Go Big or Go Home

This post originally appeared in The Wall Street Journal: The Accelerators blog on June 30, 2013

As an institutional investor, it is my job to identify new and emerging market leaders across many different industry categories. The companies we back don’t always emerge from technology hotbeds like Silicon Valley or New York (we actually delight in finding great companies in odd places), but the companies almost always place these and other large metro areas highest on their list of target markets. The reason is simple: these markets tend to be much better test beds for new technologies and business models than smaller regional markets.

Large, competitive markets like New York are often well-versed in new technologies and not afraid to kick the tires on something new. Prospective customers – be they large financial institutions, small corner restaurants or even individuals – are themselves living in a state of heightened competition, constantly in search of something that will give them a slim edge in growth, efficiency, or time. This makes them eager consumers of new solutions.

Conversely, so-called secondary markets are generally more risk-averse. Getting a new offering off the ground can be made even more difficult by trying to turn a traditionally “fast follower” or laggard customer base quite literally into first adopters. There is also a simple factor of logistics.  A small market doesn’t always mean a concentrated market; in fact, it’s often the opposite. The density of potential customers in a heavily populated urban area and the efficiency with which they can be reached is a tangible factor when it means making seven sales calls a day instead of two. Larger markets also allow emerging companies to penetrate higher levels in an organization – meeting with a strategically-minded CEO who’s local versus a regional manager who gains no benefit, and can incur meaningful risk, by saying “yes”.

Finally, we find that going up against the best in the most competitive markets forces entrepreneurs to work harder, enables them to find the right product formulation, market positioning and sales messaging earlier, and ultimately – if it comes to this – allows them to fail faster. After all, floundering in the minor leagues for years is the worst thing you can do if your business idea was never suited for the big leagues in the first place.

The question of market choice – going with a closer, safer and smaller market versus a bigger but scarier market – is something we see playing out even among later-stage companies that are contemplating international expansion for the first time. Europe is convenient, familiar, and close; but Asia is BIG. As the global market for business ideas and technologies becomes even more fluid, we believe that emerging companies will need to tangle with these big markets even earlier in their lives. In short, adopting the phrase “Go big or go home” as part of your company’s mantra could be the fastest way to get your business off the ground and perhaps one of the quickest ways to measure if it ever had a chance for success in the first place.

Don’t Rush a Response

This post originally appeared in The Wall Street Journal: The Accelerators blog on December 11, 2013

The rise of being social on the Internet has fundamentally altered the relationship between company and consumer. A startup’s reputation is no longer something that it can impress upon to consumers. Like the old Silk Road Bazaar, it’s something that is built and driven principally by word of mouth. The good stuff tends to rise to the top, but on the flip side problems can ripple outwards very quickly.

The most important practice in positioning yourself in the marketplace of opinions is simple — listen. Companies today need to carefully monitor the social Web for comments, remarks and references, both positive and negative, formulate systems to track sentiment and enter into the public dialog in a way that is true to the voice of the brand.

Once your business has scaled beyond the point where you can engage in the social web yourself, you will need to assign a team and formulate a set of rules of engagement. Who should respond to complaints or plaudits? How? When and how often? What should be the overall tone? While defining these elements upfront may sound bureaucratic, without this focus you won’t speak with a single coherent voice to the marketplace. This process of interacting with the social web, in my opinion, should not be outsourced.

So, you are listening engaging with the broader world in an organized, unified fashion. What happens when something goes wrong, whether it’s a bad review, a bad customer experience that goes viral or bad press?

First and foremost, don’t rush a response – the social web is very fast-moving and responsiveness is important, but not at the expense of being thoughtful. An overly hasty response is far more likely to come off as defensive and can potentially exacerbate the problem. Second, evaluate the merit of the complaint (is it simple trolling, or a valid problem?) and evaluate the influence of the complaint – it sounds undemocratic, but with limited resources, not every comment can be addressed. Third, if there is an actual issue you’ve created – apologize, acknowledge the problem and outline what concrete steps you as a company are taking to resolve it.

Honesty and humility are tantamount – remember that the customer has cared enough about your business to say something, and has done you a favor by doing so. Finally, follow up privately with the complainant once the issue is resolved. The objective is to make your critics into evangelists.

Making fans, customers or even critics into active evangelists is one of the more intriguing challenges in modern marketing. Beyond a great core offering, you want to find ways to surprise and delight ardent fans, ideally focusing your attention on those that carry the greatest social media weight. The objective is to create a spark that captures the same consumer attention as a great TV spot. Unlike TV, though, you can’t buy your way in.

Finally – use all the tools at your disposal and find the right medium for the message. Twitter and Facebook are great, but don’t neglect video, email or real-world events. The best companies know how to play across all of these media to achieve large results.

Lack of Preparation is a Red Flag

This post originally appeared in The Wall Street Journal: The Accelerators blog on July 3, 2013

I always say that the goal of your first investor meeting is simple: Get to the second meeting. If you’re able to succinctly explain why the market opportunity you’re going after is big, why your approach is unique and defensible, and why you’re the person/team to pull it off, chances are you’re going to get to that second meeting.

Many of the mistakes I see teams make in pitch meetings boil down to lack of preparation. In that first meeting with a company, I’m typically looking for an obvious reason to say no – not because I’m trying to be difficult, but because a quick no is often the best favor I can do for an entrepreneur who is already strapped for time. I am looking to find holes – either with the business plan or with the team – and lack of preparation is a major red flag. It makes me wonder about the team’s approach to other, more important interactions with partners, prospective employees, and most importantly clients.

Some dead giveaways of lack of preparation include reading off the slides (Please don’t do this!); over-simplification (I particularly hate shorthand business explanations like, “We’re the X for Y”); glossing over key risks such as competition (“I have no competitors!”); and lazy analysis (“Our market is billions of dollars!”). This last point is a particular pet peeve of mine. Many entrepreneurs make the mistake of conflating the entirety of money spent in their market ecosystem with their own addressable market – for example, a company selling software to widget manufacturers presenting the billion-dollar widget market as their addressable market.

Another form of lack of preparation is lack of editing. A 50-page PowerPoint presentation is not appropriate for a first investor meeting; if you can’t tell your complete story in 12 to15 slides (or less), your story is too complicated. This isn’t to say that detail isn’t important; all the nuances, bits of market knowledge and answers to all of the investor’s potential questions should be rehearsed and in your head, not on the page.

A final bit of preparation that is too often missed by entrepreneurs is knowing your audience. Just like a job interview, you should come in with a basic understanding of who you’re meeting with, and something about his or her firm. Has the firm invested in your sector before? What other companies is the partner invested in? How does the firm present itself on its website – how can they help you? And by the way, is there a potential competitor in their portfolio already?

The initial meeting is one of the most important screening gates that we investors have in evaluating new opportunities. If you’ve made it into the room, chances are you’ve already sparked some interest, and fit the firm’s broad investment criteria. So demonstrate that you’re prepared by showing that you understand the market. Take the time to explain why you’re confident (without being arrogant), and above all answer questions directly. Your audience will appreciate the straightforward approach, and having a well-rehearsed presentation will leave a great first impression.

A Core Social Mission Pays

This post originally appeared in the Wall Street Journal: The Accelerators blog on August 28, 2013

As a VC, I believe that at the most basic level, every business incorporates a fundamental social good. Startups employ people. They contribute to the growth of the economy.  They promote the forward progress of their respective industries. It can be overlooked (or overstated for that matter), but every person that founds a company is promoting social good.

For businesses that want to go beyond this standard, social good isn’t something that can be folded into a business model; it needs to be the business model. Entrepreneurs wishing to do social good should look to develop businesses which can have societal benefit. It could be global (cutting carbon emissions), local (promoting neighborhood businesses), direct (micro-lending in emerging markets) or indirect (enabling businesses to provide better service for less money).

Of course, not every startup supports this type of social good. Starting and building a business is a risky and difficult undertaking, no matter the subject matter, but entrepreneurs who are taking the trouble and time to create something new may as well also shoot to create something that has lasting value, beyond enterprise value.

What about a business that is “neutral” from a social good perspective?  Are there any ways for philanthropy to be incorporated into a startup’s culture?  Yes, but with difficulty.  Founders are the leaders and custodians of their businesses, and any company-centric social undertakings should support business goals.  When working with charities, a business needs to make sure that the charity gains at least as much from the partnership as the business. A business that lauds its own philanthropy to acquire customers is being exploitative if the economic benefits to the charity aren’t proportionate.  Businesses are better off keeping it simple. For example instead of going sailing for a team-building outing, build a house; rather than attend another cocktail event, teach a class on entrepreneurship or technology.

However, nothing gets me quite as excited as a founder who is in the process of building a business that can really change the world for the better.  These are the companies that I aspire to invest in, and that great people will take a risk to work for.  It pays to have a social mission at the core.

Tumblr Acquisition – Cautionary Tale for Later-Stage Investors

The Tumblr acquisition announced this morning was great news for the company, founder David Karp, and the New York technology scene.  Likewise, early-stage investors Spark and Union Square Ventures should be congratulated for what was undoubtedly a fantastic return.  Funds that invested in Tumblr’s Series D round in September 2011, however, are likely not feeling as pleased today.

Reports indicate that Tumblr was valued at $800MM at their Series D round.  Companies typically refer to pre-money valuation (how much the stock is worth before the fresh capital went in) – so almost two years ago new investors were sitting at a $885MM post-money valuation following the $85MM investment round.  Given the competitive nature of that round, I would speculate that the terms were relatively “clean”, meaning that the shares didn’t carry a participating preferred structure or any other features which would otherwise boost returns.

The return on the Series D, however, isn’t as simple as computing the difference between $885MM and the $1.1BN purchase price that Yahoo! agreed to pay.  Because Yahoo! wants to retain Karp and other key talent, a significant portion of the purchase price is almost certainly being allocated specifically to management rather than shareholders.  Such arrangements have become commonplace in deals over the last several years.  Assuming 15% (or $165MM) of the $1.1BN goes to management in the deal, shareholders are left with $935MM of consideration for their shares. The Series D shareholders’ roughly 9.6% stake in the business will be worth just shy of $90MM – not much of a return on their initial $85MM investment.  And this assumes no incremental dilution over the past two years for employee grants and the like.  Assuming a mid-August close of the deal, under the above scenario the IRR would be around 2.9% – that’s better than treasuries, but not by much, and certainly not on a risk-adjusted basis.

Obviously the math above is based on press reports and makes a number of assumptions (the most important being the lack of structure on the Series D), but regardless it does show the challenge of making “later-stage” investments in companies with great user growth and usage dynamics but limited revenue.  For the investors in Tumblr’s Series D – largely smart firms with strong track records – Tumblr represented a grasp at creating another Twitter or Facebook that fell short.  Getting capital back plus some small return is better than the proverbial stick in the eye, and certainly better than I’ve done in some of my investments, but  in this case a $1.1BN sale was not the hoped-for outcome.  

Later-stage investors – venture funds, hedge funds, and the like – as well as their limited partners should view this acquisition as a cautionary tale.  Entrepreneurs should also take heed – if you’re going to take money at a lofty price, your investors aren’t always going to see eye-to-eye even on a large exit – what is a great outcome for some will be a disappointment for others.  If you’re unwilling to provide the investors who came in later with some mechanism for earning a reasonably good return, at least be sure that you don’t give them the ability to block a sale!

The Curious Psychology of Groupon

Groupon is a fascinating company, and perhaps an even more fascinating as an example of various methods of social influence available to online companies today, and their intended and unintended consequences.  Groupon’s meteoric growth had everything to do with three very powerful techniques of social conditioning: perceptual contrast, scarcity, and social proof.

• Perceptual contrast.  The significant discounts highlighted on Groupon (e.g., $39 for an $80 dinner cruise!), make an item much more attractive than if the discounted price were offered in isolation (e.g., $39 for a dinner cruise!).  People love getting a deal, and if the perceptual contrast is great enough, they may even buy something they didn’t want in the first place (e.g. a dinner cruise).
• Scarcity.  People hate missing out on something, and it’s been proven that people are more likely buy if they feel that they may soon lose the opportunity to do so.  This is the reason that “for a limited time only” is such an effective advertising call to action.  While many Groupon deals are “uncapped”, i.e. everyone who wants the deal can get it, each deal is open for only a certain amount of time, thereby stimulating urgent buying behavior.
• Social proof.  One means people use to determine correct behavior is by watching other people’s behavior.  By publicizing how many people have signed onto an offer so far, Groupon provides a valuable and persuasive signal that others have made the decision to buy, so you should too.  Kleiner Perkins partner Aileen Lee wrote a great piece on social proof here.

Successful consumer-facing internet companies almost always rely on at least one or two forms of social influence (e.g., social proof and reciprocity for Facebook, scarcity and perceptual contrast for Gilt Groupe), but Groupon was able to hit on a model that brought to bear three very strong techniques in concert.

While Groupon’s rise is attributable to the strong psychological influence of its business model, their difficulty in driving strong repeat visits for their merchants – a consistently cited challenge and one at the crux of why a merchant would run such a deeply-discounted promotion in the first place – is also a consequence of psychological factors at play.

The theory behind running an offer with Groupon is that once a consumer has purchased once, they should be more likely to buy again at your establishment.  Indeed, consumers should on average do this even in the absence of reminders or follow-up marketing assuming their first experience was good.  Anecdotal evidence suggests that this isn’t the case, or at least that it’s often not the case.  Some have argued that the reason why merchants don’t see more follow-up traffic is that the consumer relationship belongs to Groupon, not to the merchant.  I’m not sure this is entirely correct.  While the purchase decision happens on the Groupon platform, at the end of the day the consumer is not receiving a Groupon sandwich, a Groupon haircut or Groupon eye surgery.  There is a relationship created between the merchant and consumer.  The problem is that from the outset it is a fundamentally adversarial relationship.  The reason it’s adversarial stems from another powerful method of social influence.

Sales professionals will often use a compliance technique where they play the role of the customer’s “champion”, taking the side of the buyer in order to secure them a good deal.  For example, a car salesman will appear to “do battle” with his boss at the dealership in order to secure a good price for a new car buyer, thereby putting himself on the side of the customer and securing his trust.  The psychology of Groupon works in a similar way – Groupon the deal promoter collaborates with the customer to secure an advantageous deal.  The merchant, meanwhile, is cast in the role of the parsimonious boss from whom concessions are extracted.  While the marketing copy of a Groupon deal will tout the attractiveness of the merchant’s goods/services (and it’s of course in Groupon’s interests to do so), the underlying framework of the deal is that the consumer is getting something, Groupon is enabling the consumer to extract that value, and the merchant is (reluctantly) providing that unbelievably good deal.

Adding to the effect, there is another collaboration going on: because a Groupon isn’t “activated” until a minimum number of people sign on, each consumer is also in collaboration with the others in opposition to the merchant.  While this group activation feature is an important element in providing valuable social proof, it has the unintended consequence of adding to the dynamic of “us versus the merchant”.

This deal mentality helps explain an oft-reported negative consequence of Groupons – the bad and overly demanding behavior by normal consumers who should be pleased by, and grateful for, the deal they’re getting.  It’s not that Groupon consumers are inherently more rude, greedy, condescending or discontented than anyone else, as some have assumed; it’s that they’re conditioned for this behavior by the inherently adversarial nature of the deal itself.

There is one final reason why merchants have perhaps had trouble getting Groupon customers to return to their businesses: shame.  In the Groupon model, consumers put themselves in the position of extracting value from merchants who, almost by definition as Groupon offerers, are struggling to meet their sales objectives or fill excess capacity.  Consumers are made aware by Groupon itself that they are receiving goods and services from these (struggling) merchants at deeply discounted prices – 50-90% off retail price, as advertised by Groupon.  As humans, we are all conditioned at an early age to value reciprocity and fairness.  After voluntarily entering into a collaboration with Groupon and other consumers to extract value from a merchant; after observing or even participating in bad behavior directed at this same overwhelmed merchant; and after making away with our deeply discounted muffins, eyelash extensions or bellies full of food, is it really any wonder that consumers are reluctant to return to the scene?

The principal power of a more social and interactive web is that as individuals and consumers we can each see what everyone else is doing.  Individual decisions become group decisions, and individual actions potentially become herd behavior.  Individual and group psychology, and their attendant compliance techniques, can be tapped to drive incredible growth, influence decisions and activity, and ultimately build big businesses.  On the other hand, these same techniques can have serious adverse consequences that might not be readily apparent at the outset.  While the new internet is a data-rich internet, at the end of the day we are all humans and as such act and react in ways that are emotional, illogical and often surprising.

Instagram a Good Buy for Facebook

Facebook agreed to acquire Instagram today for $1 billion.  While Instagram has not yet begun to meaningfully monetize its user base, making a strictly financial calculus of the company’s worth challenging, if you buy into Facebook’s $100 billion valuation $1 billion for Instagram may not seem so expensive.  Let’s take a look at the relevant metrics, culled from Facebook’s S-1 and various Instagram announcement on user numbers and engagement:

On a per registered user basis (granted the comparison is not strictly apples to apples, as the Facebook number above is MAUs, smaller than their overall registered user base), Instagram looks like a relative bargain compared to Facebook.  Looking at per photo and engagement multiples, Instagram again looks attractive relative to Facebook.  While one could argue that a meaningful number of Facebook photo uploads originate with Instagram and that under this math they’re effectively paying for photos they get already, this would cease to be the case if another party, say Twitter, acquired Instagram and turned off Facebook sharing.

Facebook has shown that user engagement can be monetized at attractive rates.  Facebook should be well-positioned (much more well-positioned than Instagram as a standalone) to translate Instagram’s strong usage and engagement metrics into a viable business.

Social Strategy, Beyond Counting Fans: Part II

Strength of Affiliation

In my last post on this topic, I wrote about ways that brands can think about their social media marketing activities beyond collecting fans.  I proposed a formula:

where:

• n = number of fans;
• S = sentiment, where positive values correlate to positive sentiment and negative values to negative sentiment;
• C = clout, or how influential the individual is; and
• F = strength of affiliation

Number is easy enough.  Sentiment is easy to conceptualize and in theory easy to quantify, though in practice sentiment scoring isn’t always 100% accurate, even when humans are involved.  Clout is a somewhat harder to conceptualize, but probably easier to quantify than sentiment; there a number of techniques to do so including degree, betweenness, and my favorite, Eigenvector centrality.

Strength of affiliation, F, is a tougher concept.  In a way, it’s resistance to change – brand loyalty on the positive side, brand antipathy on the negative.  When brands talk about the impactfulness of ads, they are referring to ability of those ads to influence strength of affiliation, usually by touching on some emotional connection.  In some sense, strength of affiliation is the emotional compliment to the logical calculus of utility.

Long Term Brand Strategies in Social Media

The goal of any brand in social media is to ultimately drive more sales – more from new customers, more from existing customers.  There are two basic ways to drive sales via the social media channel, one tactical and one strategic:

• Tactical.  Brands can drive immediate activity and sales via social media by exploiting the existing social graph and viral distribution.  Creating viral content with a clear call to action, providing special deals to customers who share their purchases, and blasting a coupon code out onto Twitter are all examples of how to extract additional sales via the social channel.  These tend to be one-time, quick hit, solid ROI, but low long-term impact propositions.
• Strategic.  Brands can drive higher retention, higher lifetime value, and much greater brand equity (with accompanying sales that may be hard to attribute back to social media) via the long-term cultivation of their images as responsive, responsible, sympathetic and ultimately human organizations – in other words, by maximizing factor F from above.  This long game effort is much trickier and involves real effort and thought, but long term I believe it can drive more value than any other marketing or customer outreach activity.   It’s the strategic use of social media that I find most interesting, and that I’d like to focus on here.

What brands should be doing strategically from a social media perspective all reflect back on the variables of the formula at the beginning of this post.  Value is derived from increasing numbers (obvious and not covered below), improving sentiment, recruiting influencers, and deepening connection.

Doing things to improve sentiment among its fan base (S Factor).  This encompasses everything about being a great company – building great products, providing great customer service, delighting your customers, etc.  In the social realm this should also include special privileges and rewards for your fan base – these rewards should be when at all possible endemic (i.e. non-monetary) in nature.  Your fans, after all, already like and presumably buy your products.  By giving them coupons, you dilute your own revenues and make the relationship transactional; by providing your fans the first samples of a new product and soliciting feedback, you (a) offer a special perk, (b) get valuable product feedback, and (c) make your fans feel special and invested in your success.  These special privileges should be unexpected rather than programmatic – think surprise perk, not frequent flyer program.  Finally, a small but important point: be fun.  It’s hard enough to get people to engage with a brand; making your Facebook page read like the press release section of your corporate website won’t do much to inspire great enthusiasm.  Brand sentiment should be continually monitored, and signs of trouble should be immediately addressed.

Attracting fans that have significant social clout (C Factor).  Brands should try to single out individuals that have large followings in relevant categories (e.g. for ToysRUs, top mommy bloggers and tweeters).  Similarly, a “like” or retweet by a broadly followed celebrity can also drive significant impression volume and yield numerous new followers, who can then in turn be cultivated and converted into fans.  For their most influential followers and fans, brands should provide individual attention, and provide some social value back to them.  More than for followers generally, brands should look to engage with high-clout individually to enhance stickiness and increase the likelihood of more and better social activity volume.

Deepening the strength of feeling that your fans have for the brand (F Factor).  Social media strategy can positively impact how strongly consumers relate to a brand.  The best social strategy to create positive connections with individuals boils down to two words – be human.  Many brands with great reputations – e.g. Apple, Amazon, Google – have achieved these reputations by providing outstanding value for their customers.  Of these three, Apple has done a remarkable job enhancing its brand by presenting a human face to consumers: the company was embodied by one person, Steve Jobs, up to his death last year; their “Genius” employees in their stores are trained to be empathetic, flexible problem solvers (versus rigidly defined by set policies of what they can or cannot do/say); the company’s entire design approach was human-centric (a fact that is a consistent refrain, explicitly and implicitly, in almost every interview, press conference and product introduction).  While not every company can be Apple, every company can listen, be empathetic, be consistent, and allow individuals with customer-facing roles enough flexibility to come across as human rather than scripted.

As brands become increasingly adept at utilizing the social media channel to build their brands, we will certainly see new techniques and tactics for enhancing brand position and ultimately driving measurable ROI.  Ultimately though, each brand will need to find its own voice and best ways of interfacing with individuals on the social web – this is a medium where there will be no set formula, and one which notes and values honesty, humanity and individual attention more than any other.

Social Strategy, Beyond Counting Fans: Part I

Overview

Brands today are, rightfully, interested in their social media presence.  As many other observers have pointed out, the way brands are perceived has changed radically with the wide-scale use of social media – it’s what consumers say on Twitter, Facebook, online forums and blogs that defines brands today, not what the brand itself says.  Producing a great commercial of your new sedan zipping around a mountain pass won’t carry water if everyone on the Internet says that your car is a tin can on four wheels.  This, we all know, is the new paradigm of marketing.

Many companies have identified social media as a core focus area for 2012, and will look to expand upon their existing social strategies over the next year and beyond.  On the whole, brands have adopted social media tools and techniques remarkably quickly.  CMOs have moved beyond simply establishing Facebook fan pages, and are using sophisticated social listening tools, responding to complaints on Twitter and on forums, using various social networks for promotions and integrating social into their existing websites and online ad campaigns at increasing rates.

Brands are engaging with social media today with a principal goal of building up large legions of fans and followers that they can then activate via promotions and offers.  Having lots of fans of your product is certainly a great place to start: in many cases brands are even tying this approach back to near-term ROI, the current gold standard of online marketing.  However, this is only scratching the surface of what social networks can be used for.  As brands become even more versed in social media their strategies will mature beyond more fans/more followers and begin to reflect deeper and more personalized approaches to how they grow, cultivate and activate their social networks.

Measurement of Social Strength

Measuring social media success isn’t the same as simply counting up Facebook fans and Twitter followers.  While the absolute number of social followers is an important measure, the composition of this network is equally if not more important.  A fan base of ten highly-networked, highly-influential people is of greater value than a fan base of a hundred or even a thousand sparsely-followed nobodies.  There are other important factors at work as well that drive the value of a brand’s social network: how actively do fans engage with the brand and promote it via social networks (brands gain little from even gold-plated networks if they never engage or publicly laud the brands’ products); how deeply do each of these fans identify with the brand (strong affiliation and loyalty is far more valuable than passing affinity).

Rather than a simple function of size, the value of a brand’s social network will look something like this:

where:

• n = number of fans;
• S = sentiment, where positive values correlate to positive sentiment and negative values to negative sentiment;
• C = clout, or how influential the individual is; and
• F = strength of affiliation

Under such a formula, the value of the brand network scales linearly with the number of individual fans: going from 2,000 to 4,000 fans doubles the value (all other variables being equal), but adding the incremental one million and first fan adds relatively little (again, all else being equal).

Sentiment is an easy concept to get – individuals with a strongly positive brand sentiment should be worth a lot more than those with only modestly good things to say.  Similarly, fans or followers who have strongly negative sentiment (think bank customers put on hold for hours only to be given the run-around) will tend to have a much more significant impact than those with a moderately negative view.

Clout is another easy one to understand – it’s a function of the size of one’s network and also of how likely one’s views are to be registered and heeded on a particular topic.  Klout is a well-known example of a company looking to categorize each person according to their clout on specific topics.

Strength of affiliation is a bit of a tougher concept.

Strength of Affiliation – the F Factor

Strength of affiliation, the “F factor” above, is probably the hardest input to understand and quantify, but I believe is also the most important (thus I’ve squared it in our formula here).  I differentiate here between strength of affiliation, F, and sentiment, S.  While S as a variable might change based on immediate stimuli, like a bad customer service experience, F represents a more subtle and deeply-held connection.  For example: I began my career in investment banking, and remember quite well when I was issued my first BlackBerry pager.  For years my BlackBerry served as an important line to the office, which enabled me to actually wander afield from my desk rather than, say, waiting by my computer all day on a Saturday for a critical email to reach my inbox.  I loved my CrackBerry, and most of my colleagues similarly loved theirs.  Over the last several years the BlackBerry has fallen way behind in the sophistication of their devices, and most people would acknowledge this, but many people (including some colleagues of mine) refuse to give theirs up largely, I would argue, based on strength of affiliation.

F is the factor that keeps users loyal in the face of poor service or product stumbles, and in a sense represents resistance to change; it also compels people to come to the aid and defense of a brand when things go wrong and be frequent active advocates for a brand over time.  It is very hard to create, but social networks open up a whole new way of fostering it and nurturing F feelings among fans.

In my next post, I’ll discuss some ways that brands can move beyond simply counting up Likes, fans and followers, how to begin to build and strengthen F, and how to engage with their social networks to improve the overall power of their social strategies.  I’ll also touch on another important factor in driving engagement – messaging the right content at the right time to increase the probability of engagement and viral distribution.

Respect and Disrespect in Entrepreneurship

We all know that the successful entrepreneur must have a certain degree of disrespect for conventional wisdom, for how things have been done in the past, in order to have the conviction to create something new for the future.  This disrespect is often deep-seated in the entrepreneur and combined with a profound degree of self-confidence: “The current way of doing things is wrong, and I can do it better.”

Fred Smith, the founder of FedEx, noted the inadequacy of existing logistics systems in a paper he wrote as a college undergraduate.  Despite early skepticism from Wall Street and the venture community (which demanded the creation of no less than three independent marketing studies validating the company’s premise), Smith persisted in his view and today we have FedEx.  There are thousands of similar stories from entrepreneurial history up to today, and everyone has their favorite – it is clear that without at least some disrespect for authority and the prevailing way of doing things, nothing new would come.

This disrespect for authority is the romantic part of entrepreneurship – the dreamer entrepreneur, alone in his conviction, against a skeptical and hostile world.  Some of the best entrepreneurs and CEOs I’ve worked with, though, combine this classic disrespect with a level of respect for precedents, received wisdom, and the counsel of others, particularly if it’s coming from people that have faced similar obstacles in the past.

Respecting conventional wisdom isn’t the first thing that we think of when we consider what makes a successful entrepreneur (it’s actually probably one of the last things), but I’d argue that it’s essential – challenging every assumption, arguing against every broadly-assumed maxim, is exhausting and, more importantly, extremely time-consuming.  It’s like that old joke about prejudices: they save time.  There simply isn’t time enough to challenge every little thing when you’re trying to build a company from the ground up – you have to choose which conventional wisdom to accept and which to reject, as you go, or else you just end up going around in circles.

One of my own heroes, the physicist Richard Feynman, gave a talk in April 1966 to the National Science Teachers’ Association where he discussed how science instructors should teach their students to consider the scientific conclusions of the past; essentially, received wisdom.  His thoughts can just as easily applied to the community of entrepreneurs:

Each generation that discovers something from its experience must pass that on, but it must pass that on with a delicate balance of respect and disrespect, so that the race … does not inflict its errors too rigidly on its youth, but it does pass on the accumulated wisdom, plus the wisdom that it may not be wisdom.

Telling the difference between what to respect and what to disrespect is hard, as Feynman notes.  The only really good way to do this, I think, is through a constant observation of cause and effect.  As an entrepreneur you mindfully make certain assumptions based on received wisdom.  If conventional wisdom turns out to be correct, everything is fine.  If on the other hand you observe effects that suggest that some bit of conventional wisdom you used is wrong (the social game you designed for young men is catching on with a subset of moms, your marketing campaign is delivering weird results), that may be a clue that this wisdom doesn’t apply and that it should be discarded. It may be due to a particular circumstance of your business, or due to a measurement problem, or perhaps even an indication that something in the market ecosystem has fundamentally changed.  It is these latter types of indicators that are really interesting, and may lead to new business opportunities in their own right.

We all make assumptions based on experience – ours or someone else’s.  As a VC, entrepreneurs often tell me that some commonly-held belief (how fast they can grow, how many skilled people they can hire in such and such a time, how efficiently they can deploy marketing dollars) doesn’t apply to them because they’re special in some way.  I know that they’ll mostly turn out to be wrong.  But when they’re right – wow.  That’s when even the skeptical VC has to re-orient his database of conventional wisdom.  That, as Feynman would say, is the real pleasure of finding things out.