Diaspora, the project started by a few NYU comp-science undergrads, has been able to raise more than $200,000 through Kickstarter. What has been so amazing by this, is the fact that neither the pitch, nor the product description made a lot of sense to a lot of people (as is evident when you go through the comments).

What fascinates me are two things:
The way in which they were getting that money.
The amount of money these guys were able to get by coming to a relatively unknown platform (kickstarter).

The Message
As Simon Sinke pointed out so very eloquently in his TED talk, these guys were providing a message which was resonating with a lot of people: privacy and facebook’s ongoing issues with it. Most people still probably have no clue what it is these guys want to do or what benefits Diaspora is going to provide–aside from the fact that privacy is getting major attention. So, I guess this proves the point that these guys did not only address a growing pain but were also able to stimulate emotions in the people watching the talk from Eben Moglen that inspired them, reading about it in the news or just reading the headline on Kickstarter: Decentralize the web. To quote Simon here: it is far easier to ask people for something when they are emotionally hooked.

Kickstarter
The platform, through which they were able to collect their seed funding, was already gaining some traction (as is evident by the Google Trends graph) before Diaspora was showing up. However, through all this media attention and the great buzz the four NYUs created, Kickstarter has the potential to become more than what it was before. Let’s face it: the call for a smaller amount of early stage VC funds and the ability to start your company with minimal investment provides a perfect ground for what startups need: some little cash that would be way too unattractive to professional capital investors but maybe just a bit too much one average John Doe. I hope Kickstarter fills this void and excels to provide us all with what we need: more startups left and right.

I was recently reading this post on why web apps are supposed to be better than native desktop apps. To be quite frank, I was a bit startled by the argumentation. From my perspective, there are a couple of advantages, web apps have over native apps and will ultimately succeed.

Feedback Loop
Native applications are suffering from their obvious lack in insights into user behavior. Tracking every click in an app is vital to understand what users are doing or to see what really makes your app so popular or successful. It prevents you from dealing with feature creep. With web apps you can do fantastic things like A/B tests to run different versions for a certain time to see how people’s behavior changes. Sure, you can’t do all the things with Google Docs, but then again what features of Word are 95% of the users really using–and does it really make sense to keep developing and maintaining all those features?

Mobility
Only web apps can provide the convenience and the opportunity to truly provide mobility of your data. No matter if you are on your netbook somewhere on the road or like me right now, starting this blog post on your mobile phone, you might end up with different operating systems and hence different applications. Lucky you, if you have the same program on all your devices at hand. Switching, transferring, and sharing files between computers is such a tedious task that it seems natural that the next step is just to have the app itself in the cloud to modify them.

Maintainability: Programmers Rule
Like it or not, but programmers will drive this eco-system and provide the apps that are solving our most specific needs. The rise and speed of so many new languages and tools to provide new methods to create new web apps far outpaces those of traditional languages. And with very low learning curves, more and more people will be able to develop applications thus driving more and more innovation in this space and ultimately finding solutions to our daily problems.

Internet Everywhere
The internet with its sheer size and growth will continue to be the ultimate, most liberal market place in the world and continue to drive more people to it. Browsers have become the one platform you will always be able to count on. Sure, there are differences between those available, but they present a much larger market to address and thus provide more and easier access to potentially new users and revenue.

Admittedly, there will still be areas web apps will take longer to penetrate. Graphics programs come to mind but who thought that after 10 years of the first Quake 3 we might see an implementation of a this game running in the browser?

With the latest news from AdMob about the rise of web traffic generated by Android phones, people are starting to talk about the shift so many are eagerly expecting, dwarfing Apple’s dominance.

However, I still believe there is third dimension that is highly disregarded in all of this clutter of metrics and stats: the money.

It’s About Monetization
As Jeff Smith of Smule puts it in most simple words: “Show me the money.” Admittedly, he was referring to the even less competitive Ovi Store from Nokia. However, he was touching probably the most important piece of the puzzle: none of the other stores have generated as much revenue from all of these apps as Apple did.

Make It Easy For Users
For all that Apple does wrong, it has undoubtedly brought the mobile internet to the masses with its iPhone. It is easy to use, has a built-in system that makes it easy to use your credit card to make purchases on iTunes and the App Store. Google is regarded as liberating this market but favors its Checkout. As I wrote earlier, Google’s interest is to bring people to the internet. I think it would be great to see them enabling people to use alternatives people are already used to (e.g. PayPal, etc.).

Create A Competitive Space
Apple’s App Store uses metrics of the last 4 days to calculate its top downloaded, top purchased lists. Talking to startups, I learned that once your app is appearing on any of these lists, your downloads increase dramatically due to the increased visibility.
Google on the other hand is ranking apps by their total downloads to date. This is a pretty static approach which makes it very hard for newcomers to gain traction and use this tool to gain visibility. Hence, what Google is missing is a space that stirs downloads of newly created apps and makes it hard for old apps to remain in top spots for too long.

Ease The Pain For Developers
The beauty of Apple’s simplistic iPhone platform is its equality. There is only one screen resolution for both the iPhone and the iPod Touch. With the emergence of the iPad we have finally seen a higher resolution and rumor has it that with the upcoming fourth generation iPhone we will see another higher resolution device.
But this is nothing to the woes developers have to go through when they want to get their app running on most of the Android phones available out there. I have been hearing about rendering problems on different devices from many startups developing for this platform. And with Motorola and HTC customizing Android more and more, I am doubting that this will ameliorate in the forseeable future.
To some extent this seems all too familiar to me with what Windows did with its mobile platform over the last couple of years.

I admit that I can be wrong about my predictions here. And I wish that competition would arise as this usually creates a better outcome for all of us users and developers. But as network effects may start to kick in and apps enjoying some great popularity, any stats about web usage are second to where the real money remains and hence apps on Apple’s platform will remain the only way to go for developers with ambitions to cash in on their apps.

This morning, this news struck me:

Google Confirms Free Turn-by-Turn Directions  Coming to iPhone

Great, so Google releases one of the most unique and valuable application features to the iPhone. But why would it do that if this would have been a perfect selling point for Android devices? This proves my fears that Google could abandon Android at any time since they don’t really care about it.

Google Is An Advertising Machine
Unlike Apple, Google still makes the vast majority of its revenue with ads (something around 95% of the total $24 billion in revenue in 2009). It’s what Google does better than any of its competitors. But since advertising makes up such a large amount of their revenue, it is natural that anything else is just considered minor and less important.

Google Wants To Expand The Market For Ads
The reason Google gives away so many things for free (including the Android OS) is because with every additional person using the internet, the total addressable market for Google grows. As it is focusing on ads, any additional person using search is a potential click and in return driving new advertisers to their site.

Google Uses Android To Shake Up Competition
For this reason I suspect Google’s primary interest is showing competition how to design a phone and operating system that would enable people to use the mobile internet. For Google location search has become of primary interest. That’s why it launched a satellite, expanded maps and finally brings it to all devices. But although this all costs several millions, it is minor to what Google can expect to generate in the long run from this data. And again, because every additional user is a potential click and drives more advertisers to its site, it can give away such applications for free.

For Apple, The iPhone Is Strategic – For Google, Android Is NOT
Since Google does care more about opening up the market than about the success of it’s own operating system, it does not regard Android as a strategic asset. Sure, it was positioned well, being available on several devices. However, as long as Google is available on most of the market leader’s phones, it couldn’t care less about Android. As I pointed out before: Android itself doesn’t generate one dollar of revenue for Google. However, every iPhone Apple sells is direct revenue that goes to its income statement. Therefore Apple needs to pay way more attention to what is happening to and around its phone. But that also reassures me that they will keep on making decisions that will drive sales. And if people don’t like it anymore, Apple is in deep trouble. In case you had any doubts how big the iPhone really is for Apple, see this graph.

In general, I agree with cdixon that a startup should raise as much money as possible. However, due to the difference in mentality and capital available, we Europeans might have a different take on the reasons for that.

If you are looking for a first round investment (i.e. not angel money), raising an amount that takes you beyond deploying your product to market and achieve first revenue is likely going to be pretty hard in Europe (or at least harder than in the US). The reasons lie mainly in the size and number of funds in Europe: there are only a few VCs actually pursuing the real seed stage and if they do, their funds are way smaller than in the US (reasons can be found here). Hence, structuring the investment amount is considered equal to minimizing the amount of risk at hand while increasing the ability to pursue more investments over the same period of time. This is opposite to the behavior of American VCs that like to deploy as much cash as necessary to get you to exit.

The following graph illustrates this mentality [Disclosure: this is an example; any similarities to real funds are unintentional and coincidental]:

While the blue arrows denote capital injections due to achieved milestones, the green one might not have been possible without the failure of Venture 2 and/or Venture 4 (the red arrows indicate milestones that were not hit and hence, not additional capital injection was necessary).

How is the European perspective different from the American: generating first revenue and using that cash to grow?

First, earning $100 is not going to get you through the month. But I proves that customers are willing to pay for your product. No matter how much you want to raise, this fact alone will increase your valuation and the likelihood for raising an additional round–maybe with someone else.

Second, let’s assume you will generate those first pennies in 6 months. That is a long time for a startup. So, it is not uncommon for startups to switch their business models upside down a couple of times before they finally find the right monetization strategy. Hence, you better have more cash than what you got from your first sales.

Europeans like to structure their investments and tie those cash inceptions to milestones. So, every time you are hitting one of those milestones, you are supposed to receive another tranche of cash.

Therefore, unless you have already sold your business, you are constantly seeking investors. I refer to this as a dance that never stops unless you don’t feel like you know what business you are pursuing or have successfully exited your venture.

A lot of the negativity VCs are feeling from entrepreneurs roots in the misunderstanding of why VCs keep telling entrepreneurs to grow really big and hence seem to be pushing for more and more, making them appear like slave drivers.

VCs also serve someone else
Even though there are many VCs who might make you feel that it’s their personal money they put into your startup (which, in all honesty, is usually partly true), it’s usually coming from a fund. Funds are composed of smaller sums of money contributed by wealthy individuals and/or institutions. These people/organizations usually get to know in which companies their money went but they care only about the return their money in the fund makes. In order to make the investor happy, a VC needs to generate quite an excessive amount of money over the lifetime of the fund (usually something between 5 to 7 years). And since the failure rate of each individual startup is very high, a VC pushes for everyone to make the most and compensate for the failure of the others.

It’s unsustainable to remain small
Many people think that it’s ok to have a business that is generating enough money to provide a living for oneself and maybe a family. While this model might still work in some areas, it is usually not true in today’s hyper-competitive internet market. With radical shifts happening every couple of years, a business can easily be leapfrogged and killed by competition every second. Hence, it is hard to make a point that you can provide a sustainable living for yourself for long with a small business in a niche.

The solution: grow!
So, the answer to this problem is growth. There’s always four ways to grow according to Ansoff:

As you may understand immediately, defending  a competitive edge is something very hard to achieve for a small startup with a small customer base in the long run. Diversification can increase complexity and might create other problems (organizational, economies of scale, burn rate) at smaller companies as well. So, there is basically only one of two ways: straight up or straight right, penetrating more markets with your product or expanding in your current market with new products. And this is exactly what large enterprises are seeing: small competitors that are in a niche they have not conquered before and which are cheaper to acquire than to running the risk of failing themselves pursuing the same users.

No matter which path you choose, it will always feel like an uphill battle no matter the size or age of your company. The chances of losing connection to your target market are increasing the larger you grow because of the complexity you add with more products or more people to manage. But this is exactly why startups will always have a chance in today’s market. And this is exactly why there is still a huge supply of capital from venture capitalists to this industry.

On my last trip to Taiwan, I had a nice discussion with a highly successful local VC on the value of hardware and software. Taiwan is one of those hidden gems in IT: it is producing and manufacturing a lot of hardware for other companies at a total cost that is even hardly matched by any other country. Asus is a pure Taiwanese company and Apple has its iPhone produced here–well, actually at one of their plants in China but run by FoxConn which is a Taiwanese company.

What is so interesting is the fact that even though these companies are providing something extremely valuable to all highly developed and industrialized countries, they are still not the one given most recognition in the marketplace. We were wondering if that was stemming from the fact that Taiwan is focusing on hardware rather than software.

People value the physical goods, the feeling of holding something in their hands of value. But even before the fall of the Motorola Razr, people realized that there is more to tech than just function. Apple exploited this trend with its successful iPhones and iPods: although they were technologically not the best or stuffed with the latest technology, Apple designed them in a way so that normal people were able to use them without having to read yellow-pages-sized manuals.

The trend that technology is becoming more and more accessible by people who are not well versed in this field is more prevalent in business but has reached out to personal homes by now. With the need to drive down costs and the lack of affordable and available specialists in IT, companies are asking for easy-to-use tools in almost all fields. I do not see an end to this trend as most of us will become used to the ease of using rather complex technology more and more. And people adapt this to their personal homes and vice-versa.

We hence concluded that in today’s IT hardware market, most of the value comes from software that is bundled with the hardware and not from the hardware alone. User experience (UX), usability (UA), and user interaction (UI) are three emerging fields that are gaining traction as more and more people realize this trend.

I am sure that Taiwan will continue to prosper and defend its position in the world. But I am also sure that design and conception of software will remain an asset in other countries and have more impact on product success or failure.

Follow

Get every new post delivered to your Inbox.