Business development: the Goldilocks principle

Background: At Hunch, we switched our focus (“pivoted“) about 14 months ago from B2C to B2B. Over that time, we pitched over 500 potential partners, trying to get them to use and eventually pay for our recommendation services. This process had its ups and downs, but eventually ended well when – after 8 months of grueling diligence – eBay decided to acquire Hunch in what I expect will be a successful outcome for both companies. During this time, I got a crash course in B2B sales/business development. Here is the first in a series of blog posts based on what I learned.

Somewhat counterintuitively, the biggest problem we encountered when pitching Hunch technology to potential partners wasn’t that it wasn’t interesting or useful to them, but that it was so interesting and useful that they considered it “strategic” or “core” and thus felt they needed to own and not rent it. The situation reminded me of the “Goldilocks principle” sometimes referred to in scientific contexts:

The Goldilocks principle states that something must fall within certain margins, as opposed to reaching extremes. It is used, for example, in the Rare Earth hypothesis to state that a planet must neither be too far away from, nor too close to the sun to support life.

Basically, if your technology is “too hot” – or, in business-speak, “strategic” or “core” – then there are three likely outcomes:

1. The potential partner turns you down because they decide to build a similar product themselves. This happened to us a number of times. I think part of the reason was that there was a lot of market buzz around “big data” and machine learning which lead to the perception – rightly or wrongly – that those capabilities needed to be owned and not rented.

2. The potential partner says yes because your assets are so defensible they can’t replicate them. I’m sure Zynga considers the social graph strategic but at least for now they have no choice but to partner with Facebook to access it. It is very rare for startups to have this kind of leverage, but ones that do are extremely valuable.

3. The potential partner wants to own what you do, but thinks you have a sufficiently superior team and technology that acquiring you instead of replicating you makes more sense. This is only possible if the partner is large enough to acquire you and has a philosophy consistent with acquiring versus building everything in-house. (A common tech business term is “NIH” which stands for “Not Invented Here”. It refers to a set of companies that consider anything developed outside of their offices technologically inferior).

At the other extreme, if your technology is “too cold” – perceived as not useful by potential partners – you’re going to have a lot of frustrating meetings.  In this case, it is probably wise to reconsider whether there is actually demand for your product.

To build a long-term sustainable business, the best place to be is “just right” – useful to lots of partners but not so strategic that they are unwilling to rent it. This is where I wanted Hunch to be but we never got there.  Most companies I know use externally developed products (commercial or open source) for databases, web servers, web analytics, email delivery, payment processors, etc. These are often highly competitive markets but the companies that win in these markets tend to become large and independently sustainable. These “just right” companies – to extend the astronomy analogy – are the planets that support life.

Taste graph infographic

Cool infographic about our core technology at Hunch, what we call the “taste graph.”  My favorite stat is that we have >25,000 API clients making >400,000 calls per day (many clients seem to be devs building not-yet-release apps).  Upcoming infographic will focus just on API usage and growth.  And yes, crazy as it seems, we have Assembly and C code, which was necessary to optimize core inner loops which are extremely computationally intensive.

(click for full size)

Good bizdev cannibalizes itself

A few successful websites were built almost entirely through viral growth. The vast majority, however, started off by partnering with other, already successful websites. Even Google began by partnering with Yahoo. As superior as Google’s search algorithm was, it was very hard to get the masses to switch to a new search engine.

In the web 1.0 world (approximately pre-2004), integrating two web services involved lots of manual work, such as negotiating legal contracts and custom technical integration. Creating these kinds of partnerships is usually referred to as “business development” or “BizDev” (personally, I usually just call it “BD”). In the web 2.0 world, it became common for websites to create fully functional, self-service API’s with standardized legal terms. This made it possible to drastically reduce the friction of integrating services. My Hunch cofounder Caterina Fake coined the term “BizDev 2.0″ to refer to this idea (and of course Flickr was a pioneer of super robust APIs).

There is no question that removing legal and technical hurdles is a win for everyone (except lawyers). However, unless your service is extremely high profile and its value is easily understood, it still needs to be marketed to potential partners. Many websites won’t consider using a self-service API until they’ve seen it working on other sites with measurable results. So how do you overcome this particular kind of chicken-and-egg problem?

During his interview process, Hunch’s Shaival Shah, said something that struck a chord with me: he didn’t want to be called “VP BizDev” because, he said, a good BizDev person makes BizDev irrelevant. The idea is to create a number of BizDev 1.0 partnerships while simultaneously building and marketing a full service API.  If you can do BizDev 1.0 with some number of (ideally high profile) websites and demonstrate that it is valuable to them (ideally quantitatively), you can then scale your service BizDev 2.0 style. Maybe this could be called BizDev 1.5.

Shaival wrote up a much more detailed post on self-cannibalizing BizDev that is well worth reading.

Why you should put the new Hunch badge on your website

If you sell stuff:  Companies like BazaarVoice have proven that displaying user reviews on ecommerce sites increases conversion rates. You can pay BazaarVoice for this or get it free from Hunch. Here’s an example widget for Mario Kart Wii:

new HUNCH.ResultBadge({width: 160, praise: 3})
If you have a blog:
You can put a badge on your site that shows what your readers think of your blog. Here is an example badge for TechCrunch:

new HUNCH.ResultBadge({width: 160, praise: 3})
Readers can click through the widget and rate your blog on Hunch. This in turn can drive traffic back to your blog (Hunch had 1.2M uniques last month).

You can go here to make a badge. If your blog isn’t in Hunch’s database you can add it here

New Hunch interface

Today we are releasing a new version of the Hunch question-and-answer interface.  The main idea behind the new interface is that you now see Hunch’s top recommendations updated in real time as you answer questions.

Besides giving instant feedback, this also lets you see how each answer you give affects the recommendations.  We think it does a better job exposing Hunch’s intelligence, particularly the statistical intelligence the system has acquired from the tens of millions of user feedback clicks collected over the past few months.

Here’s an example.  Suppose you are looking for a video game and you’re a brand new Hunch user – Hunch knows nothing about you (you can try this yourself by logging out and going to our video games topic).  You start by seeing a list of video games ranked by overall popularity among users:

start

Now suppose I answer the question on the left by clicking on XBox 360.  The list on the right then updates, showing only the most popular Xbox 360 games:

xbox

Since at this point I haven’t told Hunch anything about myself, this list is still just an un-personalized list of popular XBox 360 video games.  Now let’s try some basic personalization.  Suppose I start over and instead of answering which video game console I prefer, I click on “About me” tab:

q gender

and click on Male. The video game list then changes to show games that tend to be preferred by males:

male

This list is determined statistically from Hunch user responses.  For example, Fallout 3 rose to the #1 spot after I said I was male because Hunch user responses correlate liking Fallout 3 with being male:

Screen shot 2009-12-03 at 9.47.24 AM

This is obviously a very basic example of personalization.  Things get more interesting when you answer a series of questions and Hunch combines filters and statistical data on the fly, thereby giving you highly personalized and relevant results.

Another new feature is that if you click Yes or No next to a result:

Hunch will not only learn from your click – thereby getting smarter – it will also recompute the result list on the screen instantly.

For example, let’s start video games from the beginning again and click “No” next to the top result Brain Age.  Hunch then changes my result list to show more “hardcore” games that are statistically anti-correlated with Brain Age (a game hardcore gamers tend to think is “kiddie”):

Screen shot 2009-12-03 at 9.53.19 AM

Please feel free to give us any feedback on the new interface.