Collecting Thoughts

Sig Fig just launched their beta product, which will replace the old Wikinvest portfolio. Applying a “Mint for investments” model, it is one of the financial services startups that I find the most promising out there since it applies two of the three ingredients that I think the next billion-dollar financial company will incorporate – a free consumer service, and no need to immediately change accounts (the third is social). Overall, while I was generally impressed with the design of the site, I found that the misalignment in the purported consumer value proposition and the business model negatively impacted the product in key ways. Full review below.

Sign-in Process: A
Sig Fig claims you can get all signed up in less than 60 seconds, and I think they might just live up to their billing. From a user experience perspective, this is definitely one of the better sign-up experiences I have had. The steps I needed to take (really just picking a user name and password and connecting my brokerage account) were laid out clearly and the animations that showed me what was happening (connecting to your accounts, downloading your transaction history, generating advice, etc.) were minimalist and actually helpful.

Overall Design and User Experience: B
The site comes across as relatively clean, but overall the design seems a bit more geared towards the mainstream middle-class consumer than the slightly older and wealthier demographic that I would have figured they should target (memo to the designers: people with money are generally older, richer, and wiser than the average Facebook user). I can’t decide if the “we don’t take ourselves too seriously” feel embodied by an ever-present pig mascot is whimsical and fun or slightly condescending to users, but I’m leaning towards the latter. They haven’t quite hit the Apple balance yet of assuming customers are idiots but not overtly treating them like ones.

The user experience after sign-in is also pretty good, but not yet perfect. While the guided tour helps, I still felt a bit confused what I was actually suppose to do once I had signed up. Feels like they need some “excuse for engagement” to get people to come back to the site. This is where some kind of social functionality could come in helpful if it was done right. As it is, I spent about five minutes on the site, consumed about all it had to offer, and don’t feel the need to go back to it for another six months. Not ideal from SigFig’s perspective.

Value of Advice: C-
Sig Fig’s “advice” section is, in my mind anyway, the core of their product. It is their answer to getting users to go beyond the usual asset allocation pie-charts that anyone can produce, but that few actually come back to or use to make any kind of investment decision.  I firmly agree that the site should be about more than producing colorful charts. This is the whole reason I got excited about the company – financial services is 100% about building trust, and what better way to do so then by giving people free and unbiased advice.

Maybe it’s just because this is the “MVP”, but the advice section left me feeling a bit disappointed. I got two pieces of advice myself and was left with a bad taste in my mouth about both.

The first informed me that I have traded less than the average Sig Fig portfolio user, and therefore might be in need of a consultation with a Financial Advisor. This struck me as 1) Bad advice, as countless studies indicate that portfolios with lower turnover actually outperform those with higher turnover and 2) A pretty blatant attempt to monetize me before any kind of real relationship had been established. This goes into my concerns with their business model, but obviously Sig Fig makes money when I sign up with a “high quality” financial advisor that is in their network. Of course, this is not necessarily in my best interest at all – most financial advisors charge a fee of 1% of assets to create a portfolio that I could mimick on my own using ETFs for free.

The second piece of advice was that I might want to switch out of a pariticular mutual-fund that I owned (Vanguard Mutual Fund) and into an ETF. This is definitely a bit more interesting, but again the approach they took left me feeling a bit uneasy for four reasons. First, the recommendation was oversold. Above the “Advice” secion Sig Fig highlighted the actual dollar figure that this would purportedly “save” me. But this dollar figure comes totally from a dumb three year historical comparison of returns. This ties into reason two – historical returns are not a great way to pick mutual funds at all. Numerous academic studies have indicated that portfolios that bought past winning funds and sold past losing funds do not outperform the market. If it was really that easy we would not need people like SigFig… Finally, I was left feeling a bit suspicious about the recommendation they have me. I was in a very low-cost Vanguard fund and they advised me to switch to a higher-cost ETF that focused on dividend stocks. The ETF charged a fee of 70 bps, which seems much too high for what is essentially an index fund. It left me wondering why they would suggest this particular fund – it is just because it has had good performance the past three years, or is the company receiving an advertising fee / kickback from the provider? Four, I have actually thought of switching out of this fund before (not to the dividend ETF, but to something else) but rejected it because I have held the fund a while and would have to pay a pretty heavy tax bill if I sold. Put all these together and it is not at all clear that Sig Fig is giving me good advice.

Beyond that, I will give Sig Fig a lot of credit for the way they approach their advice, of running over 100 different “tests” against a user’s portfolio. This is a good way to organize things. I just didn’t find anything that was that interesting or insightful for my personal situation.

Business Model: C-
Sig Fig offers its service to consumers for free, and makes money by charging a lead generation fee to financial advisors and mutual fund companies that are in their “network.” I like the “free” part, but the decision to go lead-gen for revenue would concern me for two reasons.

One, it introduces the potential for pretty obvious conflict of interest, which as I have mentioned, I think you can see pretty clearly in the product already. While the company goes out of its way to talk about how “unbiased” it is, its incentives most closely resemble those of a full-service broker that earns money on commissions – the ones that are losing share to fee-based RIAs that have a fiduciary responsibility to their clients. Like brokers, Sig Fig will only make money on you if it can get you to invest in a fund or through an advisor that it gets a kickback from. This encourages them to 1) Recommend only advisors/funds they have a relationship with, which might not be the best choices for the consumer and 2) Encourage you to “churn” your portfolio since they only make money on transactions. Neither of these is a deal-breaker in principle, all kinds of relationships in the real world come with mixed incentives and conflicts of interest. But I don’t like how SigFig is marketing themselves as the unbiased savior of the deceitful financial world when there is a pretty obvious conflict of interest at the heart of their business model.

Two, I am a bit skeptical about the market size potential for a lead gen business. I don’t know what kind of deal they have worked out with advisors, but in most lead generation models but Mint predicts revenues per user around $30 / year off of a variety of “bounties” that range from tens of dollars to hundreds of dollars. This figure is important since the costs of servicing users is not cheap – Yodlee charges between $.5 to $3 per user per account for the aggregation service alone, and then you have server/bandwidth and personnel costs on top of that, plus the cost of hiring a sales force to reach your “advisor partners.” Notably, it doesn’t seem that Mint was ever all that profitable. http://www.quora.com/How-does-Mint-com-make-money

Conclusion – Misalignment between value proposition and business model hurts what could otherwise be a compelling offering. 
Overall, I would strongly prefer if sigfig employed a true freemium model that offers premium services like the ability to speak to an advisor or turn your assets over to a Sig-fig branded financial advisor instead of relying on lead generation. While this might take a bit more capital to hit break-even, I think it is a much larger market (can capture all of the fees versus just a lead gen part) and better aligns the interests of the firm and customer, enabling a more compelling product.

My fiancee is a management consultant. Because of this, I get to listen to my fair share of consultant “trade talk,” most of which revolves around never-ending comparisons of hotel rewards programs, and is therefore not particularly apropos to the average startup person.

Lately however, I have come to appreciate the value of at least one of the common consultant aphorisms. Management consultants like to say that in the period between projects they are “on the beach.”

As a consultant, “being on the beach” is a period when you are waiting for your next client work to start, and are therefore not racking up billable hours for your firm, but are still being paid to sit in the proverbial bullpen.

I never thought “being on the beach” could apply to entrepreneurs. But lately, while sifting over the rubble of the past couple projects I have been working on and trying to plot out the next one, I realized that I was in such a state.

The difference with consulting is that being on the beach as an entrepreneur is not all that fun. Firstly, nobody is paying you to bide your time. Secondly, everyone else around you is pouring over their day jobs, making money, working on their big startup idea, or just generally doing something seemingly big and important, while you are struggling to explain exactly where the last week of pouring over market research and compiling countless random evernote documents has gone.

What every entrepreneur on the beach wants to do is to dive into building a product. Building something – anything really – just feels good. When you are building something you are suddenly important and productive again. And you can explain what you are working on to parents and in-laws without sounding like a directionless bum.

Better yet, building something seems like it’s being “lean.” Instead of sitting around “thinking” (and writing haphazard thoughts in evernote), why not hop to it and start building a minimum viable product? What could be more lean and less wasteful than that?

A lot, it turns out.

The core idea of building a minimum viable product to begin testing your assumptions as rapidly as possible makes a lot of sense. But diving into building something is not always the right way to do that.

For one thing, a lot of the basic assumptions of a prospective business can be tested without building anything at all, just by talking to the customer and looking at what other companies are doing or have tried in the past. Doing this research is not always quick, easy, or fun, but it is certainy much faster and cheaper than going to the trouble to create an MVP and then drive enough traffic to it to get real data to test your “hypotheses” with.

But more importantly still, while lean as a set of techniques might be reasonably efficient at maximizing your odds of success in the market you have decided to go into, it is not a good way to pick a market, and the selection of the market is actually a pretty essential and perhaps neglected part of the startup experience.

Just as some developers are just intrinsically superior in every way to other developers, some markets are just intrinsically better to go into than other markets. That’s life.

If you are a startup seeking VC funding, there are three things in particular that should cause you to question starting going into a given market.

One, your market could be too small. Everyone knows that VCs only want to invest in companies capable of reaching revenues in the hundreds of millions of dollars a year range, but how many entrepreneurs really take the time to do a meaningful market size calculation? I’m not talking about the usual hand waving about taking only 3% of a trillion dollar market, I am talking about a realistic bottom-up view of how many potential paying customers you have, and how much each of them is going to pay.  Sometimes it can be possible to build a following in a niche market and then pivot to something mainstream, but this does not work in every market. It is something you should consider before devoting months of your life to something.

Two, your market could be too crowded. At just about every meetup event I have gone to in the last couple months, someone has had basically the same idea for a social media management tool. This is probably a good sign that this a crowded space. If you think you have a particularly awesome secret sauce that is going to cause you to rise to the top one percent of all startups in the space, then maybe it is okay to go ahead and enter a crowded market. But for most of us trying to hack our way to riches by faking it until we make it, a better probability-weighted approach is probably picking a different space. Once again, it is better to learn this early than to figure it out after putting months of work into a product.

Three, your market could be prohibitively expense to reach. Building a product that is valuable is awesome,  but a valuable product only makes a profitable business if the price that you can charge your customers is greater than the cost of acquiring them. Rocket science, I know. Typically this becomes an issue for very fragmented markets – say the dog walking industry. It might be the case the average dog walker uses technology extremely inefficiently, so much so that a simple dog-walking SaaS solution could save them a lot of money. Of course the rub is that finding said dog-walkers and educating them on the value of your service would probably cost a lot more than they would be willing to pay for it, no matter how valuable it was. It is certainly possible to do a successful startup in a space like this, but it must be built as much on a novel way of reaching a previously unreachable customer as much as it is on a great value proposition. Perhaps, for instance, a new social network like pinterest is dominated by dog-walkers, allowing you to reach them en masse in a way that previously would have been impossible. In any case, focusing on the value of your product without considering the cost of reaching and acquiring the customer is a recipe for wasting months of your life building a useful but commercially worthless product.

The point, of course, is that is possible to develop a good understanding of the size of a market, the degree of competition, and the likely cost of serving the customer all without building a product. But again, this is thankless work that often does not feel fun or produce a tangible result, causing many to skip past it and dive into the product / customer development.

This is a mistake. Thankless work at the early stages of a project can easily have 100x or more leverage later on, if it saves you from spending weeks or months going down unprofitable paths. Entrepreneurs should learn to embrace the beach.

Recently I have been working on Ivy Bytes, a project that I will hopefully have more to write about in the future.

For inspiration in getting started, I went back and read The Four Steps to the Epiphany and The Lean Startup, in that order. Both were good brush ups from the Launching Technology Ventures class at HBS, and good reads in their own right as well.

I have always had mixed feelings about the “lean” movement. Sometimes I’ve thought it all seemed rather common-sensical, at other times I’ve thought Reis really hits on something revolutionary, and then at other points I couldn’t help wondering if it’s all really bullshit.

After reading the books in their entirety, I’m somewhere in-between the first two – it’s not all bullshit, but I’m not sure it’s quite as revolutionary as it sometimes is made to sound. Which is not a slap against anyone – a brother’s got to sell books, after all.

The Value of Lean Startup

The parts that make the most sense to me are:

• Launch early with a “minimally viable” product instead of spending time developing a complete solution without really knowing if there is a market for that solution.
• Think closely about your business model and assumptions, but don’t worry too much about creating a comprehensive business plan at the early stages.
• Don’t be afraid to “pivot” (change strategies) based on customer response.
• Create an environment where you can systematically test changes to your product and messaging against a baseline. For instance, you could set up google ads to draw in 100 clicks a day to your product, and then use cohort analysis to measure the conversion history of customers that have used different versions of your product.
• Use customer interviews as a tool to understand  what is driving the quantitative results you are seeing, but not necessarily as a stand-alone means of directing your business. This is one area where Blank and Reis seem to diverge a bit, probably because Blank’s experience is largely with B2B businesses while Reis is obviously more of a consumer internet guy. In Four Steps, Blank is adamant about talking to customers while the product is being built – Reis is bigger on running tests and talking to them later.

Those five bullet points, along with a few helpful techniques for iterating at a faster rate, are pretty much the extent of my takeaways. Maybe I’m missing something, but supposing these are the biggest takeaways from Lean Startup, is this really enough to call it a revolution?

I don’t know, maybe it is. As Reis points out, we are all brought up with this narrative of entrepreneurs as mythical visionaries that can imagine a different future and will stop at nothing in order to create that. Maybe some entrepreneurs are really like that, but the odds of success in throwing away all market research and pursuing your vision with reckless abandon seem lower than I would like to accept.

At the same time, the opposite path of creating a detailed business plan with dollar-by-dollar projections of revenue to 2025 all seems unappealing. It is well known that too much “analysis” can often result in “paralysis,” and in a startup environment often just making a decision is more important than making the right decision.

Lean seems like a middle-ground between these opposing but mutually unattractive visions. With “Lean” you start with a vision, but rather than assuming that the market is going to come around to your vision, you launch early and are as analytical as possible in evaluating your business model and iterating, if it makes sense, to something that might be slightly different, but which has much better odds of success.

Some Reservations

This all seems sensible enough, so why did I spend parts of the last ten months wondering if “Lean” wasn’t a giant hoax? I think that in selling the movement, Reis and others can make the whole thing seem a bit too “scientific.” Nowhere is this more apparent than the somewhat confusing narrative around “hypothesis testing.” Each of the fundamental views about your startup are supposed to be subjected to a scientifically falsifiable test. But when you really think about it, such a test is almost impossible to design.

I can see using results of tests vs. a baseline to draw inferences about where incremental value is, for instance what kinds of features users are likely to best respond to. But in testing any falsifiable fundamental “value hypothesis” there are always going to be multiple reasons the tests might fail. Maybe nobody is interested in the product, sure. But maybe you aren’t marketing it right. Maybe your landing page sucks. Maybe there aren’t enough other users for your product to be ‘cool’ yet, but if you persevered a little longer you would hit some kind of critical mass. Maybe you aren’t bidding for the right keywords.

Hypothesis testing seems to minimize the fine entrepreneurial art of “hustling.” Take AirBnB for example. Initially, nobody was interested in their product. It took some crazy hustles to get things off the ground. There was a lot more than scientific experiments going on here. The founders did not sell “Obama-O’s” at the political convention solely to “learn” if their assumptions about the market were correct…

Many of the supposed examples of “Lean” companies that employed hypotheses also seem pretty contrived. For instance, we are suppose to believe that Dropbox confirmed a hypothesis that their service would create value by getting a demonstration video to go viral on a hackers forum. Fine, maybe this “test” really did demonstrate value. But as Reis correctly points out himself, a hypothesis only has value if there is a falsifiable test associated with it, in other words if there is a way to conclusively tell whether it is true or not. Are we really supposed to believe that if the video Drew Houston posted had not gone viral, that he would have meaningfully changed the product as a result? This seems silly. But if this “test” had no impact on the rest of the business (other than a way to drum up interest in the business, which is, I suspect, the true reason), why does Reis want us to think that it was so significant?

For someone that is claiming to take such a scientific approach, Reis suffers from a pretty severe case of lookback bias. You can look at any successful company today and find something they did that first take off and say “Look, this company demonstrated their value by doing x.” But this doesn’t tell us what the company would have done if x did not work, or how many other ways they tried to test x before that failed. It’s just another example of survivorship bias in action.

Conclusion

I reserve the right to change my mind at any time without notice on this, but where I come out on Lean Startup after taking a class on it, reading about it, reading what others say about, and attempting to practice it, is this:

1. Starting any innovative business requires taking a leap of faith.
2. Entrepreneurs should not celebrate this leap of faith, but instead do everything in their power to minimize its extent. This includes launching early, being rigorously analytical, and not being afraid to pivot.
3. (this is where I think I disagree with Reis) I do not think that there is a convincing one-size fits all method to do this. I do not even think there is a convincing one-size fits all framework for accomplishing this. But the process of observing early product trial results and cross-referencing these with qualitative feedback from customers will gradually build facts and understanding, which can eventually replace the initial faith.
4. Any decision to alter the business model based on what you are seeing is going to come down to a hunch. There are just too many variables in all of this to pretend to be “scientific” about your “testing.”  But at least with a lean approach, your hunch will be based on intuition developed from seeing your product in action and talking to potential customers, not another blind leap of faith.

Vivek Wadwha wrote a Tech Crunch article several months back that has been on my mind for some time. I am going to paraphrase his argument as: google is no longer awesome. In fact, its results are increasingly overridden by spam and not that relevant. So far, so good. But where I disagree with Dr. Wadwha is his conclusion that there is a burning need for a “better google”. In fact, I believe the disruption of google is already naturally occurring before our eyes, and that the result will not be a single “better google”, but rather an ecosystem of specialized sites that do a great job finding information of one kind or another.

What would we expect the disruption of search to look like? The famous Harvard Business School professor Clay Christensen talks about two types of disruptive innovations. In a new market disruption, a new entrant provides a product or service at a price that makes it accessible to a customer segment which was previously excluded from the market. In a market re-segmentation, a startup provides a good or service that is better tailored to a customer with specific needs who was previously forced to purchase a one-size fits all product.

In common parlance, “disruption” is usually meant to mean the first, low-cost variety. Google seems pretty clearly immune to attack on the low end, at least on the consumer side where it gives its main product away for free. On the surface, google would also seem immune to the second variety of disruption, since their do not seem to be customer segments with drastically different search needs.

Another one of Christensen’s theories illustrates why this might not be the case. Christensen talks about segmenting a product by the different jobs it does, rather than looking at a standard cut along customer demographics. The “job to be done” is simply the reason a customer uses a product. While it is not clear whether there are significant differences between customers of search engines along the traditional demographic boundaries, It is not hard to come up with a lengthy list of the different reasons to find information on the web (this one by no means comprehensive):

“Jobs to be done” of a search engine

Finding or Recalling a specific web page
Looking for advice on a business or technical issue
Locating information
Looking for something to do
Finding a good restaurant for dinner
Researching a paper
Finding something to buy
Finding a good person to trim a tree

As a first generation, one-size-fits-all model, google attempts to play in all these verticals, and for a while, it dominated them all. But when search is viewed in the light of its jobs to be done, the path to disrupting an entrenched market leader seems pretty straightforward: pick something that people are looking to find on the internet and come up with a better way of locating that particular thing than crawling the entire web and applying a link-based algorithm to measure the relevance of results.  Examining the above list, it would be pretty easy to make a case that precisely this has been happening for some time now:

Finding or Recalling a specific web page
Looking for advice on a business or technical issue – Quora, stack overflow, etc.
Locating basic information on a subject – Wikipedia
Looking for something to do -
Finding a good restaurant for dinner – Yelp
Researching a topic for a paper
Finding something to buy – Amazon Marketplace, Yipit
Finding a good person to trim a tree – AngiesList

Sure, this process is not complete, and google might continue to dominate the “search” category for some time. But the boundaries of the category will continue to steadily shrink. For a while, it seemed that google might be successful in truly organizing the world’s information. Now that goal seems seems, in the kind view, less literal. It turns out that information comes in many forms, and that not all forms are necessary searched and accessed in the same way. And maybe that’s a good thing.

In my last post, I argued that google is unique among the leading online companies in that it fundamentally lacks network effects that create the enduring competitive advantages that its peers enjoy. Instead, google’s strong position is primarily a result of brand advantages and scale efficiencies. In this way, it is much more similar to industrial-age companies like General Motors than to its new economy brethren.

Of course, brand and scale can both be extremely powerful and lasting barriers to competition. The last ten years seem to confirm this is the case for google. From a brand perspective, while Bing’s search results are as relevant as google’s Microsoft has not been able to overcome google’s superior name/association. Meanwhile, the formidable expenses required to start a search engine have kept most start-ups out of the space – blekko seems to be the only search upstart with any traction.

It is easy to look back on the past decade and explain away google’s success by arguing that there must be enormous returns to scale and brand awareness in the search category. But how much of that reflects a ex post facto narrative bias? Could google actually be showing signs of diseconomies of scale today? It is possible.

To make this case, I would use an analogy to Microsoft Internet Explorer circa 2004. Like google today, at the time it seemed that IE had an overwhelmingly dominant position in its category. The fierce “browser wars” against Netscape had been fought and won, and there was no serious competitor in sight.  Firefox was able to make initial headway in a IE dominated market partly because while Microsoft had many economies of scale operating in its favor, it had one important dis-economy of scale (or, maybe more accurately, a perverse network effect?). The “bad guys” of the internet that wrote malicious software naturally chose to target potential holes in the browser that 90% of the internet used. This gave Firefox and Chrome a “default” competitive advantage in the security realm – even if they took zero security precautions, so long as hackers were writing their malware “for IE”, then Chrome and Firefox would look great by comparison.

A similar phenomenon may be occurring today with search. Affiliate marketers and a myriad of hucksters selling cheap crap are targeting their “SEO content viruses” straight at google’s algorithms precisely because there is millions of dollars to be made from appearing on the first page of the results that the majority of the world uses to find anything. Since google is #1 in the market by such a wide margin, it is arguably more susceptible to SEO spam than its smaller competitors.

And make no mistake about it – this kind of search-engine spam is a real issue. Google has become nearly useless for whole categories of search, as the always-insightful Vivek Wadwha pointed out in a recent Tech Crunch article. I’m sure that google’s search engine technology has advanced in leaps and bounds since the early days, but it is hard not to wonder if the entire premise of measuring authority based on links is in need of a huge disruption. The definitive search engine wars might not have been fought and won quite yet.

This is the first of  four-posts in which I want to  explore the possibility of creating and bringing to market a disruptive search technology: how strong are the natural barriers to entering the market, what “inning” of search technology are we in, how effective is google’s search technology anyway, and what could a disruption in the industry look like?

Benchmark Capital VC Bill Gurley recently wrote a well-followed article discussing Google that was picked up by Tech Crunch under the apt title “Search is a castle, everything else is a moat.” Gurley’s well-taken argument is that Google subsidizes peripheral products like web browers, gps navigation systems, and mobile phone operating systems in order to protect its money-making search business by controlling potential distribution channels. Gurley’s argument is certainly relevant to anyone trying to compete with one of google’s subsidized arms. In this post, I will attempt to analyze how relevant it is to competitors in google’s core search business. Is this “castle” really as unassailable as Gurley and other prominent investors seem to think?

As a new economy titan, google is often assumed to have some kind of special web enabled “network effect” that prevents others from competing with it. Too often, the exact nature of this supposed barrier is left un-described. On close examination, it is hard to find evidence of any strong network effects in the google model.

• Direct network effects occur when the value that accrues to each of a company’s customers is proportional to the number of customers. Strong direct network effects can result in a winner-take-all market since smaller players are unable to provide much value. Social networks like Facebook are an obvious example – the network has no value unless a critical mass of your friends are on it. In contrast, the value a search engine provides is entirely dependent on the quality of the results, with no direct bearing on the number of other users. If blekko can get you to the data you want faster than google, why would you use google just because everyone else is?

• High switching costs occur prominently in businesses that are platform-based or have a high learning curve. Complex enterprise software systems like Oracle are one example – to switch to a rival system often requires re-training an entire organization, at significant cost. In contrast, it is completely trivial to switch between doing searches using Google and Bing – just type a different address or change the default search option for your browser.

• Multi-homing costs occur when the cost of running two systems in parallel are high – for instance, using both Apple and Microsoft may result in purchasing redundant software. Yet again, it is entirely trivial to run multiple search engines – you can even run them at exactly the same time in side-by-side tabs and compare results. This makes it easy for users to trial a new search engine with no cost before they decide to switch their default choice.

• Indirect network effects occur in platform business when the value to one side of the platform is dependent on the number of users on the other side. The rise of Windows owes to this phenomenon – users purchased the OS because the majority of software applications they wanted were developed for it; developers wrote applications for Windows because the majority of users they wanted to reach used it. In contrast, google’s indirect network effects only go one way. Advertisers are drawn to google as a result of its strong user base, but users do not care much how many advertisers are on the system.

In contrast to its new-economy brethren like Microsoft and Facebook, Google’s real source of competitive advantages feel very industrial-age – scale and brand.

• Much like building a new auto plant, the costs of entering the search business are quite high since a) The technical challenges of building a modern search engine mean you need a significantly large amount of capital to hire the necessary engineers/scientists and build the required data centers and b) ingrained consumer habit/inertia (e.g. to “Google” has become a verb) significantly lengthens the likely market penetration rate and increases the chance of an expensive failure.

• The indirect network effects discussed above amplify scale and brand effects because Google is able to subsidize users by charging advertisers, while any new market entrants would be unlikely to attract any advertisers before building a critical mass of users and would thus be forced to either: a) Charge users to search or b) raise additional capital to absorb initial losses.

• A variety of other arguments for google’s strong assumed position are bunk.
  • Some argue that the quality of searches improves with the number of searches done since google can presumably data-mine its results. But this is true of any business – there will always be some learning curve and return to experience. It is a scale effect – and a weak one at that – not a network effect.
  • Some argue that consumers benefit from the presence of advertisements, making the indirect network effects go both ways. If this was true, we should expect to see much higher click-through rates on ads. It is marginal at best.
  • Some argue that google is dominant because it hires the top talent engineering talent. But this is an operational advantage that can change fast – witness Faceook’s ability to poach top talent.

A few conclusions come from this:

1)      While still strong, the natural barriers to Google’s search business are less than popularly perceived. If this is a castle, it is a castle on a hill – not on a mountain.

2)      Successful “moat-building” by google will at most cut off one of two routes of attack on its castle. Starting a next generation search engine will require either a) Raising a large enough sum of money from VCs to develop search technologies and withstand early losses while attracting advertisers and building a brand b) using an existing peripheral business as a source of both cash-flow and distribution for an emerging search engine. By knocking off other competitors, google reduces some routes of b.

3) However, the effect of “moat-building” is necessarily limited since:

1. They can never cut off all potential routes (witness facebook, IOS, Quora, Yelp, etc.) and
2. Even if they could, so long as there is a free internet and users can go to whatever search site they want, google can never kill off the chance of a brand-new entrant with a disruptively better technology.

In summary, for all the talk about constructing moats, the primary barriers holding up google’s search castle basically come down to the age-old phenomenon of scale and brand. Not so different than Wal-Mart or General Motors.

At least that’s how I see it.

Inspired by Tom Eisenmann’s HBS “Launching Technology Ventures” class, I have decided to launch my very own blog, a step which completes my admittedly slow transition into the digital world. While I am now a full-fledged user, I still have somewhat mixed feelings towards blogging and its micro equivalent.

In the early years of blogs (as well as Twitter), much of what was published was – to be blunt  - mindlessly boring and mundane. The world did not need to know the very latest on the size of the hairballs our neighbor’s cat hacked up last night. While professional journalists and thought leaders now dominate the top ranks of blogging, there is still undoubtedly something that seems a bit narcissistic about the medium. There is a fine line between empowering a new generation to publish their own thoughts, and deluding teenagers and middle-aged housewives with too many cats into thinking the world revolves around the trivial details of their own lives. After all, technology should be about encouraging people to connect with the vast and amazing outside world around them, not about encouraging them to retreat ever further into their own self-aggrandizing spheres.

Blogging and the emergence of other social networking tools like facebook and twitter also, to my earlier self, seemed to provide the latest tools that enabled a dangerous shortening of our collective attention span. Numerous studies have indicated that the “multi-tasking” that so many younger people are enamored with is, in a cognitive sense, a lie – our brain is not capable of truly focusing on more than one task at a time. Indeed, those that think they are the “best” at multi-tasking actually perform worse than others on objective tests of how well we can perform more than one task at a time. Meanwhile, Malcolm Gladwell and others have written extensively about how true breakthroughs are made by those that have spent 10,000 hours (the equivalent of five working years) absorbed in their field. Intuitively, it is hard the exponential learning curves that lead to the 10,000 hour rule if you are interrupted every three minutes to respond to a new tweet or facebook friend request.

My reasons for overcoming these concerns and jumping into the blogging fray come down to a mixture of professional utility and personal reflection.

Steven Carpenter, a Tech Crunch contributor, entrepreneur, and LTV class guest, puts the professional utility argument most bluntly. Carpenter talks about the “google test” as one of his “Six Traits to Look for in a Non-Technical Founder.” Simply put, if you want to work in a business role at a startup, you better be the first thing that comes up when someone googles your name. The underlying logic is that if you can’t market yourself then you clearly cannot be trusted to market a new product or site. Of course, this again assumes that we are all trying to market ourselves, but nonetheless his point is well taken. In any case, blogs are a good way to communicate thoughts and interests to potential employers in a medium that is far harder to “game” than an exaggerated resume or reference.

Meanwhile, class visits by prominent VCs and entrepreneurs have convinced me that while blogs seem narcissistic on the surface, for many authors they are actually works of deep personal reflection. One guest commented that he really did not care if anyone read his blog or not, but he found the habit of gathering thoughts and constructing a coherent argument to be enormously valuable in developing his own views and reinforcing key learnings in his own mind. In this sense, reflective blogging is the “anti-twitter.” In the age of 140 character mind-bursts, forcing ourselves to sit in an empty and quiet room and deeply reflect on our own views of an important issue may actually be therapeutic.

The bottom line: social tools can be incredibly powerful, and I was wrong to be slow to fully adapt them. But like many things, new tools can be a doubled-edged sword. Just as social tools like facebook should never be used as a replacement for the real-world slow dinners with wine that have been positively correlated with happiness and life satisfaction in every study ever done, “rapid-fire” online tools should not be used as a substitute for the deep-thought and reflection that lead to true breakthroughs in the intellectual realm.