Chris Dixon

I’ve been trying to set up a “Popular Posts” widget on the sidebar of this blog but somehow repeatedly failed.  So instead I’ll just post them here:

The most important question to ask before taking seed money link

The challenge of creating a new category link

Man and superman link

The new economy link

Why content sites are getting ripped off link

Software patents should be abolished link

Climbing the wrong hill link

Google and newspapers: the false choice of opting out link

New York City is poised for a tech revival link

To make smarter systems, it’s all about the data link

The one number you should know about your equity grant link

Why you shouldn’t keep your startup idea secret link

Ideal first round funding terms link

One of the hardest things to do as a startup is to create a new category.  Bloggers and press have a natural tendency to “pigeonhole” – to group startups into cleanly delineated categories, and then do side-by-side comparisons, comment on the “horserace” between them, and so forth.

At my last startup, SiteAdvisor, we were at first consistently pigeonholed as an anti-phishing toolbar, even though what we did was help search engine users avoid spyware, spam, and scams, which (for various technical reasons) had almost no functional overlap with anti-phishing toolbars. My co-founder at Hunch, Caterina Fake, had a similar experience at Flickr.  Early on, people compared Flickr to existing photo sharing websites – Shutterfly, Ofoto, SnapFish - and found Flickr lacking in features around buying prints, sending greeting cards, etc.

Pigeonholing is one reason startups should actually welcome direct competitors.   It was only once a direct competitor to SiteAdvisor appeared that people started treating “web safety” as its own category (Walt Mossberg was the first one to legitimize the category with this article).

At my current startup, Hunch, being pigeonholed as a so-called Answers site is one of our main marketing challenges.  Hunch is a user-generated website similar to Wikipedia except, instead of creating encyclopedia entries, contributors create decision trees that help other users make choices and decisions.  For example, about 50 computer enthusiasts came together to create this decision tree about computer laptops that helps users with less expertise find the right laptop.  Hunch gets smarter over time as more people contribute to it.  So far, about 10,000 users have made 115,000 contributions to the site.  Last month, our third month after launch, over 600,000 unique visitors used those contributions to make decisions.

Many of the initial reviews of Hunch accurately reflected that Hunch is trying to create a new category of website.  Nevertheless, the tendency to pigeonhole Hunch as an Answers site remains. Answers sites allow users to ask a question and get back direct answers from other people.  There are many Answer sites including Yahoo Answers, Mahalo Answers, Vark, Answerbag, and ChaCha. These are all excellent and useful services – but have as much to do with Hunch as Ofoto had to do with Flickr.

There is no easy solution to avoid being pigeonholed.  All you can do is consistently, straightforwardly describe what you do, and then keep beating that drum over and over until the message gets through.

I carry around an iPhone and a Blackberry Tour.  I know that’s ridiculous. The iPhone is a great device on an awful network; the Tour is an awful device on a great network.  If the rumors are true and the Verizon “Droid” is a great device on a great network, I’ll be the first in line to get one.  But for the wireless ecosystem as a whole, it would be a bad thing.

Some people are saying a great Droid would mean more competition amongst handsets.  But you can’t really choose a handset – you choose a handset-carrier pair.  The real innovation inhibitor in the cellular world has been the power of the carriers to dictate what devices you can use and what apps go on those devices.  Just ask an entrepreneur who tried to create handsets or cellular apps.  They are completely beholden to the whims of the carriers.

Apple has gotten very close to breaking the carrier stranglehold – just look at how many people put up with AT&T’s atrocious network to have one.  Had Verizon capitulated and accepted Apple’s presumably stringent terms in order to carry the iPhone, we might have finally started to see a true decoupling of handsets from carriers.

Finally, don’t think just because the Droid runs Android it’s going to be truly open.  Verizon knows a truly open OS – one that allows you to run Google Voice, Skype, 3rd party SMS apps – would make their network a dumb pipe.  They’ve shown in the past they won’t let that happen.

Some startups become huge sensations without requiring any active marketing – YouTube, Skype, and Twitter come to mind. However, the vast majority of successful startups gained adoption through marketing:  PR, SEO, partnerships, paid marketing, and so on. My strong suggestion would be to hope for the former but plan for the latter.

Marketing is a huge topic.  Here I just want to make the point that, for starters, you need to figure out two things:   1) how information and influence flows in your market, and 2) when and where people use and/or purchase your product.

I’ll use my last startup, SiteAdvisor, as an example.  SiteAdvisor (now called McAfee SiteAdvisor) is a consumer security product.  Most consumers don’t learn about security products on their own.  Instead, they rely on their “family/friend sysadmin” (smartest computer person they know).  These family sysadmins read technical websites and magazines.  In order to reach this audience, we performed studies on data we had collected, which led to lots of coverage, which raised our profile and bolstered our credibility.

Now to when and where people buy security products.  Most people only think about security when 1) they buy a new computer, 2) they first get internet access, or 3) they get a virus or other security problem.  The last case is actually pretty rare, so most companies focus on 1 and 2.  How do you reach people at those moments?  Through “channels” – in particular PC makers (“OEMs”) and internet providers (“ISPs”).  (For public market people:  focusing on these two channels was McAfee’s big insight in the 2000′s and how they made a comeback versus Symantec who dominates retail).

Most people don’t talk to their friends about security products so it’s very hard to do mass word-of-mouth marketing.  (Exceptions would be the beginning of the spyware epidemic around 2001-2 when AdAware got super popular via word of mouth).  So you have to understand and pitch to these channels.

These observations are specific to consumer security, but every startup should have a similar theory of how to market their product.

I’ve used Google Reader religiously since it launched.  I’m a few days away from quitting it forever.  Pretty much every blog I read tweets the titles of their posts along with a link.  Better yet, the people I follow retweet their favorite links, providing a very efficient way for me to discover new articles to read and publishers to follow.

Contrary to all the uninformed handwringing about how Twitter is making people dumb, I find I’m reading more long form blog and newspaper content than ever.   And the stuff I’m reading is more interesting and relevant.  That’s a good thing.

Meanwhile, Google Reader has been desperately adding social features such as sharing starred posts and automatically recommending blogs.  These features are clumsy and won’t save Reader, or RSS, from its inevitable decline.

Although I’m generally happier as a user, I think all of this is bad for the internet.  Twitter isn’t an open protocol.   It’s a private company with a profit motive that has a history of unreliable service. Moreover, URL shorteners – a byproduct of Twitter – are effectively creating a second layer DNS service that is far less secure and reliable.

I know that many people have been calling for an open alternative to Twitter for a long time.  I support them, but I’m afraid it’s too late. The network effects of Twitter’s social graph are just too strong.  Not to mention its brand momentum.  But the biggest reason Twitter has won is that mainstream users don’t care enough about these “principled” objections to switch.  Do you think Ashton or Oprah cares about open protocols?  I doubt it.

But someday they will care – when the internet is less open, less reliable and less secure.

A commenter on my blog the other day (Tim Ogilvie) mentioned a distinction that I found really interesting between intent generation and intent harvesting.  This distinction is critical for understanding how internet advertising works and why it is broken.  It also helps explain why sites like the newspapers, blogs, and social networks are getting unfairly low advertising revenues.

Today’s link economy is built around purchasing intent harvesting.  (Worse still, it’s all based on last click intent harvesting- but that is for another blog post).  Most of this happens on search engines or through affiliate programs.  Almost no one decides which products to buy based on Google searches or affiliate referrers.  They decide based on content sites – Gizmodo, New York Times, Twitter, etc.  Those sites generate intent, which is the most important part of creating purchasing intent, which is directly correlated to high advertising revenues.

But content sites have no way to track their role in generating purchasing intent.  Often intent generation doesn’t involve a single trackable click.  Even if there were some direct way to measure intent generation, doing so would be seen by many today as a blurring of the the advertising/editorial line.  So content sites are left only with impression-based display ads, haggling over CPMs without a meaningful measurement of their impact on generating purchasing intent.

All of this has caused a massive shift in revenues from the top to the bottom of the purchasing funnel – from intent generators to intent harvesters.  Somehow this needs to get fixed.

There is a widely held assumption that new business models will continue to emerge online – that statements like “how will Twitter ever make money?” will look as silly in 10 years as similar statements made 10 years ago about Google look now.

There is no question that, if they wanted to, Twitter could make tens of millions of dollars tomorrow, by, say, running ads or by licensing data feeds.   The big question is whether Twitter and other social media sites will figure out how to make Google-scale money and not just Facebook-scale money.  Google and Facebook get (ballpark) the same number of monthly visits to their sites.  Facebook made hundreds of millions of dollars last year and reportedly lost money.   Google made over $22B last year with huge profit margins.

The optimistic view (which I tend to hold myself) says that where people spend time, money will follow.  If people are spending all their time on Facebook and Twitter, the Proctor and Gamble’s of the world will eventually find an effective way to shift the bulk of their ad spending online.   The tacit assumption in this view is that the next 15 years will see as much business model innovation as the last 15 years.

On the other hand, what if we are mostly done creating big new business models for the web? History suggests that business model innovation is rapid right after the advent of a new medium and then slows down considerably.   If indeed it is slowing down, social media could end up like instant messaging – incredibly popular but basically lousy at monetizing.

A while ago I dug up this quote from Business Week from 2000:

But how will Google ever make money? There’s the rub. The company’s adamant refusal to use banner or other graphical ads eliminates what is the most lucrative income stream for rival search engines. Although Google does have other revenue sources, such as licensing and text-based advertisements, the privately held company’s business remains limited compared with its competitors’.

We now know what people were missing back then and why Google generates such massive revenues from advertising.  The lesson is that the RPMs* of online ads are directly proportional to the degree** to which the user has purchasing intent.  This is why when you search Google for “cameras” you’ll see ads everywhere (and those advertisers are paying high CPCs), but when you search for “Abraham Lincoln’s birthday” Google doesn’t even bother to show ads at all.

This is also why Nextag will have revenues this year in the ballpark of Facebook’s revenues, even though Nextag gets a fraction of the visits:

When people talk about search being a great business model (for, say, Twitter), they should distinguish between search with puchasing intent, which is an incredible business model, and search without purchasing intent, which is a terrible one.

This may change as brand advertising moves to the web.  But for now web advertising is dominated by “direct response” ads, and those are all about purchasing intent.

* RPMs = revenue per thousand impressions – can we please agree to start saying RPMs instead of CPMs or eCPMs?  :)

** degree being how close the user is to actually purchasing multiplied by the profit margin on what they are purchasing

The alleged societal benefit of patent law is that it creates a financial incentive to innovate.  The societal drawback is that it reduces competition, reduces the spread of innovation, and creates deadweight legal costs.

Perhaps patents are necessary in the pharmaceutical industry.  I know very little about that industry but it would seem that some sort of temporary grants of monopoly are necessary to compel companies to spend billions of dollars of upfront R&D.

What I do know about is the software/internet/hardware industry. And I am absolutely sure that if we got rid of patents tomorrow innovation wouldn’t be reduced at all, and the only losers would be lawyers and patent trolls.

Ask any experienced software/internet/hardware entrepreneur if she wouldn’t have started her company if patent law didn’t exist.  Ask any experienced venture investor if the non-existence of patent law would have changed their views on investments they made.  The answer will invariably be no (unless their company was a patent troll or something related).

Yes, most venture-backed companies file patents (I have filed them myself), but this is because 1) patents can have some defensive value, 2) they can grease the wheels of an acquisition (mostly because big companies want a large patent portfolio for defensive purposes), and 3) occasionally failed startups will get funded by investors whose intention is to go around suing people (hence providing “downside value” for the initial investors).

Articles like this recent one in New York Times promote the urban myth that the main beneficiary of patents are lone inventors whose idea is stolen by the big guys.  I have no special knowledge of the situation referred to, but I find it hard to believe in 1995 the idea of tying GPS to mobile devices wasn’t obvious to anyone in the field.   Almost all software and technology patents that I’ve ever come across are similarly obvious to practitioners at that time.  In theory obviousness is grounds for disallowing patents, but in practice patent examiners grants tons of silly patents.

Take the case of Blackberry and NTP.   NTP is a “patent holding company” – a patent troll – whose sole purpose is to sue people.  Now, I’ve been around long enough to know that the idea of mobile email is as old as email itself.  What RIM did was they actually went and made it a reality.  They figured out how to make a simple device that people loved, how to market it, and how to convince investors to give them money for what probably at the time seemed like an overwhelmingly difficult project.  The founders of RIM are the heroes of the story.   They didn’t need to sue anyone because they built a product and made money by actually selling a product people wanted.

How did having patents help society here?  NTP never tried to build any products.  No one is claiming RIM took the idea from them.  The only beneficiaries here are a company that never built anything and a lot of lawyers.

Software/internet/hardware patents have no benefit to society and should be abolished.

Holman W. Jenkins Jr. has an op ed in the Wall Street Journal today arguing against net neutrality. He positions himself as someone defending innovation and particularly startups against incumbents like Google.  For example, he says:

What if some startup Google sought to achieve the same goal by outsourcing its data management to the telcos, say, by mounting servers in their premises to help deliver Web applications more quickly? This would be a win-win for both parties. Data that travels within a carrier’s system is cheaper to deliver than data that must be handed off between two or more carriers. Would such an arrangement be a violation of net neutrality? Google would likely shriek so.

Huh?   Pretty much every startup I know does host their web apps at telcos.  My company Hunch, for example, hosts at Level 3.  The 20 or so startups I’ve invested in all do as well.  I’ve never heard any net neutrality advocate argue against this practice.  It also sounds like he’s unfamiliar with CDNs like Akamai.  In my experience those only tend to be affordable by large, international companies, so hardly favor startups.

He also seems unaware that there is already metered pricing on the internet today – it’s just paid for on the server side, by Google, Microsoft, my company, etc.

The greatest fear of Microsoft, Amazon, eBay and Yahoo is having to plumb their deep pockets and offer competing payments to broadband carriers to speed their bits to consumers.

I’m happy to show Mr Jenkin’s our Hunch bandwidth bill or he could just go look, for example, at Rackspace’s pricing page.   Apparently he wants websites to pay twice, once to the hosting provider and again to the ISP.  At any rate, I can’t imagine how “the more you pay, the faster your site runs” could possibly favor startups over cash rich incumbents like Google and Microsoft.

On the ISP side, he repeats the common anti-net neutrality assertion that there is genuine competition between ISPs.  Maybe there is where he lives.  Where I live in Brooklyn there is only one viable choice (Time Warner Cable).  Maybe once Verizon FIOS comes to my area this will change but for now I can’t get it.  At my office in Manhattan we couldn’t get T-1 service in our building, the Verizon DSL had atrocious quality of service and we ended up with only one viable choice – Towerstream WiMax beamed from the Empire State Building.

Finally, he argues that Google, Microsoft et al are just looking after their own interests:

But usage-based pricing that would give consumers a reason to think twice before clicking on a Google-sponsored ad? It would be the end of Google’s business model.

I agree this would be the end of Google’s business model.  But it would also be the end of the business models of pretty much every startup that is ad based – the vast majority of consumer internet startups today.

Personally, I tend to think net neutrality legislation is unnecessary as true competition in the ISP space is likely and will prevent any use-based pricing from gaining traction.  I am quite sure, however, that use-based pricing by ISPs would be disastrous for internet innovation, and especially for internet startups.