The Gong Show

This is the fourth post in my series on Got It Wrong posts (#1 #2 #3). Posts about how I really missed a particular trend, market development, company, etc…

The Issues With Bribing Your Users

I’ve never understood how to motivate users with financial incentives successfully. Prior to joining Union Square Ventures, I had a gut feeling that financial incentives were essentially a bribe, and ultimately corrupting to end-users’ behavior.  I remember my skepticism of services like AllAdvantage, which paid users to browse the web with a banner ad perpetually open on the screen.  AllAdvantage was never going to capture a valuable audience because the only people that would opt-in to extra advertising are the people for whom ~$1/hr would make an impact on their lives.  By definition the audience is unappealing to large brand advertisers.

Once I joined USV, my attitude towards bribing users was further reinforced.  Brad introduced me to the ideas of Yochai Benkler*, who has made a career writing about crowdsourcing, altruism of data transfer, and other economic impacts of the internet.  Yochai has a great analogy that lifts the conversation up to an easily comprehended level: after having dinner at a good friend’s house, you would never leave a $100 bill on the table; such behavior would be offensive.  If you want to foster altruistic behavior, like the best of what occurs on Wikipedia, StackOverflow, P2P networking, or even the basic DNS routing system that is the underpinning of every address request, then direct financial compensation is corrupting and detrimental.

One more case study to really drive this point home. Digg motivated users to contribute and vote on stories by giving them social validation.  If they submitted good stories, their stories rose to the front page of the site and they moved of a leaderboard of top Digg users.  By contrast Jason Calacanis launched a Digg competitor at Netscape.com which paid users for their contributions to the site, which led to people gaming the system and a lack of interest in contributing because the payment was relatively low compared to people’s full-time jobs.  Netscape.com failed after a year or so of pursuing this strategy. Digg is not the pinnacle of success either, but is having issues for unrelated reasons. As soon as you attach a price to an action, people’s attitude towards the value of that action changes dramatically, and the price causes a self-selection away from quality.

So, What Did I Get Wrong?

I took the pitfalls of paying users too literally and I didn’t realize that financially motivating end-users does have it’s place, especially when crowdsourced contributions are not relevant. Some fantastic businesses have been built during the second boom that pay users for their contributions.

For example, Groupon. Users don’t use Groupon out of any form of altruism.  Users are already spending money at restaurants, spas, and other local service providers, and a company can buy new users by offering steep discounts.  I did not see Groupon as a deal while at USV, but if I had, I know my knee-jerk reaction would have been something like:

“Groupon is bribing their users. This can’t end well because the “deals” (bribes) end up selecting for a worse demographic that other forms of small business advertising that don’t directly pay users for behavior change.”

And I was wrong. The bribe is effective thus far. Small businesses continued interest in marketing via group buying means that something must be working.  And, a $12-16 billion rumored IPO doesn’t hurt either.

Or, another example, Mechanical Turk.  Amazon creates a marketplace to pay users to do menial actions for a fraction of the cost of my traditional full-time labor.  The quality of the work isn’t great, but it’s so dramatically cheap that you can people multiple people to do the same task and only accept a majority answer. The system is cheap enough that it can QA itself.  It’s direct payment to end users for crowdsourced work, and the result has 

I’ve been bullish on Mechanical Turk and CrowdFlower (back when it was Dolores Labs) from the start, by a little voice in my head has persistently felt like it was in direct contradiction to the lessons about not paying users. Again, I’m wrong because I am trying to apply Benkler’s lessons too broadly.

So, if you have a web service that is directly paying users for contributing value inside your service. My first question will still be “Why do you need to pay the users anything at all?  Can’t you motivate your users with more emotional or social incentives?”  But, I’ll listen with an open mind, and warmly welcome a rebuttal that addresses my past mistaken skepticism.

[*If you want to expand your mind about the Internet’s effect on economies for 17 minutes, check out this TED talk with Yochai.]

Many of the decisions in a venture firm are made based on pattern recognition and various derivatives of traction (growth rate, acceleration, engagement amongst active users, etc…).  The combination of these two filters are a good mix both instinct and evidence that result in evidence-based support for a gut reaction.

One form of due diligence that gets relatively little respect and is often undervalued IMHO is user surveys.

If there are any academics out there looking for survey research topics, I know the following survey topics would be incredibly useful to me:

Digital Television: Are people actually adopting technologies like Netflix on game consoles, Boxee, Apple TV, etc.  What content do people really care about and how do they consume it.  How many devices are connected to the TV and what are they? A survey in this space should be Nielsen’s bread and butter, but they seem to be dropping the ball.

Web Presence: How many different places to normal people live online (if any at all).  How do people feel about being Googleable. How often do people use the web to research other people and which services matter in this process?  How trustworthy is self-expression online. Do people feel like the data about them on the internet actually represents themselves well.

Books: Are people adopting Kindles, iPads, Nooks?  Do people prefer to read books online or in physical, paper form? How are books gifted these days (ebook vs paper)? What are the advantages and disadvantages to ebooks? How does the content type (academic, fiction, non-fiction, magazine, etc…) affect the ebook consumption experience?

Travel: What web services (if any) matter in the various stages of travel (planning, booking, during travelling, and aftermath)? What value do travel agents add relative to web services? Does booking online affect travel planning outcomes? How trustworthy on online reviews of tourism providers, such as TripAdvisor?

I don’t think I need to elaborate with sample questions for all of these topics, but surveys would be very useful in any other sector that’s under transformation by the internet, such as: real estate, global B2B trade, retail commerce, job seeking and recruiting, fashion, etc… 

And the most interesting piece of any of these surveys would be the demographic slicing.  What are teens doing online?  What about the AARP crowd?  What devices are they using (hello iPad)? How does engagement and reliance vary across demographics?

If I were doing media or communications post grad work, I’d spent all my time in surveys about Internet usage.

Big shout out to the Pew Internet & American Life Project, which is doing amazing work in this space.

I look at many variations of social networks at Spark Capital. There are a number of ways to organize social networks and some ways are more useful than others.  You could organize by media type (ie Youtube is a Video network. Flickr is a Photo network), but I don’t see much value in this form of organization because it’s superficial and subject to simple change (Flickr now offers video). A more informative way to slice networks is by how connections (or edges, in graph-speak) in the network are defined.  Here are some variations I see, with examples:

One-to-Many, single direction: Best example is Twitter. Twitter’s most popular use case is as a broadcast medium that allows one person to push messages to followers efficiently and without the burden of having to listen for responses or uphold a conversation with all the followers.

One-to-Many, bi-directional: This is a network in which one person or organization attempts to hold a conversation and be responsive to all edges in a network. Some examples are group chat products like Groupme. Some organizations like Zappos do attempt to use Twitter in this manner, but it’s difficult to keep up with the flow.

One-to-One, bi-directional: Each edge on the graph is a two-way communication between two individuals with an expectation to uphold the conversation. Some examples are private chat products such as AIM or Skype on the desktop and Kik or plain ol’ SMS on mobile devices. 

One-to-One, single direction: Each edge on the graph is a one-way push between one individual to another with no expectation of response.  This style of graph is rare inside social networks because it would make for a pretty lonely experience.  Instead examples are stuff like transactional email between an organization and its members is a good example of this, such as a receipt from Square or a new follower notification email from a social service.

Many-to-Many, bi-directional: This is harder to define, but many people communicating with many other people is not easy to imagine.  But, I do see this type of behavior between guilds in World of Warcraft, where groups are coordination with/against other groups, each of which is a collection of individuals.

Many-to-Many, single direction: I’m not sure how this would work… it’s a group of people all pushing messages to another group with no expectation of a response. Would love to hear examples in the comments.  

So what?

Good question. Some social networks start in one category and try to evolve over time into other categories, often with mixed success because a different graph model is counterintuitive to users existing expectations.  

For example, Facebook started as a one-to-many bidirectional graph: it was a way to broadcast your profile, photos, and conversations to your peers whom you explicitly permissioned as OK to access your data.  But, as Facebook saw Twitter rise in popularity, Facebook tried to expand into the one-to-many single direction category by loosening default permissions of users’ data, thus reducing privacy. This shift from one graph category to another violated users’ prior understanding of the service’s privacy model and led to repeated controversies. Google Buzz made similar mistakes when the company assumed that the Email Contact graph would be a seamless way to bootstrap a social network, which was rife with issues.

When I’m looking at a new social network as a prospective investment, one of the first questions I dig into is what type of connections are being established inside the graph.  It’s an organizing principle worth establishing early because it will determine many future product and business design decisions going forward.

Apple has been rejecting a number of applications from the App Store that allow users to pay directly for content or services.  Sony’s e-reader was recently rejected from the App Store because it allowed users to purchase content outside of Apple’s own in-app purchasing system.  Similarly, Readability was recently rejected for taking direct subscription payment from users outside the App Store.  

Apple’s revenue share on all app purchases (upfront or in-app) is 30%, which is steep by any platform standards.  Facebook’s platform also requires a 30% revenue share, but neither of these price points feel sustainable.  How much margin can any application on these platforms have if 30% of the revenue goes out the door immediately?

There are two important unintended consequences of Apple’s crackdown on apps working around Apple’s in-app purchasing.

1) If a third-party app creator is trying to decide because a direct payment revenue model and an advertising-based revenue model, their decision will now be motived by Apple’s behavior.  If the developer chooses a direct payment model, he gives up 30% of the revenue on the spot.  By contrast, there’s no 30% tax on advertising revenue.  

When put in this context, the decision isn’t even a choice, it’s an IQ test.

2) If you really want to pursue some type of direct payment via your application, the incentive to create an HTML5 mobile web application instead of a native application is now stronger than ever. Apple cannot control what mobile web apps are or are not accessible to end-users, so there’s no revenue sharing requirement for mobile web apps. I wouldn’t be surprised if you see more ecommerce apps and e-reader apps pursing mobile web implementations going forward due to Apple’s in-app payment crackdown.

Any app developers out there affected by this decision?  I’d love to hear from you.

A quick update on the two open positions with Spark Capital.  The resume submission process is now closed.  The next step is we will read and rank all the submitted applications, and then we will contact all candidates via email about relevant next steps. We have 170 submissions across the two positions, so it will be a very competitive process and the size of this process may also lead to occasional delays.  I really appreciate your patience, and if you applied, thanks so much for giving Spark Capital your consideration and attention.

And, to those people who read this blog because they like tech geek ramblings, I apologize, and we will be back to regularly scheduled programming soon, I promise.

I was out on the street this morning at 5am, and I saw newspaper delivery trucks making their rounds. The absurdity struck me. We pay people to drive around in the middle of the night, dropping off piles of pressed dead trees smeared with 8-hour old news. Really?

I think newspapers still have a useful role. I love picking up the Sunday Times and camping out in a cafe for hours on weekends. It’s a luxury I rarely consume and really enjoy.

But, it’s exactly that: a luxury, not a utility or necessity.

A few people have been asking me via email about the status of the open Spark job postings. I think it will be best if I write updates here on this blog as the status progresses.

Right now, the resume submission is still open. I’ll likely close it in the middle of next week so it will have been open for 2 weeks. So, no change in status yet.

Once resume submission is closed, the first step will be phone screens, followed by in-person interviews.

I really believe prompt feedback is important, so as soon as we know the status of your application (whether it be progressing to the next step or not), we will communicate that status directly.

The quality of the applicants are outstanding, really exceeding my expectations. It’s going to be a really difficult process with only two open positions available for such a high quality pool of talent. I really appreciate the interest and enthusiasm we’ve received around these openings.

I had a great dinner with the Startup Tribe group at HBS last night (no link because I’m writing on a phone on Amtrak). We discussed a bunch of interesting startup ideas. I don’t want to share other people’s ideas without their permission, but I’ll gladly share my own contribution here if anyone is interested in taking it and running with it.

I would like to see a ratings and reviews service for startups and SMBs to rate their vendors and service providers.

Every startup I talk to is always asking me: who is a good startup lawyer? Where is the best place to get swag printed with my logo for conference booths? What’s the best applicant tracking service for hiring? Which bank is best for startups? What’s a fair price for a third-party 409a valuation? How do I select an auditor?

All of these questions could be answered in public for the benefit of everyone if startups had a good place to rate the vendors and service providers they use.

TheFunded did this for VCs only, but I don’t see much activity over there these days. I’d love to see something like that expanded to a wider range of service providers.

Today this need is solved by email lists and networking groups like Founders Round or NextNY’s Google Group. A number of VC firms also have email lists for their portfolio companies where these types of questions are answered. Some of this behavior is also happening on Quora. But the answers provided in these places are 1) not structured in a way to generate aggregated ratings and 2) not easily discovered by future startups asking the same question. My proposed solution would hopefully solve these problems.

There must be a decent ratings and reviews open source solution available on Github. Or I bet there’s a way to build this quickly with Drupal. Would really love to see this happen.

We are hiring for two new positions at Spark Capital.  

One new role is an Analyst position.

We’re looking for someone to help us organize the collective knowledge of the firm and the portfolio using a combination of web services and entrepreneurial grit.  

The gig is probably most similar to a Product Manager role inside a small startup.  Being only eight people on the investment team, Spark is a bit of a startup of its own, and the analyst’s role would be to find help us scale our network, our internal reporting, and our effectiveness with portfolio companies’ management.

This role is a great way to learn what venture capital is all about.  It’s also a role that would require taking on incredible responsibility outside typical experience one day, and also handling very administrative basic tasks the next day; each of which are critically important to success in this job.

Learn more about the Analyst role…

The other new role is an Associate.

The term “associate” means different things at different firms.  At Spark, here is how we define the role:

An associate at Spark is part of our investment team in our Boston office. He or she will help our team with market & competitive analysis, process deal flow, source new investment opportunities, due diligence potential investments, assist our portfolio companies, attend & organize meetups as well as various other firm responsibilities such as annual reports and portfolio analysis.

This is not a classic two year and out program. We are looking for someone that will grow with us or possibly join one of our portfolio companies over time. The investment team at Spark is small so there is no clearly defined path or mentorship. You need to be ready to make your own way.

Learn more about the Associate role…

How to Apply:

If you’re interested in the Analyst position, throw your hat in the ring via this form.

If you think the Associate gig is your cup of tea, then get in touch with us here.

If you apply for one job and we think you’re a better fit for the other job, we will let you know and shift things around appropriately.  A good way to think about which role you fit best is work experience.  0-1 year experience is likely best for the Analyst role whereas 2-4 years is likely best for the Associate role.

I’m happy to answer any questions about these jobs in the comments, so hopefully the answers will benefit everyone.