VC Tomasz Tunguz explains his approach to SaaS investing (podcast)

 

In this week’s episode, we talk with Tomasz Tunguz, a partner at Redpoint Ventures and a noted expert on SaaS company metrics.

Tunguz explains how a law firm internship in South America when he was 17 launched him into tech, building a small software company and then winding up at Google before landing at Redpoint seven years ago.

One of the things that has garnered him a lot of attention is the blog he writes. He posts nearly every day and includes a lot of data-driven analysis, providing useful and concrete insights that entrepreneurs can really use. One of the things that got him started with that? Becoming a father and getting up early every morning to give his son a bottle. The site gets 100,000 views per month on the website, and he also says he has 10,000 email subscribers and 10,000 RSS subscribers.

In our interview, Tunguz explains where he gets his data for his posts — and goes on to talk about what he looks for in startups and why he wound up focusing on SaaS. (Hint: 65 percent of VC dollars go to enterprise companies, and consumer startups only get 15 percent — even though the latter get much more press.)


Also in this episode, Ruth Reader and I tell you what to think about:

You can listen to the podcast in the player above.

Or, click here to get the MP3 of this episode of What to Think.

You can also listen to What to Think on SoundCloud.

And please subscribe to What to Think in iTunes, where you’ll get every episode delivered to the device of your choice as soon as it’s released!

originally published on VentureBeat » Dylan Tweney http://ift.tt/1Qkpxzy

VC Tomasz Tunguz explains his approach to SaaS investing (podcast)

Using data to improve diversity — and business performance

Studies show that diversity improves performance of human teams. Not sure about beach huts, though.

Too often diversity discussions in business are framed as a zero-sum game: affirmative action versus meritocracy, minority versus majority, them versus us.

There are some hopeful signs that the tech industry is starting to realize that this is not the case. Google, Facebook, Twitter, Apple, and Amazon — among others — have all made a point of releasing their diversity numbers, at least insofar as diversity means “gender and ethnicity,” and have done so for two years in a row now, so we can see how little things are improving. At least they recognize it’s a problem.

More significantly, these companies are releasing this data without apology, and with a frank recognition that diversity is a goal worth striving for. It makes companies smarter, it makes them more sensitive to the needs of a diverse customer base, and it’s the right thing to do.

But, as anyone who writes about the topic will discover in the comments on social media about their work, there’s still a sizable contingent of people who believe that companies need to lower their standards in order to increase the diversity of their work forces.

Not so, says Joelle Emerson, the founder of a relatively new agency called Paradigm that applies data-driven social-science techniques to the challenge of helping companies increase their diversity and manage more diverse workforces more effectively. Clients include Slack, Airbnb, Pinterest, and Udacity.

In fact, Emerson said, numerous studies show that diverse teams are more innovative and better at solving problems than teams where everyone shares the same background, race, or gender.

I spoke with Emerson at a discussion on diversity earlier this week at Draper University. Incidentally, Draper was a great venue for this chat. Every time I’ve visited Draper University I’ve been impressed by the diversity of the students (they are truly a global, multiethnic, mixed-gender group) as well as their infectious enthusiasm, curiosity, and seriousness of purpose. They ask great questions, too, and they are unfailingly welcoming and polite, which is something you don’t always encounter in Silicon Valley. Say what you will about Draper’s goofy “hero” iconography, they are doing something right in this department.

So if diverse teams produce better results, why not just focus on results, and let the diverse teams shine through their own merits?

Actually, Emerson told me, at least one study has shown that the more meritocratic people try to be, the less meritocratic their hiring and promotion decisions actually are. In other words, people are more likely to give big raises to men and small raises to women if they’re told to base their decisions exclusively on meritocratic principles. It’s a phenomenon known as the paradox of meritocracy.

You can see that dynamic at work in Silicon Valley, where investors pride themselves on their “pattern matching” and “data driven” decision making, but still somehow overwhelmingly prefer to invest in founders that look like them. When VCs are 91.8 percent male and 77.5 percent white, that’s a problem.

So if companies want to be truly meritocratic, they need to take steps to make more objective hiring and promotion decisions. That should result in better business performance — and more diversity at the same time, since it will eliminate built-in biases.

One such technique is the blind audition, which I’ve written about before. In symphony orchestras where people audition for jobs from behind concealing screens, hiring managers are forced to pay attention to the only thing that really matters: how well the person plays their instrument. Similarly, blind auditions in a tech company can help managers focus on the work a person can actually do, such as writing or coding, rather than on their look or their self-presentation.

I’ve used blind auditions, with reasonably good results, in hiring journalists. I will say this, however: If you’re forced to focus only on the work, it does make the hiring process more laborious, because you actually have to read every work sample very carefully. But there’s no doubt that leads to fairer decisions.

Emerson herself has a handful of recommendations in a smart article on raising the bar in hiring. Her basic thesis: If you fix your hiring process, you’ll wind up with employees who are both more diverse and more talented. She recommends doing that by democratizing the job application process (for instance, by eliminating the advantages that certain groups have thanks to training on how to interview); focusing on job-related skills; and retuning your “culture fit” questions around aspects of culture that really matter, such as “would I enjoy working with this person?” rather than “would I hang out with this person after work hours?”

This being Silicon Valley, there are a number of startups aimed at helping tech companies with their diversity efforts (in addition to Emerson’s Paradigm). Gapjumpers helps companies conduct blind auditions for more objective recruiting. Textio uses AI and natural language analysis to improve the text of job listings, removing words that might discourage women or other diverse applicants. And Jopwell helps connect black, Latino, and Native American job candidates with companies that want to hire them.

The bottom line: Diversity is — and should be — good for business. Smart companies will embrace this approach and make themselves not only more inclusive, but higher functioning.

For more on these issues, follow VentureBeat’s collections of stories on diversity, gender, and race. And please let me know how your company is — or isn’t — tackling diversity in tech.


 

Originally published on VentureBeat

Using data to improve diversity — and business performance

I, for one, welcome our new surveillance robot overlords

A Knightscope K5 robot patrols an empty parking lot.


Knightscope founder and CEO William Santana Li is not modest in his ambitions.

He estimates that crime — of all kinds — has an annual global economic impact of a trillion dollars. That’s $1 trillion lost every year due to theft, vandalism, robbery, violence, and more.

He wants to cut that in half. And to do that, he’s building a fleet of surveillance robots.

The Knightscope K5 is a tall (about 5.5 feet), dome-headed, wheeled robot loaded with cameras and sensors. It rolls around at a slow speed, just a few miles per hour, and as it goes it emits a sort of drone-like humming sound. The sound is deliberate, so the robot doesn’t surprise people by rolling up silently behind them, but it also gives it a somewhat eerie presence — a sensation that’s probably appropriate, given that it’s watching your every move with a sensor suite that includes light detection and ranging (LIDAR) devices; high-definition, low-light video cameras; a camera designed to read and recognize the digits on license plates; directional microphones; proximity sensors; an inertial measurement unit; and a GPS unit.

The K5 looks a bit like a cross between R2-D2 and a Dalek, and that’s right where Knightscope wants it. The design challenge, Santana Li told me, is to make something that commands respect but isn’t frightening; that’s serious-looking but approachable. So, for instance, even though the technology might allow it, Knightscope is not going to make black-painted robots that zoom around at 20 miles per hour, because that would terrify people. Like police officers and security guards, the K5 aims to be a constant, calm, reassuring presence.

Knightscope seems to be succeeding in that. I find the robots eerie, but I’m also a born cynic. Most people apparently find them charming, and many people take selfies or family photos with the robots.

Now, Santana Li’s approach might strike some people as a little overly optimistic. Indeed, he had a difficult time convincing any Silicon Valley venture capitalists to back him. “Hardware is too hard,” is the refrain that many investors will tell you: It’s simply too expensive and too difficult to build a sustainable hardware business, particularly in a world where fast, professional, and cost-effective Chinese manufacturing is so dominant.

Santana Li has little patience with that. In a recent onstage interview I had with him at GSV Labs’ Pioneer Summit, he expressed exasperation at the crop of tech entrepreneurs who are tackling social media sharing and apps instead of challenging hardware innovations.

“It’s un-American for an entrepreneur to take the path of least resistance!” Santana Li yelled.

Undeterred by the lack of venture backing, Santana Li raised a total of $7 million from a State Farm-backed incubator, Flextronics, and NTT DoCoMo. The company said it has just four customers so far, but claims to have over 100 on its waiting list.

Santana Li is also impatient with the arguments that privacy advocates bring up. You don’t like having a robot rolling around your neighborhood, recording video 24-7? Well, think how you’d feel if you were a victim of crime, Santana Li said. Now what’s more inconvenient?

I don’t find that argument fully persuasive, but the analogy he draws with beat cops and security guards is a good one: Sometimes the mere presence of authority is enough to deter crime, and — given the recent push to put body cameras on police officers — it’s maybe not such a big step to having a fully autonomous camera-equipped robot rolling around.

Besides, for the most part, Knightscope is punting on the privacy and data storage issues: It will let its customers sort those questions out.

The pricing model is what’s perhaps most intriguing. Knightscope plans to rent its robots out for $6.50 an hour — far lower than the $20 per hour most security guards make. With that, you’d get 24-7 coverage, a web-based console, and a slew of features that can supplement, not replace, whatever security force you already have. Customers could include businesses (for monitoring a mall or a parking lot, for instance), neighborhoods, or maybe someday even police forces.

And if Santana Li’s ambitions pan out, it could turn into a very big business. According to the National Institutes of Health, the U.S. spends $179 billion a year on police protection, legal proceedings, and corrections. At $6.50 per hour, supplemental security monitoring might look like a very economical alternative to policing and security guards — and with billions already being spent, Knightscope has the potential to carve off quite a big slice of revenue.

Just as long as it can keep from freaking people out too much.

Originally published on VentureBeat

I, for one, welcome our new surveillance robot overlords

Netflix reveals the future of enterprise tech: Here’s why

This is the legacy: Data centers that most people don't need to think about any more.

I was sitting in a conference on enterprise infrastructure this week when I realized that the generational shift long promised by cloud advocates is finally, irreversibly underway.

That shift is away from “legacy” data centers built on x86 servers, VMware-managed hypervisors, SQL databases from Oracle, and storage hardware provided by EMC. Replacing all that are web-scale (or at least wannabe web-scale) technologies based on containers, commodity hardware, NoSQL databases of various kinds, and flash storage. The new infrastructure is cheaper, easier to scale up to large volumes of data and computation, and more flexible and agile.

But who really cares about that architecture, except the billion-dollar infrastructure companies that are about to take a giant hit in their valuations? And by that I mean Dell, HP, IBM, Cisco, Oracle, and, yes, EMC (which Dell is in the process of trying to buy). These companies might not quite be the walking dead, as Wired called them this week, but they are certainly headed for a world of hurt, which is why Dell is trying to buy EMC: It needs to shore up its legacy business.

Who cares about them, except their shareholders? Because it’s now possible to build a billion-dollar company without ever setting foot in a data center. You don’t have to care whether the datacenter is using HP and Dell hardware or some cheap commodity CPUs built to spec by the cheapest possible manufacturer. All you need are virtual servers you can spin up on a moment’s notice, the ability to deploy containerized apps into that environment, and support for the unstructured databases you need to handle the massive influx of bits you’re about to start collecting and will need to analyze.

Netflix shows what that looks like, and why — for now — Amazon owns such a big piece of that future.

Neil Hunt, the chief product officer and vice president of engineering for Netflix, was speaking at the Engineering Summit on Infrastructure, which had been organized by Engineering Capital, a small, enterprise-focused VC fund. Hunt talked about Netflix’s longstanding use of Amazon Web Services, the market and technology leader in cloud services. But it’s not just Netflix, Hunt said: Everyone is moving toward AWS.

“AWS is now the basic layer of compute services,” said Hunt.

Netflix is not just heavily reliant on AWS — it’s about to become completely dependent. Hunt plans to power down his company’s last data center this year, at which point Netflix will be running almost entirely on outsourced cloud infrastructures, mostly operated by Amazon. (It’ll still run its own content delivery network — CDN.)

Note that this timeline is new. Netflix originally said it would shut down its last datacenter in 2014, and then again this past summer, but the future sometimes comes a little slower than expected. That’s one aspect of enterprise infrastructure that will probably never change.

Still, Hunt would be happy to be less dependent on a single vendor: “That’s a somewhat uncomfortable place: To be dependent on a partner who is also competing with you,” Hunt said, referring to the fact that Amazon also sells a streaming video service.

But up to now, Hunt hasn’t found a single provider that matches Amazon in terms of its capabilities and scope.

“AWS is years ahead of Azure and a year or two ahead of Google in terms of the features and levels of abstraction they offer,” Hunt said.

“It’s getting closer, but Amazon keeps raising the bar in terms of AWS features.”

Gleb Budman, the CEO of Backblaze, which also recently began providing storage services that compete with AWS, asked Hunt if he’d consider using other cloud providers, even piecemeal. For the most part, Hunt said, the answer was no. Apart from a few tests here and there (Netflix is backing up data to Google, for instance), the company is almost entirely based on AWS.

So is the battle for the next generation over? Hardly. AWS has an enormous head start, but there is still no standardization of cloud services — something that Hunt believes will be necessary.

Hunt looks forward to a day when there is more standardization among computing components — and, by extension, more competition for AWS.

“Let’s get it right. Let’s make a standard toolkit that software engineers use when building software, just like hardware engineers use when building a bridge,” Hunt said.

“Then we’ll see an incredible increase in productivity.”

originally published on VentureBeat

Netflix reveals the future of enterprise tech: Here’s why

Twitter Moments joins a long lineup of attempts to curate the news

Twitter Moments screenshot 1


Twitter made its long-awaited move into the news business this week with the launch of Twitter Moments, a new tab in Twitter’s mobile apps that let you see semi-curated summaries of the biggest news stories, as represented by things people are tweeting.

It makes sense, given that Twitter contains — among the 500 million things people tweet every day — an enormous amount of “news,” however you define that. But finding the news you’re interested in has historically been very difficult. You need to spend a lot of time creating lists or following people who actually have newsworthy things to say, and even then, their smartest tweets are often mixed up with a whole lot of stuff that may be interesting, and even funny, but which hardly qualifies as useful information.

Twitter, however, is a latecomer to the social news curation game. Lots of people have attempted to extract useful signals about the news from the huge mess of social data, with varying results. Let’s put Twitter Moments in context:

Techmeme: One of the earliest attempts to bring order to the news, Techmeme focuses on tech news. Tech journalists have a love-hate relationship with it, and can become obsessed with “getting on Techmeme” to the detriment of actually producing useful, well-written news. But by aggregating stories from a variety of sources and giving prominent links to the most useful and/or most-referenced stories, Techmeme actually is a handy way to scan the day’s top tech news.

Google News: Less focused on social signals than textual ones, Google News uses its analytic tools to group together related stories and highlight the biggest ones. Unlike Techmeme, it’s entirely driven by algorithms, and that means it often makes weird choices. I’ve heard that Google uses social sharing signals from Google+ to help determine which stories appear on Google News, but have never heard definitive confirmation of that — and now that Google+ is all but dead, it’s mostly moot. I find Google News an unsatisfying home page, but it is a good place to search for news once you’ve found it.

Flipboard: The closest thing to a magazine experience on mobile, Flipboard arguably presents the most readable, news-centric view of your social stream by letting you view stories that people in your Twitter or Facebook networks have shared. Unfortunately, it doesn’t do a lot of filtering or weighting of those stories (to make the most-shared ones more prominent, for instance).

Pulse: LinkedIn has been putting a lot of effort into curating news, and Pulse shows some of the fruits of that effort. Its most useful feature is the ability to notify you whenever one of your LinkedIn contacts is mentioned in the news. It also presents a list of stories based on what people in your network are sharing, which can be handy — but that feed is often dominated by the kind of self-promotional stuff that many people on LinkedIn can’t stop posting. More relevant are the daily news roundups from LinkedIn’s editors.

Nuzzel: This app has been getting a lot of press lately, first because Twitter investor Chris Sacca suggested that Twitter ought to buy it. It’s not a bad idea: Nuzzel actually makes Twitter useful for news by looking at the URLs that the people you follow are tweeting. If enough of them tweet the same URL, it puts that story in your news feed on Nuzzel; if even more people tweet it, Nuzzel will send a notification to your device. That’s handy if you have interesting people in your Twitter feed who tweet about news you’re interested in, but Nuzzel also offers some curated lists that can augment that, and may be expanding its curated feeds soon. I like the Nuzzel experience a lot, even if its algorithm is relatively basic — showing that you don’t necessarily need high-order artificial intelligence to extract the news from Twitter.

Twitter Moments: If you want a TV-like experience showing you some cool pictures and videos from the top news, sports, and entertainment topics, this is the place to go. I’ve been using it for less than a day, since it was first released, but my initial impression is that this is a good way for Twitter to highlight interesting things without asking me to do a lot of work to find those things. The big drawback is that it’s entirely self-contained: None of the tweets link out to stories on the Web, so if I want to see more than just headlines and pictures, I have to go somewhere else.

Upvoted: One more site worth mentioning just launched: Upvoted, a homepage that Reddit has put together out of the stories posted on that social network. One key feature of Upvoted: It’s just the stories, no comments or votes allowed. In other words, if you love Reddit’s obsession with nerd culture, kitten GIFs, space exploration, and geek love stories, but you hate its toxic mix of racism, sexism, and juvenile stupidity, Upvoted is the place for you.

What conclusions can you draw from this admittedly biased and ad-hoc survey of the landscape? First of all, Twitter Moments is way behind the rest of the pack in terms of social curation capabilities. It is hardly the “bold change” Twitter execs want you to believe it is: It’s kinda neat, but ultimately underwhelming.

Second, nobody is really using algorithms of any sophistication, with the possible exception of Google News: All of these sites and apps rely on the most basic stats, such as how many times a URL is shared, and most of them — including Twitter — add a significant layer of human curation. You’d think it would be pretty easy for Twitter — or someone else — to come up with a more effective solution than that.

Third, news consumers still have to put a fair amount of work in before they can get the news they want, consistently and readably. There is still a big opportunity for a company that can figure out how to curate a set of news, tailored to each reader’s interest, with speed and reliability.

Whether there’s a business model in doing that remains to be seen, however: The news has not exactly been a good place to find high rates of return on investment in the past few decades, and it’s getting even worse as online advertising approaches the end of the line. But that’s a topic for another day.

originally published on VentureBeat

Twitter Moments joins a long lineup of attempts to curate the news

You think women in tech have a problem? We all have a problem

women learning to code


The tech industry’s complicated and sorry treatment of women has become a big topic.

Lawsuits have helped blow up the issue. Most notably, former Kleiner Perkins partner Ellen Pao filed a discrimination suit against the VC giant last year, lost the suit this year, and recently dropped her planned appeal.

Also in the spotlight are public speaking appearances by some of the industry’s most powerful women, where they are inexplicably asked to talk about motherhood before they are asked about the billion-dollar businesses they run.

And of course, women continue to be underrepresented in tech, particularly in engineering, executive, and investor roles.

Google, Facebook, Twitter, and other big Silicon Valley companies have all gotten into the habit of releasing their diversity statistics, which are remarkably consistent: In almost every case, less than 30 percent of their workforces are female. (Amazon is the lone standout, with a 37 percent female workforce.) The transparency is laudable, but the ratio is not changing. When releasing the numbers, these companies all provided pretty much the same predictable spackling of public relations on top of their data: We know these numbers aren’t great, but we’re doing the best we can.

Note: Those poor diversity numbers don’t only reflect the plight of women in tech; they show that African-American and Latino techies are underrepresented in these companies, too.

This is an issue that should concern everyone in tech, male or female, particularly when there is so much demand for talent. The arguments that men are somehow better than women at coding carry no water, especially when you look at the history of computer science, where there were accomplished female programmers in abundance until the past few decades. The industry collectively turning its back on almost 50 percent of the available talent pool is not optimal. It’s also just not right.

That’s why I think everyone who hires or manages anyone in tech ought to read the remarkable book, Lean Out, edited by Elissa Shevinsky. Shevinsky is an entrepreneur and coder, and, as it turns out, an excellent aggregator of passionate, useful, insightful, and infuriating essays about all aspects of gender and tech.

We’ve written about Shevinsky before, when she got the nickname “Ladyboss” while working with Pax Dickinson, a man who got into trouble for being outspoken (and indeed quite offensive) in social media while working as the CTO of Business Insider. She’s hung onto that moniker, even though she has since moved on from the startup she and Dickinson cofounded. It suits her: She seems like someone who is comfortable owning her differences and is able to command the respect of brogrammers even as she pushes to make tech more welcoming to all kinds of women.

Lean Out is clearly a response to Sheryl Sandberg’s wildly successful book Lean In, which convinced a small army of women to step up, “lean in” to their workplaces, and demand more responsibility and more respect. Shevinsky and the authors of the essays in this book take a different angle: If tech companies are unwelcoming places, to hell with them. Start your own company and run it better.

It’s fitting that Lean Out begins and ends with exhortations from FakeGrimlock, a Twitter personality who, as a robot dinosaur, shouts at people to get them to follow their passion and start companies themselves.

But the book is not just directed at women who might want to opt out of the rat race and start their own thing. This book is packed with stories — and statistics — that should give anyone in tech management pause. Katy Levinson’s stories of frequent harassment, and even rape, in corporate work contexts are starker and scarier than most of the anecdotes that make it into public discussion about gender equality. Essays from transgender writers like Anna Anthropy and Squinky show that it is possible to A/B test gender in tech, with some unsurprising, but moving, conclusions.

Katherine Cross offers a somewhat academic, but ultimately sensitive and understanding, portrait of male nerd culture, and how (and why) it only reluctantly accommodates women. Her essay makes it clear why the current nerd culture we have is so gendered — and why it leads to ridiculous outbursts of anti-female sentiment, of which Gamergate is the most egregious example.

And Shevinsky herself, in an essay critiquing the “pipeline problem,” points out that she and many of her female friends have not been able to land jobs at companies like Google — or even get called by their recruiters — despite having over 10,000 hours of programming experience and having held leadership roles at sites with millions of users. She recounts that in her college classes, not that long ago, the students were about equally split between male and female. But at some point those women were unable to find work in tech, or found themselves unwilling to put up with the static that went along with the job.

In other words, tech has a pipeline issue, but not the one companies usually blame: The supposedly empty “pipeline” of girls taking an interest in science in grade school, leading to fewer female engineering majors, leading to a dearth of qualified women.

No, the problem is the pipeline coming from the other direction: The VCs and executives funding and running most Silicon Valley companies are overwhelmingly male, and largely white, and they have been trained through years of “pattern recognition” to place bets where they seem the safest: On companies and new hires that reflect their often unconscious assessments of what quality looks like.

That means they tend to hire white, male executives, who in turn hire white, male middle managers and engineering leads, who tend to hire white, male engineers.

Meanwhile there is a persistent, male-oriented nerd culture that actively drives women out of the field.

Katy Levinson offers a three-point program to address this in her essay:

The first thing is pretty simple: in all organizations, demand that there exists a code of conduct and clear method to report misconduct. …

Second, while there will always be truly malicious people, most people just don’t realize the harm of their actions. There needs to be correction without punishment for people who are not malicious. …

Third, and most important, is making a serious personal commitment to solving this.

The overwhelming sense from this book is of a group of women and transgender people who are just fed up with all the crap. As Shevinsky wrote in an earlier essay, also reprinted in this book, “I didn’t want to think about gender issues but the alternative is tit and dick jokes at our industry’s most respected events.

It’s time to change that. And it’s not just women who need to do something about this. Whether by “leaning out,” or by doing what you can to make the company you’re at work better for women, you need to help fix this. We all do.

originally published on VentureBeat

You think women in tech have a problem? We all have a problem

The writing is on the wall for the ad-supported Web: It’s the end of the line

It's the end of the line.


With the release of iOS 9 this week, the discussion over ad blocking has reached a peak.

That’s because the latest version of Apple’s mobile OS includes tools for developers to create ad-blocking software, affording mobile users the same freedom from advertising that desktop browser add-ons like AdBlock Plus and Ghostery have provided for years.

In the U.S., 16 percent of Internet users employ ad-blocking tools, according to a recent study by PageFair and Adobe. (Note: PageFair provides tools for publishers and advertisers to get around ad blockers.) The percentage is even higher in Europe, with the highest rate of ad blocking in Poland, where 39 percent of the population blocks ads.

Expect that number to rise even higher in the coming year, as iOS tools like Crystal give people the ability to remove mobile web clutter, promising that this will increase page load times by 4x, cut data usage in half, and increase battery life.

The discussion around ad blocking has been going on for weeks. Instapaper creator Marco Arment wrote a self-reflective piece on the ethics of ad blocking in mid-August. Investor and former Apple executive Jean Louis-Gassée provided a very smart analysis titled “Life after content blocking” later that month. Over on the Awl last week, Casey Johnston wrote a long essay called, cleverly, “Welcome to the block party.” And today, Verge editor Nilay Patel got in on the action, welcoming us to the hell of an advertising-free web. They’re all good pieces, and I recommend anyone interested in the issue to read all four of these.

The story, in a nutshell, is that readers are finally getting fed up. Fed up with incessant banner ads, obnoxious pop-ups, and videos that automatically start playing when you load a page. Fed up with fullscreen takeovers that force you to find, and click, a tiny “x” before you can read the article you actually came for. Fed up with cookies and widgets that track their every move online, allowing advertisers to target them with increasing precision. Did you look at an underwear website a few weeks ago? You’re going to be seeing ads for underwear every time you visit Facebook — or any of dozens of other sites — thanks to retargeting software that lets the underwear maker target ads to you based on the fact that you expressed a fleeting interest in their product.

Advertisers are throwing all this crap on the web for two simple reasons: It works, and publishers are out of alternatives.

Advertisers use retargeting and data-collecting ads because they provably increase the efficiency and accuracy of their ad spend. Those ads really do get people to buy more underwear, and if the price for that increased revenue is putting photos of tightie whities into a bunch of people’s browsers, so be it. Banner ads don’t really work, but there’s a tiny, tiny percentage of people who click on them, and some small fraction of those people will go on to buy something, so it becomes a numbers game: Throw up enough banner ads, and you’ll generate a return on your investment.

Publishers allow these ads because they need the revenue from advertisers. For a decade and a half, the predominant business model for online publishers — not to mention gigantic platforms like Google and Facebook — has been advertising. The problem is that, thanks to the law of supply and demand, the value of advertising has been steadily decreasing over the past 15 years. Advertising is sold based on impressions, or the number of times that people have seen it (or are assumed to have seen it). As web use goes up, people see more web pages, and that means publishers are delivering more impressions. As the number of impressions approaches infinity, the value of those impressions approaches zero.

For publishers, that means that ad revenues have been steadily decreasing for years. The most obvious response is to try to increase the number of impressions to offset their declining value. There are two ways to do that: Increase traffic, and put more (and more intrusive) ads on each page. The first strategy leads to BuzzFeed-like clickbait and desperate reblogging of the stories deemed to have the most traffic potential. The second leads to ad-choked pages and increasingly in-your-face advertising.

A third approach is to try selling native advertising: Ads disguised as content, so ad-blockers can’t block it and readers are confused about whether they’re reading independent content or an ad. Lots of publishers are embracing this model, and advertisers love it, for obvious reasons. Readers, however, find native ads obnoxious, because their implicit value lies in deception.

These three responses, of course, have resulted in the ad-choked, click-bait, sponsored-content Web we have today.

There are two other strategies available to publishers, but they haven’t worked in most cases. One is to try to stay above the fray, offering premium content in search of higher-value advertising aimed at a more premium audience. That works, but only if the publisher has a truly premium audience (like Techmeme) or enough scale to build out a network of sufficient size to get advertisers to take it seriously (like Vox Media).

The other is to find a non-advertising revenue source. VentureBeat, for instance, is building a research business, selling high-value reports to companies willing to pay for valuable information. That’s a good bet if, like VentureBeat, you have a deep pool of in-house expertise and a relevant audience. It didn’t work for GigaOm, which went out of business last year, but VentureBeat is running its operation differently enough that I think it’s got a good chance.

Other publications have experimented with paywalls, to varying degrees of success; events (VB does these too); micropayments; and tip jars or fundraisers, where readers can chip in a few cents or a few dollars to help support publications they value. There are very, very few examples of these working at any kind of scale.

The thing is, there’s not even really a debate about ad blocking. It’s coming, whether advertisers and publishers like it or not. The economic forces governing Web advertising have led us to a point where ads are out of control, and readers have no choice but to take measures to protect themselves and their bandwidth.

For publishers that are dependent on ads, that means a very grim future indeed.

The question is, can they evolve new business models in time?

Originally published on VentureBeat

The writing is on the wall for the ad-supported Web: It’s the end of the line

A VC and a labor leader walk into a workers’ rights debate…

Photo of a minimum wage protest, by The All-Nite Images, on Flickr.
Photo of a minimum wage protest, by The All-Nite Images, on Flickr.

Nick Hanauer and David Rolf are an unlikely pair of troublemakers. Hanauer is a Seattle venture capitalist and was the first non-family investor in Amazon.com. David Rolf is a labor organizer who once rallied enough support to unionize 74,000 home health care workers in Los Angeles.

Yet the two of them agree on one thing: We need to pay part-time workers better, and provide better benefits. And they’ve teamed up to start a campaign to make that happen.

Their argument could slash the profitability (or future profitability) of many tech startups, including Uber, Lyft, TaskRabbit, and more. But it might also ensure the continued existence of a robust middle class, even in an era in which most of us work part-time or contract jobs for companies like Uber, Lyft, and TaskRabbit. And those companies actually require middle-class people to be their customers, so it might be win-win in the end.

On this Labor Day weekend, it’s an argument worth considering.

Bear with me, tech execs and captains of Silicon Valley. This might sound like some kind of socialism, but it’s not. Hanauer and Rolf say it’s about ensuring the future of work — and the viability of companies that depend on having a U.S. market for their services.

“All of the people I employ at startups can afford to go to Starbucks every day. But none of the people who work at Starbucks can afford to buy the products that we make,” Hanauer explained in a recent conversation.

That’s a problem that even Henry Ford recognized: You need to pay auto workers enough so they can afford to buy your cars or you’re not going to have a market for your product for very long.

Establishing better pay and better benefits will help preserve a robust middle class, even as many people increasingly work in what’s called the “1099 economy,” named after the tax form that independent contractors get at the end of each year. (Disclosure: After leaving VentureBeat’s employ recently, I’m an independent contractor now too.)

The duo recently published an article in the journal Democracy called “Shared Security, Shared Growth.” In it, they propose raising the minimum wage to $15. They think there should be mandatory overtime pay for anyone making less than $69,000 a year, far higher than the current threshold of $23,000.

And they propose a “Shared Security System,” somewhat like Social Security, except that in addition to providing retirement benefits, it also provides a way to fund vacation time, sick pay, and a host of other benefits to all people, including part-time workers.

“You have this idiotic situation where you have vast industries essentially parasitic off the rest of the economy by paying their workers poverty wages, and expecting the rest of us to make up the difference in food stamps, Medicaid, and rent assistance,” Hanauer said.

He’s not just talking about Uber and the like: He’s also referring to Walmart, Starbucks, McDonald’s, and other giants of part-time, minimum-wage employment. The fact is, there are many companies — tech “unicorns” as well as publicly traded Fortune 500 companies — that are benefiting from a generational shift from long-term full-time work for a single company to a constellation of part-time, temporary jobs for a variety of companies.

That shift provides flexibility for individuals, efficiency for companies, and a more rational allocation of labor resources for the economy at large, at least in principle. But it also leaves a large class of workers without benefits that many of us would consider standard, such as sick days, vacation days, or even the knowledge of what hours they’re expected to work next week.

These “on-demand” companies depend heavily on a workforce of people who work a few hours here, a few hours there, but remain independent contractors — or so the companies argue. (California courts recently took a different view, stating that Uber drivers are employees, but litigation is still ongoing.)

“All of the on-demand platforms, what they’re really selling is labor,” Rolf said.

Not that he’s opposed to that in principle, or to the rich valuations these companies have attracted. “It’s fair that since they invented a cool app, they ought to get something for it,” Rolf said. And, he added, “I’m a huge fan of the on-demand economy.” He regularly uses Uber, Lyft, and TaskRabbit. “It’s made life easier for a huge number of people.”

But, he points out, the people who actually provide this labor are having an increasingly hard time getting into, or staying in, the middle class. And that’s not fair — or smart.

It’s a shift that’s been decades in the making, thanks to deliberate policy changes and shifts in the way companies hire. Now, Rolf and Hanauer argue, it’s gone too far.

As Rolf put it, “Everyone got rewarded for driving down the wages of their workers and reducing benefits. That only works as long as you’re the only one doing it.”

“When one person doesn’t pick up after their dog in the park, nothing bad happens. When everyone doesn’t pick up after their dog, there’s no more park.”

These guys might sound so far out in left field that you can safely ignore them, but guess again: Their proposal for a $15 minimum wage has found surprising traction in a large number of cities, even if it was a nonstarter in Congress. New York, Seattle, San Francisco, and Los Angeles all have $15 minimum wages, and Washington, D.C. is considering it, along with other locales.

The annual salary cap for mandatory overtime also got recently raised, though not as high as Rolf and Hanauer would like. President Obama recently announced plans to raise the overtime threshold to $50,440, which means if you make less than that, your employer will be required to pay you extra for working more than 40 hours in a week.

What’s next on the duo’s program is a plan for a privately operated Shared Security System that collects payments from companies for every worker, even the most transient ones, and puts those payments into a trust fund that the worker can use to pay for benefits.

It’s not a tax, but a benefits payment, on the order of a few cents for every dollar of wages paid. And while they hope it will be federally mandated, they think it should be privately managed.

In a techie twist, Hanauer and Rolf propose that implementing this scheme — which would have been a top-heavy accounting nightmare in past decades — should be simple with today’s technology. It would be straightforward for even small employers to outsource all their benefits work to a company managing one of these trust funds. The fund itself could easily keep track of thousands or millions of accounts. And individual workers could check on the status of their accounts, or draw on them for approved purposes (like sick days), using an app.

Rolf told me that the two are already in discussions with some companies about prototyping the system on a smaller scale, although no one has actually tried it yet, and he wouldn’t say which companies.

“If all you had to do was install an app, and all your benefit payments would be allocated and taken care of, that takes a huge headache off the entrepreneur and a huge number of sleepless nights off the workers,” Rolf said.

The two will be speaking in November at O’Reilly Media’s Next:Economy conference, and maybe they’ll have more to say about this then.

As Rolf and Hanauer argue, it’s time to make sure that on-demand workers — and the greeters at Walmart and the baristas at Starbucks — get some economic security too.

Otherwise, who’s going to be left to take advantage of all these wonderful services provided by on-demand startups?

(Note: this article originally appeared on VentureBeat.)

A VC and a labor leader walk into a workers’ rights debate…

The hidden costs of the on-demand economy

Uber sticker. Photo by Jordan Novet/VentureBeat
Uber sticker. Photo by Jordan Novet/VentureBeat

Despite what economists like to think, people do not always make rational economic decisions. That’s nowhere more apparent than in today’s service-centric, app-based consumer Internet.

The fact is, people are willing to pay more — often a lot more — for services that are pleasant to use. Uber, Zipcar, Munchery, and Washio all prove the point. They cost more than old-school alternatives that have been around for years, but make up for that by offering an experience that just feels nicer.

What’s more, they bury their cost disadvantages by creating false comparisons.

For example, Uber’s founder Travis Kalanick frequently talks about how he wants to make Uber a cheaper, more convenient alternative to owning a car. That’s a reasonable comparison to make, but only at first glance.

Investor Megan Quinn, a partner at Kleiner Perkins and an investor in Uber, recently broke it down in a post titled “I don’t own, I Uber.” It’s worth a read. She estimated that the cost of owning, parking, and maintaining a car ran her $10,281 a year, while in a comparable period the following year, after she’d sold her car, she spent $4,656 on Uber, taking frequent trips with the car service in London and in San Francisco.

So by Quinn’s estimate, using Uber whenever you need to get around is less than half the cost of owning a car. Sounds like a great deal, right?

The issue is that many people who live in dense cities already don’t own cars, for the exact reasons Quinn points out. Parking in particular, is especially pricey, accounting for $4,200 of Quinn’s total. If you have access to free parking at your house, Uber may still be cheaper than ownership, but the difference shrinks.

But the high cost of owning a car in the city has been true for years and years, long before Uber ever came on the scene. It’s just that city dwellers used to take cabs (at a comparable cost to Uber) or public transit (generally far, far cheaper). In New York, you can buy 12 monthly unlimited-use MetroCards for $1,398. Even if you have to supplement that with the occasional cab ride or car rental, you could still live in a city with decent public transportation and get around for $3,000 a year, without relying on Uber, Lyft, or any of the modern car services.

In San Francisco, I occasionally use Uber, Lyft, or a taxi to get from point to point. Business Insider did a detailed analysis of Uber vs. taxi prices last year, and UberX came out on top in almost every situation. In my experience, it’s not always so clear. For instance, during a peak demand period one recent evening in August, Uber was advertising rates at 200 percent normal, while Lyft was at 150 percent to 180 percent. (I checked a couple of times, hoping the rates would go down, but instead they went up.) At that rate it would have cost me about $20 to go from downtown to the train station. I reserved a Lyft, it promised to arrive in 1 minute, but more than 5 minutes later I was still waiting. Meanwhile, empty taxis kept driving past me. Eventually I got tired of waiting, canceled the Lyft, and hailed a cab. Ten minutes later I was paying a $10 taxi fare (with tip) and getting out of the car at my destination.

You could do a similar analysis for Zipcar. Sure, it’s super convenient to rent through Zipcar, and compared to traditional car rental agencies the experience is light years better. Also, you can rent a car for just a few hours. But if you’re renting a car at $7 to $10 an hour, it doesn’t take long before the daily rate is far higher than what you could get through Avis or Enterprise, where it’s common to be able to rent a car for $60 a day. If you’re not in a crowded city center, rates are even better – often $40 per day or lower.

Munchery: Similar deal when it comes to food. Prices for Munchery’s delivered meals have come down a lot, but they still run $8 to $10 per person. For a four-person family, that is easily $40 a meal. You can cook your own food for half that price — but at far less convenience, of course. I recently spoke with Munchery founder Tri Tran on NBC Bay Area’s “Press:Here,” and he spoke about how much time this could save an individual or family. That’s true. But the cost is definitely higher than cooking for yourself.

My point is this: Uber, Lyft, Munchery, and Zipcar are all wonderful examples of companies using mobile tech and smart back-end logistics to deliver services in a far more delightful and convenient way than before. But the same fact that makes them such good businesses means that, economically, they’re not such a good deal for consumers: There is a lot of potential profit margin baked into their fees. And when their executives start talking about what a good deal they are, watch out: They’re probably not comparing themselves to the most economical alternative.

For consumers, that simply means buyer beware: You are paying for the extra convenience and for the experience of using an app that actually knows who you are. Add surge pricing, and the extra cost could be quite high.

For these businesses and their competitors, there’s a deeper lesson: They may be vulnerable to future disruption by businesses that offer a similar level of convenience, but which are more competitive on price.

Imagine, for instance, that a savvy municipal bus service got its act together and made it super easy to find a bus route to your destination via an app or mobile site. Or imagine a car rental agency that learned how to keep track of its customers so you didn’t have to fill out six pages of paperwork every single time you went to pick up a subcompact car. Established, low-cost companies like these might have a hard time embracing the kind of customer-first, experience-centric model that startups have built themselves around. But it’s not in principle impossible.

That’s something investors need to keep in mind when evaluating these companies and others like them: There is a price for convenience.

This column originally appeared on VentureBeat.

The hidden costs of the on-demand economy

How Tile went from crowdfunding to 2M units sold in two years

tile-lost-wallet

Tile makes a deceptively simple gadget: a rounded square of white plastic, about the size of a poker chip, that you can clip to your key ring, slip into a backpack, or stick onto any other object you want to keep track of.

Today the company is releasing a new version of its gadget and updating its app. Tile is also saying that it has shipped 2 million of the $25 gadgets since it launched a year ago — a remarkable milestone for a product that started life as a crowdfunding campaign.

The inspiration: just being able to use technology to solve one of life’s persistent problems.

“We were shocked that you could go on your phone and find out anything, but you couldn’t find your keys,” Tile cofounder and chief executive Mike Farley told me in a recent interview at Tile’s San Mateo, California headquarters.

Here’s the basic idea of the gadget: If you lose track of anything connected to a Tile device, the Tile app on your phone can help you locate it. It uses Bluetooth to connect with the Tile, so the app can tell you the last place it “saw” the device – and when you get close enough, it can make the device beep so you can hear where it is.

The new version of Tile, being announced today, is three times louder than the old one, so its beeps are noticeably easier to hear behind a flowerpot or under a pile of mail.

A Tile in every block

Anyone with the Tile app can help you find your stuff, too: As their phone walks past any Tile device that has been marked as “lost,” it silently connects to the Tile via Bluetooth, then anonymously uploads the location to Tile’s cloud servers, which then ping the owner with the location. That comes in handy if you left your keys on a park bench, or in a coffee shop, and didn’t have your phone with you to keep track of the Tile at that time.

You might think that for this to work, it would depend on a pretty high critical mass of Tile users, and you’d be right. But the company says that’s already happening: In Manhattan and San Francisco, you don’t have to walk more than an average of one block to pass a Tile user.

Next step: getting even more people to use Tile. One way is through a real-world retail partnership – the company’s first – with T-Mobile. Previously, Tile was only available through online retailers; now it will also be for sale in 3,300 T-Mobile stores around the U.S.

The other is through an improved app, for Android or iOS, that turns the phone it’s running on into a virtual Tile device. If you can’t find your phone, you can sign in to Tile’s web site and look for it, just as you’d look for any Tile you own.

So how did Tile go from idea to launch in one year, and from launch to 2 million sold one year after that? A smart crowdfunding decision early on played a key role. Lucky timing helped. And an assist from a major contract manufacturer also made a big difference.

“It’s amazing how much work goes into that little piece of plastic there – it’s insane,” Farley said.

Smart timing

The release of Bluetooth 4.0, which included a “low energy” specification, was key. The spec has been around since 2010, but the iPhone 4S was the first smartphone to implement Bluetooth 4.0, in 2011, with other devices following in 2012. Farley had been noodling around with the idea for a while with cofounder Nick Evans, but “Bluetooth 4.0 becoming ubiquitous is what made it all possible.”

In November of 2012, Farley quit his job and began to work on the project full time. By February 2013, the duo had raised a $200,000 seed investment from Tandem Capital, a seed-stage venture firm with an interest in hardware startups.

In June 2013, they had launched a crowdfunding campaign. A month later it had exceeded all expectations, netting them 200,000 pre-sales and $2.7 million in working capital.

DIY crowdfunding

Notably, the company did not use Kickstarter or Indiegogo for its campaign: It built its crowdfunding campaign using Selfstarter and ran it on its own website. That was harder, but it had a lasting benefit for the company.

“We weren’t relying on people who went to Kickstarter – we had to figure out how to get people to our website,” Farley said. Ultimately, that made Tile a much better direct-sales company, because once sales started, it already had the necessary marketing expertise — and a killer list.

Partnering up

Going into the crowdfunding campaign, Tile had planned to make 20,000 units, and had lined up some local contract manufacturers.

“But once we hit it out of the park, we had to find a high-volume, top-tier manufacturer,” Farley said. Candidates included Foxconn, one of the world’s biggest electronics manufacturers, not just for Apple but for many companies; Flex, formerly known as Flextronics; and Jabil, a gigantic company that has mostly stayed out of the limelight for the past five decades. (It has 180,000 employees around the world, is publicly traded, and has $15.8 billion in annual revenue, but for some reason Jabil doesn’t hit the tech industry headlines the way its competitors tend to.) Jabil won the business, starting work with Tile in August 2013.

The crowdfunding campaign, and the cash it raised, were critical.

“Getting to that point was what it took to get someone like Jabil to pay attention,” Farley said. That’s because manufacturers are taking a big risk when they take on a new client: They have to invest in manufacturing tools, customizing a production line, and so forth. They want to be sure that the client has the ability to pay.

Manufacturing

Turns out that it’s not so easy to move from the prototype phase to high-volume production, a theme I’ve heard from many other hardware entrepreneurs. Tile’s team spent months flying to China and back, testing out production samples, learning about injection molding and ultrasonic welding (it’s what bonds the two halves of the Tile’s plastic body to one another), and fixing a weird problem where bits of the welded plastic were sticking out of the finished product. It was an involved, iterative process.

Eventually, they ironed out all the kinks. In May 2014, an assembly line in China started producing Tiles and shipping them back to the U.S. From there, sales seem to have really taken off — both directly on Tile’s website and on online retailers like Amazon.

Farley says that none of this would have been possible without crowdfunding.

“Hardware is so dangerous, and VCs stay away from it, because it is so easy to screw up,” he told me. “Crowdfunding is one of the best things to happen to hardware, ever.”

Originally published on VentureBeat: How Tile went from crowdfunding to 2M units sold in two years

How Tile went from crowdfunding to 2M units sold in two years