Marketplace Pricing

Marketplace pricing strategies tend to fall into one of three categories: 

  • Flat-rate fees - where a fixed price is charged typically per-listing or per-lead generated.
  • Subscription - where participants on one or both sides of the market pay a regular fee for access to the marketplace.
  • Commission - where a percentage cut of transaction value is taken.

Of these three models the commission approach has largely become the standard with flat-rate and subscription models being relegated to marketplaces where the actual transaction happens off-platform (housing, cars, recruitment, etc.) or where transactions aren't priced (data sharing, dating, etc.). 

This convergence on commission pricing has meant it's possible to broadly compare marketplaces serving different industries and how the level of commission varies with the nature of the transactions. So to do this I pulled together an analysis looking at the commission rates for twenty-five different marketplaces across six categories: 

  • Digital Products - Apple App Store, CreativeMarket, ThemeForest, 99Design (Ready-Made store), Shutterstock
  • Local Services - TaskRabbit, Uber, Homejoy
  • Remote Services - oDesk, Amazon MechanicalTurk, Fiverr
  • Physical Products - Etsy, Ebay, Just-Eat, Seatwave, Vinted, Amazon Marketplace, Asos Marketplace
  • Holiday Rentals - AirBnB, Wimdu, HouseTrip
  • Fundraising - JustGiving, CrowdRise, Kickstarter, Pledge Music

To make the commissions as comparable as possible:

  • Both demand side and supply side commissions are combined
  • Commissions are inclusive of credit-card/payment processing fees
  • Commissions are based on non-exclusivity and don't include volume discounting
  • In cases where fees aren't officially published they're calculated based on other publicly available data

Looking at the data this way it's hard to ignore how high-commission digital product marketplaces are - the low-end of the category being equivalent to the high-end in every other category. It's not clear if it's a case of profit taking or if the digital marketplaces face unique costs (vetting product quality, marketing, etc.) but given that newer marketplaces such as Creative Market are operating at a much lower (although still high) commission the high-end digital marketplaces look distinctly vulnerable to disruption. 

There's also a noticeable gap between the marketplaces for remote and local services with the later commanding a notable premium. While the obvious explanation would be local marketplaces requiring greater local presence and deeper supply side vetting, the holiday rental market faces similar challenges without the same level of markup. It'll be interesting to see if the rates get driven down as competition grows in the local services space.

One factor not taken into account here is transaction value and volume; in theory markets in which those are larger should result in higher revenue from smaller commission. However even once segmented by category it's not obvious that there is a correlation between those factors and commission levels. One reason may be that marketplace startups tend to either be "low-value high-volume"  or "high-value low-volume" with the two factors essentially cancelling each other out (presumably "low-value low-volume" markets are hard to build significant companies in and "high-value high-volume" markets extremely rare).

If you have any comments or are working on a marketplace startup I'd love to hear from you. I can be reached via email <imranghory@gmail.com> or twitter at @imranghory

What Publishers Think: Subscriptions, Self-Publishing and Discovery

This weekend was #FutureBookHack, a hackathon which brought together hackers that were digital leaders from top-tier publishers (Faber, Harper Collins, Pan Macmillan, Penguin Random House, and Simon and Schuster), as well as other industry experts including industry analysts (Nielsen), booksellers (Blackwells) and literary agents.

While The Bookseller has extensive coverage of the event itself, there hasn't been much coverage of the key themes that emerged not only from the formal presentations/workshops, but also from the more informal discussions that took place over the weekend.

Given such a unique collection of experts, there was a lot of industry insight which I've gathered together to share with a wider audience.

I've split it into - the more formal topics; (discoverability, audio books and children's books); the informal ones (Netflix for eBooks, Publishers vs Self-Publishing); and then rounded up some of the more insightful smaller points.

THE INFORMAL

SPOTIFY/NETFLIX FOR EBOOKS

Given how "hot" this topic has been over the last year, it was almost an inevitable that this was bought up a number of times. Almost always via a participant raising it to one of the publishers rather than vice versa.  

The overwhelming view from the publishers, was that the model didn't work for the dynamics of the book market. The fundamental argument being, that most readers aren't restricted to the number of books they read because of cost, but because of time.

While a music listener or movie watcher might significantly increase their consumption as the incremental price drops to zero, book readers are already close to their limit in how many books they can read.

For example, with music a single is only 2-3 minutes long, so with a subscription service the amount of genres to which a consumer listens increases significantly. An average book takes 10-20 hours of reading time and many consumers already purchase more books than they are able to read.

The fact that piracy hasn't occurred for eBooks in the way it has for movies and music, adds weight to the viewpoint that eBook consumption isn't price restricted.

As this is the case, it seems impossible for a pricing model to exist that would both make sense for publishers and readers. Readers can't be given more value for the same amount of money, and publishers can't justify the cannibalization of their sales market if subscriptions can't produce similar revenues. Publishers also lack secondary revenue streams (merchandising, concerts, etc.) that allow other industries to justify the low revenues from services like Spotify.

However, there might be exceptions for particular genres where reading patterns are different, and this has been demonstrated in a few markets. Comic books (via Comixology and Marvel Unlimited), and technical books (Safari) are both examples where readers are likely to increase consumption. They're also both markets where consumers often purchase physical editions of books they already have in electronic form, further reducing the impact of cannibalization.

There may also be other factors that play into market dynamics for specific genres beyond volume of readership. For example with academic books, a subscription model on the reader's side would be of value to students who would no longer have to carry around heavy books, and on the publisher's side it would solve the major problem of secondary market resales.

Some publishers are however looking at alternative ways of segmenting subscription markets. For example, book serialisation and models where consumers can subscribe to a particular author.

PUBLISHERS VS SELF-PUBLISHING

When self-publishing of eBooks first took off, there was significant concern in the industry that the self-publishing market could end up disrupting the publishing industry. This left many publishers in an existential crisis, questioning what they actually did, and how they added value.

As the eBook industry has matured the initial concerns have largely been allayed, with publishers finding that in general, self-published authors would prefer a traditional publisher if given the option.

Publishers now often sign up successful self-published authors, and source new books from services such as WattPad. Taking on such authors reduces the upfront risk of investing in a book, as the authors have already proven demand, so the overall impact has actually been positive for publishers.

Arising from these discussions was also the wider topic of what precisely publishers consider their “key value-add” and why authors still wanted to go with traditional publishers. Reputation, risk and expertise were the three key factors.

  • Reputation: as authors still want the prestige that comes with a reputable publishing house, and getting printed books into bookshops
  • Risk: as the the publishers take on the upfront risk in paying for advances and investing in editorial, marketing, and printing costs.
  • Expertise: not only covers both the services such as - editorial, proofing, and marketing, but also the publishers expertise, and position, in managing the overall process.

While publishers outsource many of the services that they provide to freelancers, they add value by managing those relationships. This both prevents exploitation (as authors aren’t expert buyers of these services), and removes direct commercial incentives from the equation (if the author was paying the editor directly it would impact the author-editor relationship).

THE FORMAL

DISCOVERABILITY

The ability for consumers to discover new books was something that concerned all the publishers, who were keen to see technology formalizing traditional methods of discovery (social recommendation systems, aggregation of professional reviews ala Metacritic), as well as more innovative approaches.

The general feeling, was that current discovery approaches had significant weaknesses. Such as best sellers lists (both online and off) generally being rigged for editorial and commercial reasons, and recommendation engines (typically of the form of “people who bought x often bought y”) being skewed against new and more unusual books.

There was also interest in how improvements in book metadata could result in better discovery (i.e applying SEO techniques to optimize books appearing in the right searches), with most metadata currently being optimized through human expertise, rather than via data-driven approaches.

In part, it felt the concern over discoverability arose from the power that Amazon had over owning the key search, rankings, and book recommendation systems (both via Amazon.com and also via subsidaries such as GoodReads and Audible), and an interest in reducing the dependency on a single vendor.

AUDIO BOOKS

Channels to market was the key topic among the publishers addressing audio books. While consumer demand is growing, there was visible frustration in the difficulty publishers faced in getting their product to customers - both in terms of discovery and delivery (large file sizes, clunky software).

Audio books form a unique set of challenges due to the way the market is fragmented at the moment. A literature student listening to an author reading his/her own work, gets a significantly different take on the work, as against a listener who opts for audio books while driving, or from a parent who uses a children's audio book as a substitute for a bedtime story.

At the moment, the majority of the digital audio book market is core genre adult fiction. This is partially due to the dominance of Audible, who's subscription model and marketing focus is on that group.

Audio book production is expensive to do properly as it requires studio time, a producer, and a voice actor. Due to this cost, base audio books are generally priced on the basis of length, although there is significant variation in how each is priced by the retailer.

So while audio rights to books are typically inexpensive, the high fixed production costs, the nascency of the market, and the fact that audio books sales don't seem to cannibalize the sale of non-audio versions, makes publishers keen to broaden the appeal of this medium.

The overwhelming interest from publishers, was to see new services that made it easy for consumers to access audio books, and many were actively looking into technologies such as streaming, and more consumer-friendly business models.

CHILDREN’S (PICTURE) BOOKS

An unexpectedly hot area was children’s books, one of the few areas of publishing which is seeing a significant growth in print. It is also an area in which publishers are keen to see digital developments that will allow them to reuse their image assets for incremental revenue.

Due to the picture-heavy and interactive nature (pop-ups, pull-tabs, etc.) of these books, publishers are finding existing eBook formats and tools ineffective in bringing these books to digital platforms like the iPad.

AND FINALLY....

There were also number of smaller insights raised that deserve a mention:

  • Several publishers had experimented with building apps tailored around specific books offering enriched content, but found it wasn't successful as it was difficult to build into workflow, and also expensive with costs not being recouped from sales.
  • In general, enriched content (author interviews, extra background, etc.) was hard to sell. There was not much consumer interest in paying for it.
  • Industry experimenting with an eBook first model, where a traditional publisher publishes the eBook first and looks how it performs before deciding if they want to go to a print edition.
  • The creation of a long-tail market by growth of eBooks and print-on-demand is often overlooked. It used to be 100k unique books that were actively selling, now it’s 1m+.
  • Long-tail generates revenue, but not in economically viable amounts for anyone, but is useful for residual revenue from books that have done well in the past and require no further investment.
  • Most publishers make the core of their money from “mid-tail” books with blockbusters being “bonuses”.
  • The ebooks market is shifting to multifunction devices (phones, tablets), and away from eReaders. eReader users often read on other devices as well.
  • On mobile devices eBooks have to compete against not only other eBooks, but also other forms of entertainment (music, games, etc.) available on mobile devices - often for a very low cost.
  • Some print book genres have been decimated not by eBooks, but apps taking their place. For example, maps (replaced by Google Maps) and travel guides (replaced by Tripadvisor).

How YC S12 Companies Make Money

Following on from Y Combinator's Demo Day yesterday I ran an analysis on the companies that presented looking at how they made money. I looked at two factors:

  • Whether they were primarily b2b or b2c
  • What business model they had (if any) 

    The Data

    (this data excludes companies which didn't present "on-the-record" at demo day)

    The definitions I used for classifying startups:

    • Subscription - Startups that charge a regular flat fee (typically monthly) for their services, most typically SaaS services.
    • Marketplace - Startups dealing with multi-sided markets where a commision is taken when participants on different sides of the market transact with each other.
    • Advertising - Startups which generate money through selling advertising space or through lead-gen.
    • Pay-as-you-go - Startups using metred charging models where users are charged based upon usage. 
    • Retail - Startups making one-off sales in the traditional retail transaction model. 

    The Analysis

      The split between startups targeting businesses and consumers seems to be pretty even, in an article last month I covered how AngelPad strongly prefers b2b startups; this doesn't seem to be the case with YC.

      Only a quarter of the startups that presented had no business model to date, although that rises to forty percent if you look purely at the consumer startups which suggests YC is still open to funding consumer startups that have the potential to be massmarket without a clear revenue stream.

      Perhaps most striking was how popular the marketplace model is; historically YC have funded relatively few marketplace startups (presumably on the basis that the differentiator between marketplaces is down to traction and marketing rather than technology). However the huge success of AirBnB and other marketplace startups (Etsy, KickStarter, etc.) in recent years has possibly made them rethink their stance. 

      (This research wouldn't have been possible without the DemoDay coverage provided by both Dan Shapiro and Techcrunch so thanks to them both)

      If you enjoyed this article why not follow me on twitter @imranghory

      Applying to AngelPad

      Last night I attended a poker game sponsored by AngelPad (and kindly hosted by Pusher) who were looking to promote AngelPad as an accelerator to UK based startups. Thomas (founder of AngelPad) kicked off the evening by giving an introductory talk via Skype and holding a short Q&A session.

      As there was a lot of useful information in that session I decided to do a write-up to help anyone thinking of applying who wasn't able to attend. Their deadline for their next season is this sunday and you can apply here.

      I've add my own comments in [square brackets] to distinguish what Thomas said and my own take on what was said. 

      Keypoints

      On applying:

      • They typically get 2000 applications for 12 places
      • 90% of the application comes down to the video, some people who review the application may only see the video and nothing else. It's worth doing multiple takes to get it right.
      • What they expect to understand from the video is: team, business plan and what the startup needs to succeed
      • You'll only hear back if they're interested in you, they don't send rejection emails

      On the startup:

      • AngelPad don't care about revenues or sector per-se, but they care about the core thesis of the business [presumably on the assumption that the actual product can pivot if the basic problem being tackled is significant]
      • Majority of AngelPad companies are b2b
      • Most consumer startups that apply to AngelPad aren't going after big enough markets
      • They're primarily interested in startups where the technology is the distinguishing factor
      • A measure AngelPad use is: Would this be an acquisiton target of a big tech company (linkedin, facebook, google, etc.)
      • They want startups with big potential [I read this as being startups capable of reaching $50m+ valuations given most of their existing startups are raising money in the $5m-$8m valuation range]

      On the team:

      • There needs to be developers on the founding team
      • Team needs to have leadership/management potential

      On what stage startups should apply:

      • They want teams that are already commited to the startup and are already working on it full time (i.e aren't still in day jobs).
      • Under a year old, they worry that startups that are older than that tend to lose momentum and drive.

      On international applicants:

      • For international teams they're only interested in startups that plan to relocate to the US on a permanent basis [note this is different from YC where a number of notable startups like SongKick and Lanyrd have returned to the UK after the program]
      • They think it's too hard for startups to raise investment from US investors if they don't plan to stay in the US
      • They've had 15 non-american teams go through AngelPad so far, 13 of them are still in the US.

      On British applicants specifically:

      • They've had three British startups (Postmates, Vungle, and Rolepoint) [they seem to have missed Buffer from their list]
      • They've found British startups do better than other international startups, possibly due to not having to deal with a language barrier.
      • They like British founders as they tend to have a greater focus on revenue

       

      Seed Stage VCs in London

      One complaint I hear from startup founders raising seed rounds is that it's often hard to know which VCs are open to doing early stage seed round investments and what size of investments they make.

      Hence I've been doing some research and the following is a list of all significant VC funds who've made angel investments in London over the last year and a list of the companies they've invested in - in many cases the VCs in question have done a mix of seed and later rounds; the companies I've listed are specifically ones they've invested in at a seed level.

      Where a fund has explicity stated the size of investments they make I've used those numbers, in other cases the numbers are estimates based upon the reported size of investments they've made in their previous portfolio companies.

      Two VC funds in particular stand-out from the crowd in terms of the number and nature of the investments made: Passion Capital (who primarily focus on early stage investment) and Index - both of whom are definitely worth considering for any startups seeking to raise significant seed rounds.

      The List

      Passion Capital (typical seed investment size: £300k-£500k)

      2011 Investments: Luluvise (female social network), WireWAX (video tagging), EyeEm (photo sharing), Adzuna (classified ad aggregator), Pusher (realtime web infrastructure), GoCardless (payment system)

      Other notable investments: Mendeley (academic social network), smarkets (gambling), flattr (micropayments)

      Accel (typical seed investment size $500k+)

      2011 Investments: FantasyShopper (social shopping game), QRiously (real time sentiment analysis)

      Amadeus (typical seed investment size: ~1m)

      2011 Investments: TrialReach (clinical trial recruitment), oneDrum (Document collaboration)

      Atomico (typical seed investment size: £300k-£550k)

      2011 Investments: Ge.tt (file sharing), Silk (structured content), Siine (virtual keyboard), Fashiolista (fashion discovery), Hailo (taxi app)

      Index (typical seed investment size: $300k-$2m)

      2011 Investments: Reality Jockey (augmented music), EDITD (fashion trend analytics), Lightbox (photo app), Geckoboard (information dashboard), Lanyrd (conference discovery)

      Other notable investments: SnapTalent (job ad network), netvibes (social media dashboard)

      Octopus Ventures (typical seed investment size: £250k-£800k)

      2011 Investments: CertiVox (secure content control)

      Previous investments: TouchType (virtual keyboard), Secret Escapes (luxury travel), True Knowledge (natural language expert system) and Graze (postal snacks) (I've been told the last two were later than seed stage)

      Profounders Capital (typical seed investment size: £500k+)

      2011 Investments: Luluvise (female social network), Applifier (ad network), Lanyrd (conference discovery)

      Wellington Partners

      2011 Investments: EyeEm (photo sharing), Hailo (taxi app)

      I've not included the following VC funds because I've been unable to identify any seed round investments they've made since the start of 2011: Balderton Capital, Dawn Capital and Eden Ventures, The Accelerator Group.

      Apologies to anyone I've missed out or any mistakes in the above; feel free to contact me with corrections/additions at imranghory@gmail.com or @imranghory on twitter.

      Why Seedhack Missed Its Mark

      Last weekend Seedcamp ran their inaugural seedhack, a weekend hackathon style event bring together industry specialists and developers to form new startups. Seedhack was pitched as a much more "serious" event compared to similar events such as Startup Weekend and Launch48, with the aim of having real startups emerge from it. 

      Startup Weekend and Launch48 are much more pushed towards having fun, learning and networking. That some real startups such as Zaarly have emerged out of them has been more in the way of a bonus for these events.

      Seedhack bought in industry speakers, encouraged small team sizes and tackling of "real" problems, had paperwork to deal with ownership issues, and filtered the people attending (asking potential attendees if they were in a position to create a new startup, etc.). They also had two themes Healthcare and Big Data to help focus ideas on real problems for the weekend.

      Unfortunately it doesn't seem to have worked, the products built were mostly similar to those found at any other event (apps for dating and coordinating meetups with your friends) and the follow-on rate (the number actually becoming startups) is likely to be similar.

      What seedhack could have done better

      • The Themes

      The themes (healthcare and big data) were announced after most people had already signed up.  It was clear many of the attendees had little or no interest in these themes. 

      There was also a clear lack of inspiration when it came down to ideas for healthcare startups because there were so few people (either on the developer side or the business side) who had worked in healthcare.  It would have made much more sense to have the themes decided upfront and the event promoted it on that basis (as for example the Education themed Startup Weekends are doing). It would have produced much more "aligned" interest among the crowd and likely result in far more innovative ideas.

      • The Speakers

      The theme speakers while very interesting, were probably at a bit too high level for the event. As someone asked the healthcare speakers in the Q&A "but what are the problems you want us to solve?". There were also several vague references to healthcare APIs but it would have worked much better if speakers had gone into details of the APIs. Also it would have been better if the theme speakers went before the more general technical speakers as it would have allowed the audience to be thinking about theme related ideas that could be tackled with the technologies being talked about. 

      • The logistics of team creation

      The logistics of creating teams didn't work very well. Seedhack took the approach of having a forum for people to post their ideas and online voting. While the concept was sound, in practice this really didn't work with only a handful of people even voting on the forum. The flakey wifi in the room and lack of 3g signal probably made it difficult even for those who wanted to vote to do so. Team formation was done in breaks without any real co-ordination and it wasn't really clear what was going on.

      Launch48 and Startup Weekend both use a similar format which works much better: Anyone who wants can standup in front of everyone and deliver their pitch, followed by a manual voting process, typically either a show of hand or by use of post-it notes. The top voted pitchers then move to separate parts of the room holding signs indicating what they pitched and attendees can go and find the teams they want to join.

      In fairness L48 and SW have both run dozens of events and know from experience that online voting tends not to work (not just because of technical difficulties but offline voting also makes attendees more invested in the ideas they voted for - an important psychological aid to team building), but seedhack should draw on the expertise of these other events.

      • Focus on business development

      From speaking to a lot of the attendees business development and product management fundamentals was one area that many were lacking. While this was partially made up for by the mentors, it seemed many of the teams failed to ask fundamental questions such as "why is this better than the other solutions to the same problem?". While this doesn't really matter for weekend projects, if seedhack is seeking to inspire real startups out of it they should encourage participants to think about these issues.

      While I don't want to seem overly harsh about seedhack especially as this was their first time running it, I do think their concept of a more serious version of L48/SW makes a lot of sense and has potential, so hopefully they'll iterate in true startup style and the next event will be closer to its mark !

      What happened to Hacker News

      In Feb 2007 Paul Graham launched Hacker News with the following announcement:

      Yesterday we launched Startup News, a new component of our site with a user-ranked list of startup-related links. We created this partly for our own use: we've now funded about a hundred people, so it doesn't work well anymore to send links around by email.

      Another reason we created news.ycombinator is that there is currently nothing like it. Reddit used to have a good concentration of startup-related links, but that was because so many of Reddit's initial users were connected in some way to Y Combinator. Now that Reddit is so much more popular, the top links tend to be images, or videos, or political news.

      ...

      But the most important goal of news.ycombinator was to create a place where founders and would-be founders can meet and talk. 

       

      This is the front page of Hacker News at the moment:

      There are three stories related to startups on the front page, by comparison there are five stories about Google, three about Microsoft and three mainstream news stories.

      Now look at the Startup Reddit - it's much closer to what Hacker News used to be:

      It's not that these links didn't apper on HN, a lot of them did, they were just drowned out quickly by other more mainstream stories.

      To paraphrase PG:

      Hacker News used to have a good concentration of startup-related links, but that was because so many of Hacker News's initial users were connected in some way to startups. Now that Hacker News is so much more popular, the top links tend to be general technology, or geek, or political news.

      Michael Arrington Unsolvable Conflict of Interest

      (this article was initially written but not published before Michael Arrington's resignation, as a result of MG Siegler's post suggesting Michael was pushed I've decided to publish it anyway. It was written prior to the announcement of CrunchFund, but the issues discussed apply to it as well as his other investments)

      The History

      Earlier this year Michael Arrington (editor of TechCrunch) announced a change to his investment policy, previously (since 2009) he hadn't made any angel investments due to the conflict-of-interest with his editorial role, but as of the start of this year he began angel investing again:

       

      When these investments are complete, in a few months, there’s a very good chance that I’ll be a direct or indirect investor in a lot of the new startups in Silicon Valley, and that will mean that there will be financial conflicts of interests in a lot of my stories. Either because I write about those companies, or write about a competitor, or don’t write about a competitor.

      ...

       

      The easiest way for me to handle this is to be up front about all of these investments and disclose it in posts, which I’ve done and will continue to do.

       

       

      The Problems

      Unfortunately there are a number of fundamental problem with this:

      1. Techcrunch has run articles on startups without disclaiming Arrington's investment.
      2. Arrington has invested is stealth startups and can't disclose their identities.
      3. Full disclosure isn't done when TC makes an editioral decision not to cover a startup competing with one of Arrington's investments.
      4. Full disclosure itself would result in giving an advantage to startups Arrington invests in.

       

      Missing Disclaimers

      In practice inserting disclaimers into coverage isn't happening. For example this post announcing Zaarly's launch which happened two months after Arrington invested in them (according to his Crunchbase profile), not only did it not disclose Arrington's investment, but it also listed the other seed investors while missing out Arrington's name. Furthermore of all the articles covering Zaarly's competitors such as TaskRabbit not a single one contains a disclaimer covering Arrington's investment in a competitor.

      While I don't think this was done on purpose, I think it clearly shows that even in clear-cut cases it's hard to get disclosure right. But in complex cases it's probably close to impossible.

      And unfortunately since Arrington became an a limited partner in SV Angels he's now likely to be an investor in all future Y-Combinator companies.

      Techcrunch have recently been covering a large number of YC companies as they launch before demo day and not a single one of these posts has had a disclaimer about the conflict of interest. TC has regularly given favourable coverage to YC launches for a number of years, so again I don't think TC is giving YC favourable coverage as a result of that investment, but there's a huge difference between giving an incubator positive coverage purely because you like them and when you have an investment (indirectly in this case) in them.

       

      Stealth Startups

      There are likely to be cases where Arrington isn't legally able to disclose an investment. Many YC companies operate in stealth mode, meaning that investors can't disclose their existence. The obligation to keep the investment secret directly contradicts the principle of full disclosure.

       

      Techcrunch Editorial

      The nature of Techcrunch also creates difficulty. TC doesn't on the whole run op-ed articles (with a few notable exceptions) on startups, but rather focuses it's editorial judgement on choosing which startups to cover and give publicity to. Hence to follow the principles of full disclosure they would need to not only disclose investments in articles, but also make disclosures in cases where they decide not to write articles. Again this is something that doesn't happen in practice.

       

      The Inherent Problem of Full Disclosure 

      Imagine the scenario: Techcrunch runs a negative story about a competitor to one of Arrington's companies, because of full disclosure Arrington inserts a disclaimer about his investment. The disclaimer would essentially be a free advert for the company he invested in running against an article slating it's competitor. The principle of full disclosure would mean that his companies would get favourable coverage by getting mentioned whenever their competitors got coverage.

       

      The Result

      These four problems mean that it would be very difficult for Arrington to stay on in his position as Editor of Techcrunch without violating journalistic ethics of full disclosure and the stated editorial policy of both Techcrunch and their parent company AOL.

      Michael Arrington has resigned since I wrote this article.

      Startup Experiences: What I've learnt (Part 1 - User Acquisition)

      Even though I'd spent a long time following the startup scene and reading all the standard blogs and books before founding my first startup CoderStack (a job board for software developers) when it came to actually putting theory into practice I ran across a lot of gaps in my knowledge.

      So I've decided to write a series of blog posts describing my experiences and sharing the advice that I wish someone had given me before I started.

      I've tried to roughly break the blog posts into themes and the first (this one) is going to be about user acquisition.

      User Acquisition in your Business Plan

      If I look back at my own plans from before I started working on my startup I actually cringe a little at my user acquisition strategy, I made the same mistakes that I see many other startup founders making now. My strategy was made up of broad terms like "SEO" and "Advertising" without any serious attempt to model how much traffic each of these approaches would generate and what the cost of user acquisition would be.

      Any form of user acquisition has a cost, it might be defined in terms of your time rather than money, but unless you sit down and create a model for analyzing the amount of traffic you can generate and what that will involve you have no idea if a particular form of user acquisition is worthwhile.

      Any form of user acquisition can also be modelled whether it's viral growth, PR, SEO, etc. By sitting down and building a model in Excel it helps you evaluate the strategy and understand the hidden assumptions (for example for viral growth what percentage of your users will tell their friends about your product) you're basing your business on. If I'd done that to start with it would have saved me a huge amount of time down the line.

      Once you launch and are actually implementing your strategy it's trivial to update your spreadsheet and replace your assumptions with the hard data and see how that impacts the end results. You might find that once the assumptions have to be modified to match reality that the strategy you're using no-longer works. And it's much much better to find that out up front rather than six months down the line when you're wondering why you haven't grown as fast as you expected.

      SEO

      SEO is hard, one prong of our growth strategy was getting decent rankings for focused keywords like "Python jobs". I went into this without really understanding SEO as well as I should. Even through I managed to get first page listing for many keywords (we were helped by getting links from sites like Techcrunch and Business Insider) getting into the top position for competitive keywords is much harder than I thought.

      As a new startup you automatically get a penalty for not having an "aged" domain (older websites get higher ranking), but it's close to impossible to beat off sites which have hundreds of thousands of established links, even if those links aren't as focused.

      I also didn't really analyse the numbers as I should have, the phrase "Python jobs" gets roughly 500 searches a month in the UK. The top ranked result for that search will probably only get 20% click-through (i.e a hundred visits). If you're 5th in the rankings, you'll probably get 15 visitors a month.

      In many cases the SEO effort taken to improve rankings wasn't worth the resultant traffic.

      If you plan to use SEO as strategy for your startup make sure you use Google Keyword tools to figure out how many searches are made on the keywords you're targeting and how many links, etc. you'll need to get in order to get a worthwhile ranking (I've found Seomoz and SEMRush can be good for this).

      Advertising

      I've talked about my experiences in advertising my startup extensively elsewhere, so I won't go into too much details but the key fact I discovered was that obtaining cheap traffic comes down to two things:

      1. Increasing your click-through-rate (good ad copy, etc.)
      2. Finding underpriced ad space (using demographic targeting, buying ads on smaller sites etc.)

      On pretty much any ad platform you can reduce your costs by optimizing your ads (in some cases by as much as 100x), so it's definitely worth investing time and money to learn which optimization techniques work well on the ad platforms you're using.

      Our original business plan was based around buying long-tail technical keywords (e.g. "concurrenthashmap") on Google cheaply, this strategy didn't work as it was based on the underlying assumption that long tail keywords with no other advertisers would be cheap. It turns out that due to the changes Google have made to the Quality Scoring algorithm part of their Adwords platform it's very hard to buy cheap adverts on non-"commercial intent" keywords.

      We were however lucky that we managed to figure out an alternative strategy (extermely targeted ads on social networks) that turned out to give us the cost effective advertising we were after.

      Social Media

      Having a social media strategy is often equated with having a presence on social media websites, but there are actually lots of different types of presence.

      Usage of social media by companies generally falls into one of these three categories:

      1. Companies using it to broadcast company news 
      2. Companies using it to interact with customers (support, etc.)
      3. Companies using it as a promotional tool

      The first two help you keep in touch with existing users and perhaps generate repeat business, but don't really help you gain new users.

      If you want to use social media as a user acquisition vector you really need to make sure you fall into the last category, and that means focusing on generating content that your users want to promote to their friends.

      If you're a content based startup it's definitely worth driving your content through your Facebook and Twitter content streams, because it's content far more than anything else that gets shared through the social networks. 

      Direct Sales

      Direct sales is one of the highest converting ways to get users. How effectively this scales obviously depends on how much each user is worth to you as it typically has a high cost per user acquired. Even if it's not a viable long term strategy for your business it can be good way to get your initial users.

      I'm not a natural extrovert and I still cringe a little when making sales cold calls or sending sales emails, but it's much easier than you think and once you get started it gets easier. The first few cold sales are the hardest.

      It also has the huge advantage that you're speaking on a one-to-one basis with many customers and getting invaluable feedback that can help you iterate on your product.

       

      That's it from me on user acquisition, if you have any questions or have particular areas you'd like me to talk about in detail feel free to leave a comment. You can also follow me at @imranghory on twitter.

      The Rise of the Specialist Seed Accelerators

      Since the launch of Y Combinator six years ago there have been countless competitors spring up all around the world, the primary competitive differentiator being that of location. YC's stellar reputation both in terms of expertise and connections to VC firms has been unrivalled and due to it's international nature,  accepting teams from all around the world, it has been difficult for other seed accelerators to compete in attracting the best early stage companies.   

      However the last year has seen a new type of competitor to YC spring up: Specialist seed accelerators which differentiate themselves from YC not on the basis of location but rather on the basis of focusing on early-stage companies that serve a particular sector.

      By focusing on particular sectors, especially those with unique challenges or difficulties in getting to market, these accelerators are providing a real challenge for traditional seed accelerators like Y Combinator and Techstars.

      Indeed in reference to Imagine K12 an education-focused seed accelerator focused Paul Graham the founder of Y Combinator has commented:

      If you want to start a startup building things for schools, we encourage you to apply to Imagine K12, because frankly, we couldn't help you the way they can.

      --Paul Graham

       

      So who are these specialist seed accelerators ?

      Education

      Imagine K12 (San Francisco)

      Startl (New York)

      Gaming

      Joystick Labs (Durham, North Carolina)

      Social Innovation

      Emerge Venture Lab (Oxford, United Kingdom)

      Bethnal Green Ventures (London, United Kingdom)

      Unreasonable Institute (Colarado)

      Health Care

      RockHealth (San Francisco)

      Healthbox (Chicago)

      Blueprint Health (New York)

      It's clearly only going to be a matter of time before we see a slew of seed accelerators covering a wide range of sectors, some obvious sectors for accelerators to cover include:

      Finance

      The financial sector probably produces more custom built software than anyone else in the world and it also produces a lot of startup founders (Wikipedia, Amazon, Delicious and PayPal were all [co-]founded by ex-finance people). The regulatory frameworks and the nature of selling to large financial firms makes it especially likely that a specialist seed accelerator would be able to add a lot of value.

      Marketplaces

      All marketplaces (or more generally any two-sided market business) tend to face similar problems when it comes to bootstrapping and getting around the chicken-and-egg problem. A seed accelerator with expertise in all the different approaches in tackling this problem could help a lot of marketplace startups get over the initial bootstrapping hurdle.

      Recruitment

      Recruitment is a huge business with companies regularly spending upto 50% of an employee's first year salary in recruitment costs across the whole sourcing and selection process. There's a huge amount of opportunity for innovation, yet the barrier for getting adopted by traditionally conservative HR departments can be high. Having the right connections can make a huge difference in this sector

      What other sectors do people think could benefit from specialist seed accelerators ?