way, in the long run how many people are favorably predisposed to adopting this product once they have been exposed to it by someone they know? As Valerie Coffman points out this is not an inconsequential question because viral growth quickly leads to market saturation. Market saturation in turn reduces the viral coefficient. In more concrete terms, the more time elapses and the larger the proportion of people who have already heard about a product but have not yet become users of that product, the less likely it is that such people will remain as susceptible to becoming new users of the product as they were at the outset of the process. In a sense, exposure without adoption leads to immunity to future adoption. Intuitively, we would expect that market saturation imposes a limit on how large U(t) can become as t becomes infinitely large. However, as it has been formulated, the Skok-Reiss Virality Model suggests that U(t) becomes infinitely large as t approaches infinity. ((To see this; Assume K > 0, p > 0, and U(0) > 0. Then substitute increasing values of  t into the formula.))

Second, the model assumes that the market is one in which people adopt a product and then use that product for ever. In Valerie Coffman’s words the Skok-Reiss Virality Model assumes that “there’s no churn in the customer base – once a customer, always a customer.” In reality the market is more likely to be one in which certain people might initially become users of the product, but then abandon it at some point in the future. ((Also, certain people might stumble upon the product without an invitation.))

To understand why the Skok-Reiss formulation is problematic in this sense one needs to understand and be able to describe three types of populations. A hypothetical population is one that is completely made up for the purpose of studying a specific research question. A hypothetical population typically does not reflect reality. A closed population is one in which there is no entry or exit. In certain instances a closed population is defined such that changes to the size of the closed population occur only through birth or death. In other instances a closed population is defined such that birth and death do not occur. An open population is one in which population growth is affected by birth, death, immigration and emigration. The concept of churn is important because it makes it possible for a model of viral growth to more closely resemble reality by making assumptions about; birth – an existing user brings in more users, death – existing users who adopted the product through an invitation abandon the product, immigration – new users stumble upon the product and adopt it without an invitation from an existing user, and emigration – existing users who adopted the product without an invitation abandon the product.

These two problems with the Skok-Reiss Virality Model make it unlikely that the model produces sufficiently reliable answers to the first two research questions that people modeling viral growth seek to answer.

Third, the model assumes that each user sends out a single batch of invitations after a period of time p. The assumption that each user sends out a single batch of invitations is suspect. Rather, when a user first encounters the product and enjoys the initial first few interactions with the product that user will probably send the first batch of invitations to only a few close friends and  relatives. As time progresses and the user becomes more trusting of the product’s developer the user might then send a subsequent batch of invitations to a wider circle of friends and social acquaintances. Eventually the circle of people that the user sends invitations to might grow to include professional and business associates. Finally, it will get to the point where that specific product or others like it are so widely known that the average user does not send out invitations. This is the point of market saturation, at which the researcher would expect to start seeing a decline in the viral coefficient. It is not also clear that the first invitation as well as subsequent invitations, if the model accounted for them, happen at the same frequency. ((Some models of how infectious diseases spread within a population often account for an incubation period, an infectious period, and a pre-infectious or latent period.))

Last, the Skok-Reiss model makes the error of assuming that two very different processes that form the basis for viral growth happen on a similar timescale. To use Valerie Coffman’s words, the model assumes synchronicity when it should not. The first process is that by which individual users of the product attract new users by word of mouth and through in-product invitation mechanics. The variable in the Skok-Reiss model that reflects this phenomenon is the cycle time. Though as we have pointed out, the way it is formulated falls short of adequately reflecting what one might intuitively expect to observe in reality. The second process is that by which the product’s total user base experiences significant jumps in size. Over time the nature of the growth that this process leads to is seen to resemble exponential  or compound growth. This process is driven by actions of the product developer that differ from, but complement, the actions of individual users in the first process. ((For example; marketing, PR, press related to product updates, content marketing with calls to action directed at potential new users who might want to sign up for the product without the benefit of an invitation from an existing user, presentations at conferences etc.)) The Skok-Reiss model does not adequately differentiate between these two different but complementary processes.

As a result discussions about tactics for achieving viral growth might be flawed, and could lead to disappointing results if they are based on a naive understanding of the Skok-Reiss Virality Model. Indeed, it is often suggested that cycle time is the most important lever that one should focus on in order to achieve viral growth. In David Skok’s words;

Shortening the cycle time has a far bigger effect than increasing the viral coefficient!

Let’s examine that statement with some algebra.

First, what would we expect to happen to U(t) if we let p become infinitesimally small and hold everything else constant? As the back of the envelope analysis below suggests we expect the number of users at any given time to become infinitely large as we make the cycle time infinitesimally small. So far so good.

What happens if we make cycle time infinitessimally small?
What happens if we make cycle time infinitessimally small?

Second, what would we expect to happen to U(t) if we let K become infinitely large and hold everything else constant? As the back of the envelope analysis below suggest we expect the number of users at any given time to become infinitely large as we make the viral coefficient infinitely large.

What happens if we make the viral coefficient infinitely large?
What happens if we make the viral coefficient infinitely large?

This bears repeating. There are at least two ways to make the number of users at any given point in time infinitely large. One approach focuses on cycle time and tries to make that as small as possible. The other approach focuses on the viral coefficient and tries to make that as large as possible. Which one should the product developer focus on? That depends. Certain products lend themselves to the approach that focuses on cycle time as the lever. Youtube is a great example, one that David Skok himself uses to make his argument for focusing on cycle time as the driver of viral growth. ((Messaging apps as a family might fall within this camp as well. Examples; WhatsApp, Viber, Kik, KaKaoTalk, Line, WeChat, Momo etc.)) Other products lend themselves more to the approach that focuses on the viral coefficient. Dropbox comes to mind as a product for which it would make much more sense to focus on the viral coefficient as the lever that drives user growth. ((It is important to reiterate that neither cycle time nor viral coefficient need to remain constant over a product’s lifetime. In fact, one would argue that there ought to be a team of people whose sole focus is designing ways to reduce the cycle time and increase the viral coefficient.))

A third driver of viral growth exists, and it is not given enough emphasis in the Skok-Reiss framework. Churn. There are two types of churn. The first type is the instance of the user who signs up for the product, but uses it so infrequently that ultimately that user’s contribution to the growth in total users is negligible. Tactics should be devised to increase that user’s engagement with the product. The second type is the instance of the user who abandons the product altogether soon after adopting it. Efforts should be made to minimize this occurrence. Managing churn is critical because it gives the team of people working on tactics to minimize cycle time or maximize viral coefficient room to run experiments and determine which tactics will work best in accelerating growth in the user base, ultimately compensating for a product’s initially unfavorable cycle time and viral coefficient if that is the situation in which a product finds itself after it has been been launched. Pinterest is often cited as a product that started out with a small viral coefficient and a small user base. ((I have actually heard the argument “Our viral coefficient is higher than Pinterest’s at this stage in their development.” in two or three pitches. An example of discussions about Pinterest are; Steve Cheney, How To Make Your Startup Go Viral The Pinterest Way. Accessed at Techcrunch on Jul. 27th, 2014. You can examine the raw data here. There’s also this discussion on Quora: Why Did It Take Pinterest Such A Long Time To Go Viral? Accessed Jul. 27th, 2014.))

The Skok-Reiss Virality Model is most frequently discussed amongst investors and startups interested in the topic of viral marketing and viral growth, but it is by no means the only one.  In my next blog post on this topic I will examine an approach discussed by Rahul Vohra in a series of posts on LinkedIn, and I will compare his approach to the Skok-Reiss model. After that I will delve into the Bass Model of Technology Diffusion. I’ll wrap up this series on viral marketing by following Valerie Coffman’s footsteps once more by looking to infectious disease modeling for some pointers regarding how one might fix the flaws in the Skok-Reiss model.

Model’s are useful as a guide to the researcher’s thought process, but it is the researcher’s responsibility to examine each model for flaws and weaknesses and then to devise ways to compensate for them in order to reduce the possibility of forecasts that contain large errors.

Filed Under: How and Why, Sales and Marketing Tagged With: Skok-Reiss Virality Model, Viral Coefficient, Viral Growth, Viral Marketing, Virality Formula

A Note On Viral Marketing – Part III: How Dropbox Grew

March 26, 2014 by Brian Laung Aoaeh

Dropbox is another example of a product that has experienced remarkable growth since its launch. In this case study I will explore how Dropbox has achieved such rapid growth and try to identify strategic themes that other startups might consider for experiments centered around user acquisition and revenue growth. ((Any errors in appropriately citing my sources is entirely mine. Let me know what you object to, and how I might fix the problem. Any data in this post is only as reliable as the sources from which I obtained them.))

What is Dropbox? Dropbox is a personal cloud storage service. It provides users with a mechanism for storing files in a folder on the Internet and accessing that folder through an installed client, a website, or a mobile app, on different computing devices. It was founded by Drew Houston and Arash Ferdowsi in 2007. A number of articles online suggest that Dropbox started with an initial base of about 2,000 users. It launched to the public in September 2008 ((According to this presentation by Drew Houston Dropbox had 100 thousand users by the time it launched to the public in September 2008.)). Here are some indications of how much Dropbox has grown since then:

  1. It had about 200 million worldwide users in September 2013 ((See: http://www.cnet.com/news/dropbox-is-like-microsoft-in-the-90s-says-startups-ceo/. Accessed on March 25th, 2014)), and
  2. By February 2013 its users were saving about 1 billion files every day to Dropbox ((See: http://www.cnet.com/news/dropbox-clears-1-billion-file-uploads-per-day/. Accessed on March 25th, 2014.))

How does Dropbox make money? Dropbox operates a freemium business model. The Basic plan is targeted at individuals, and provides 2 gigabytes of cloud storage for free. One can get more storage by inviting one’s friends to Dropbox. The Pro plan provides 100 gigabytes of storage for a monthly subscription of $9.99. The Business plan is designed for 5 or more users, comes with as much storage as needed, and includes other features that are not part of the Basic or Pro plan. According to reports in the press Dropbox started out with about 2,000 users or so.

How did Dropbox grow its user base? ((KISSmetrics discusses this topic here: http://blog.kissmetrics.com/dropbox-hacked-growth/. Accessed on March 26th, 2014.))

  1. Explaining With Video: In the summer of 2009, Dropbox worked with Common Craft to create an explainer video ((You can watch a version of that video here: http://www.commoncraft.com/dropbox-case-study-explanation. Accessed on March 25th, 2014.)) that played a central role in the redesign of Dropbox.com. After the redesign a visitor to the front page of Dropbox.com could watch the video, and sign up. That’s it. At this stage, Dropbox had about 2 million users. ((Dropbox closed a Series A round of financing in November 2009. Accel Partners and Sequoia Capital invested in that round.)) By April 2011 its user base had grown to 25 million. ((This video discussion emphasizes the key role demo videos played in helping Dropbox grow its number of users early in its life: http://techcrunch.com/2011/11/01/founder-storie-how-dropbox-got-its-first-10-million-users/. Accessed on March 26th, 2014.))
  2. Getting Started: Dropbox has a very simple signup process, and an easy user interface that makes it easy for new users to become familiar with the product and how to use it. New users also get an extra 250MB of storage for taking a tour of Dropbox in order to learn about its basic features.
  3. Encouraging Word of Mouth Virality: Dropbox gives users an incentive, and better tools to spread news about the product through word of mouth. Users are rewarded with extra storage capacity when their friends sign up using the referral link that Dropbox gives for email referrals. According to Drew Houston referrals led to a permanent 60% increase in signups. The referral program has a two-sided incentive. The user gets 500MB of storage if a friend signs up, and the user’s friend also gets 500MB of storage for signing up. The program was put in place in April 2010. Dropbox users sent 2.8 million direct referral invitations in the 30 days after the program was implemented. ((Drew Houston, Dropbox Startup Lessons Learned. Accessed at: http://www.slideshare.net/gueste94e4c/dropbox-startup-lessons-learned-3836587 on March 26th, 2014.))
  4. Tying in Social Media: Users are also incentivized to connect their social media accounts – 125MB for connecting a Facebook account, another 125MB for connecting a Twitter account, and an extra 125MB for following Dropbox on Twitter. Users also get 125MB of extra storage for communicating with Dropbox about “why you love Dropbox.” ((See: https://www.dropbox.com/getspace for a list of the incentives Dropbox offers its users.))
  5. Focusing The Message – Simplicity: Dropbox has emphasized simplicity above all else in its communication with existing users, potential users, and in the design of its user experience. That focus has helped it succeed in a very crowded space that includes some large players like Google Drive, Microsoft OneDrive (formerly SkyDrive), Apple iCloud, and other competitors like Box ((Box just filed an S-1 with the SEC for an IPO later this year. You can read the prospectus here: http://www.sec.gov/Archives/edgar/data/1372612/000119312514112417/d642425ds1.htm#toc642425_4. Accessed on March 26th, 2014.)), SugarSync, Evernote, SendThisFile, Carbonite and many others.
  6. Generating PR Through User Engagement: Dropbox engaged with its existing users and potential new users through Dropquest, a scavenger hunt and series of puzzles that culminate with winners earning various prizes from Dropbox. The prizes include free storage and other items from Dropbox. In 2012 everyone who completed the challenge won at least 1GB of free space. Dropbox recommended that participants in Dropquest download and install the desktop application. ((I could not find an announcement about a 2013 version of Dropquest. Perhaps it has been discontinued.))

There’s a debate about the growth Dropbox has experienced? Is it viral or not? ((See for example: http://www.bullethq.com/blog/dropbox-the-viral-lie-sold-to-every-statup/. Accessed on March 26th, 2014.)). There’s also a concurrent debate about “growth hacking” and whether it is as useful as its proponents would have us believe. ((See, for example: http://techcrunch.com/2014/03/22/the-real-engines-of-growth-on-the-internet/. Accessed on March 26th, 2014.)) Does it really matter? I think these are dogmatic positions adopted by the protagonists in the debates taking place about how Internet startups achieve growth. Whatever your position, there’s one observation that no one can argue with; It’s hard to devise a strategy to grow the number of users for a product that none wants to use.

In the next set of posts in this series I will examine a number of mathematical models related to viral marketing – we’ll start with the model most commonly used when people speak about viral marketing.

 

Filed Under: Case Studies, How and Why, Long Read, Sales and Marketing Tagged With: Early Stage Startups, Long Read, Viral Marketing

A Note on Viral Marketing – Part II: How Hotmail Grew

January 27, 2014 by Brian Laung Aoaeh

Hotmail is one example of a product that spread through the use of viral marketing techniques. This case study will cover the early days of hotmail, explore some of the underlying factors that led to its spread, and examine one model that has been used to model growth of its number of users. ((Any errors in appropriately citing my sources is entirely mine. Let me know what you object to, and how I might fix the problem. Any data in this post is only as reliable as the sources from which I obtained them.))

Ray Tomlinson is credited with inventing email as we know it today. Before 1972, email could only be sent between users of the same computer. The problem became more complex once different computers were connected to one another to form a network, and a user on one computer wanted to send email to users on a different computer. Important contributions to the evolution of email were made by others, and commercial email packages began to appear in 1976. ((Ian Peter, The History of Email. Accessed at http://www.nethistory.info/History%20of%20the%20Internet/email.html on Jan 17, 2013.))

Sabeer Bhatia and Jack Smith met at Apple Computer in the early 1990s, and later joined a startup called Firepower Systems. In 1995 they started discussing the idea of building a startup themselves. Their first idea was to build a database on Sun’s Java technology. They called it JavaSoft. Venture capitalists turned them down. During the period when they were working on JavaSoft, they encountered a number of obstacles that prevented them from communicating freely with each other. Jack Smith developed a system that allowed them to have their email displayed on a web page. This became the basis for Hotmail. They soon obtaind $300,000 in funding from DFJ and rounded up an additional $100,000 in additional capital. This was in early 1996. The funding terms ascribed Hotmail an implied valuation of $2,000,000. ((Oliver A. Hugo and Elizabeth W. Garnsey, Hotmail: Delivering E-mail to the World, http://doczine.com/bigdata/1/1370291311_60c0e3de77/4e7-hotmailcase26apr02.pdf. Accessed on Jan. 26th, 2014.))

At the urging of the venture capitalist’s backing Hotmail, Bhatia and Smith did two things. First they struck a strategic relationship with Four11, another DFJ portfolio startup which ran “the most comprehensive ‘people finder’ on the Internet” at that time according to PC Magazine. Second, they automatically included the text “P.S. I love you. Get your own free Hotmail at www.hotmail.com” at the end of every email that was sent by a Hotmail user. ((There seem to be variants of the exact message that was appended to the end of each email, but it is consistently reported that a message was included with every email sent from Hotmail.))

Hotmail launched in July 1996, with 100 signing up in the first hour. By September it boasted 100,000 subscribers. That number rose to 1,000,000 by January 1997, and 8,000,000 by October. Though Hotmail had ran out of cash before it launched its email service to the public, it went on to raise additional capital from venture capitalists. By August 1996 it was valued at $20,000,000, up 10x from the $2,000,000 at which it had been valued just 8 months earlier.

To model the growth of Hotmail’s subscriber base we’ll turn to a model called the Bass Model, after Professor Frank M. Bass who first published it in 1963 as a section of another paper. ((http://www.bassbasement.org/BassModel/)) The Bass Model states that the probability of adoption by those who have not yet adopted is a linear function of those who have previously adopted. The mathematical expression for the model is given below. ((Frank M. Bass, A New Product Growth for Model Consumer Durables, January 1969. Available at http://www.bassbasement.org/F/N/FMB/Pubs/Bass%201969%20New%20Prod%20Growth%20Model.pdf. Accessed on Jan. 26th, 2014))

$latex \frac{f(t)}{1-F(t)}=p+\frac{q}{M}\left[ A\left( t \right) \right]$

In the equation above:

  • t represents time, and the first full time interval of sales is t = 1,
  • p represents coefficient of innovation,
  • q represents the coefficient of imitation,
  • M is a constant, and represents the potential market or the number of purchasers of the product,
  • f(t) represents the fraction of the potential market that adopts a product at time t, and
  • F(t) represents the portion of the potential market that has adopted the product up to and including time t, and
  • f(t) is the first derivative of F(t) wrt t.

Alan Montgomery uses the Bass Model to fit the model’s results to actual data from Hotmail’s first year and reports a very good fit. ((Alan L. Montgomery, Applying Quantitative Marketing Techniques to the Internet, available at http://www.andrew.cmu.edu/user/alm3/papers/internet%20marketing.pdf, July 2000. Accessed Jan. 26th, 2014)) He uses estimates of 0.0012 for p, 0.008 for q, and 9,670,000 for M. I will tackle models like the Bass Model in later posts.

It is reported that Bhatia sent a message to a friend in India using Hotmail, and three weeks after that Hotmail had 100,000 users there. ((Willix Halim, My Top Five “Growth Hacking” Techniques, http://e27.co/my-top-five-growth-hacking-techniques/. Accessed on Jan. 27th, 2014.)) Hotmail was eventually bought by Microsoft in 1998, a year and a half after it launched to the public. The value of the deal was not made public but is rumored to be as high as $400,000,000. ((Jeff Peline, Microsoft Buys Hotmail, January 3rd, 1998, http://news.cnet.com/2100-1033-206717.html. Accessed on Jan. 27th, 2014.))

What ever you call it, “Growth Hacking” or “Viral Marketing”, it works. Hotmail spent a fraction of the capital that its rivals spent on marketing and advertising, but experienced significantly more growth.

In the next post on this topic I will study the tactics Dropbox used to grow its user base.

Filed Under: Case Studies, How and Why, Long Read, Sales and Marketing Tagged With: Early Stage Startups, Long Read, Viral Marketing

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