Vijay Anand | The Startup Guy.

The Only Survival Strategies.

Posted on: April 21, 2008

Venture Capitalists and Entrepreneurs call it Business Models. Economists call it as Game theories. They are such fabulously mind-stimulating equations. The equation which essentially makes someone give up hard, liquid cash in order to avail a service, and enable you to make a profit. It’s really quite as simple as that.

How do you get to that, is usually the question. If you do understand game theory, then valuations and how they are raised, along with expectations, become a wee bit simpler to comprehend. If not, its time to hit the books and look into what “Game theory” is all about.

Sometimes, the valuation game that the so-called MBA founders of startups are playing, start to get simply ridiculous that its good to return to the math and make one and one add up to bring back some sanity. Here’s the basis of how companies survive. If you don’t have one of these, you are very strongly advised the drop the high valuation game, and think of a way to claim one of these.

Strategy #1: Build Long Lasting Technology Claims.
I really don’t care what you think about Microsoft, but from a perspective of Intellectual property, and strategy, Microsoft is a company to learn from. Microsoft, Intel, IBM, all thrive on creation of Intellectual Property. Microsoft is infact quite a fabulous case study to follow, as its one of the longest running companies which still claims dominance. Given the sheer amount of grasp that they have – everything from the platform underneath your feet, the diversification of devices, and especially in how standards are dictated, they have a sure footing for sometime to come. I’d even dare say that Wikia (or some such guy) might put google out of business, but Microsoft will remain.

Strategy #2: Enter a very conservative market and dominate it.
The trick is that the entry barrier is high. Atleast it is conceived to be. it is a sector that folks are scared to get in. Case in Point: Durex condoms. How many folks do you know who want to get into the condom business? How many people do you know who want to make lingerie in India? They are all very fabulous businesses, for people with guts, and pretty much an open field for them to exploit.

Strategy #3: Scarcity is a goldmine.
Look at the headlines that India is making. There is almost a civil riot that is at the verge of breaking out because of the prices of commodities going up, and there are insinuations that there are governments who are hoarding these grains so that the prices go up. More demand, raises the price. it’s quite as simple as that. To lets get to the topic. Anything that is scarce, will demand higher price. If you hold one of the three operating licenses for the 3G spectrum, yep,that will be worth a pretty penny. If you hold land in an area that is quickly running out of space, yep, thats pretty much a gold mine. I’m sure you get the idea. It has to finite, and limited. If that is the case, pricing and survival is pretty much guaranteed.

Strategy #4: Control Standards.
Be part of every consortium which chews out standards and have a say in it.

Strategy # 5. Insider Info.
Imagine standing in an open view of the market and you alone know something that others dont. It could be simple as a technology trend (look at Ray Kurzweil), or something of very minute knowledge that adds to your efficiency to play your cards right.

Strategy #6: Build a reputable Brand.
Brands take ages to build, and ages to die.

Strategy #7: Superior Expertise.
This is most often the most common reason than any other for a startup. You might have heard this question a little differently as “So why do you think you are the right person to execute this idea?”. The answer to that question is essentially to figure out if you do understand something that others dont and have total grasp on the subject. This is the reason why when some senior personnel of a well established company goes out and bootstraps a startup, the valuation and expectation of the market is tuned to expect something fabulous – if nothing atleast a fabulous disaster. This is why teams make for the greatest assets and liabilities of a company.

In short, this is how things work. Lets say you have a startup and your shares are valued at INR 100, and you have enough shares allocated to put you at a valuation of One Crore. The simple math is that, whatever your current revenue is, be it six or seven paise or maybe even in the negative, people value you higher and put money into you hoping that in the long term you will benefit. It’s really the basis behind valuations. It’s all “In the long run”. But there is ofcourse a finite length to that, and people are going to constantly keep comparing their returns to the interest rates they can get from banks, ROIs on other assets and comparable other investments. You are going to have to measure up.

“In the long run” never happens, if you dont even exist. And the only way to ensure that you are there in the long run is find yourself a slot in one of these categories. If you havent, or cant, i wouldnt be too surprised to see someone sideline you and get ahead not too far in the near future.

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8 Responses to "The Only Survival Strategies."

#2 is a bit of flawed reasoning. How much of IP does Wikia have in its arsenal? Google may not have as many patents as Microsoft, but to think that it does not have much is also quite silly.

Even otherwise, IP as a means to profit is an approach that is slowly dying out, at least in the Internet domain. I’m not saying there is no value in IP, but that by itself won’t get you too far.

#2: Entering a conservative Market? Hmm. Not sure I understand.

Well, What makes you think Wikia does not have IP in its Arsenal? 🙂 I am not sure I’d give Google that much life as Microsoft has enjoyed.

The Internet domain has just been an enthusiastic phase. Giving away everything for “free” has been the trend and slowly people are going back to pricing models and how to make things that make sense, solve a problem and make people pay for it. Give it a year or two or slightly longer, people will go back to the roots of IP.

Hi Vijay!

Been reading your posts here and on venture woods for a long time now. Really appreciate what you are doing. Would like to call up and have a chat some time. How can I get in touch with you? About me – an Indian startup founder who thinks he is putting up a good fight 🙂

Best wishes!
Rohit

Oops, sorry, that was meant to be #1.

Wikia is built using Mediawiki, and that itself is licensed under the GPL, the content itself is GFDL. It can, of course, be used in court, but not from a point of view of using IP as a route to profit and pricing services is very different from pricing/licensing IP itself. I believe you are confusing the “free” part with licenses.

Of course, all quality products and services will cost the consumer money, either directly or indirectly. If Google was not making as much money it does with text ads, we could say with a fair degree of certainty that products like Gmail would not have happened. In effect, the usage of the product itself is paying for it a lot.

Just to clarify, I am not a fanboy of the “free” everything approach or giving everything away for free. I see valid use cases for all approaches.

Actually, Wikia is a pretty misunderstood beast. Let me see if I can explain.

The IP of the google search engine is essentially the indexed data that they hold. That indexed data, essentially is that table which has all the references based on keywords, location, update etc etc. From that database, applications such as pagerank, etc etc are built.

Now since Google is the only one that is holding that index, there is notmuch that can be done apart for the “applications” that they are building – such as pagerank, the way results are displayed, and even things like google trends.

Now Imagine, if that index was open and anyone could build what they want on top of that? If I want to build a better page ranking mechanism, I can. If I want to build a Natual Language Processing Module, I can. If I want to do something on the semantic web and improve the way the content is indexed, I can. That’s what Wikia is working on. The commercial version of Wikipedia with all the glitz and glamour is just one bit of it. The Openly indexed data is what is the crux of wikia, and what is presumed to put google out of business.

Is there an IP on that? Yep. Its essentially the same model as AWS. You become a platform so that you become the core of the universe.

Um, Google’s IP is not in the data that indexes, but in the algorithm used to index cluster, classify and correlate that data (pagerank et al). It holds not a single patent on the index itself (do correct me if I am wrong, you can look it up here: http://tinyurl.com/6qpfmz) and Google for sure won’t sue you if you are going to start indexing the web on your own by contending that you are trampling on their IP (which is why all the Powersets and Cuills are out there trying to outdo Google).

There is nothing that stops anyone from creating a counter index to Google, other than just one little factor: cost and effort. Crawling, if you try to do (I’ve done it on a much much smaller scale, and even then it is prohibitively expensive in terms of bandwidth — fetching the pages — and processing — index and classifying the pages) without big money backing you is just not sustainable. Wikia’s crawler is basically Grub now being open sourced and revived, while it could not do much when it was in its former incarnation. Existence of an open crawler by itself is no big deal, there have been and there are still plenty of them around: Nutch, Heritrix, Websipder etc are just a few that I can name off hand.

Do you know what is the single problem all of them have? It just does not scale into the levels that the Google index is right now. Nutch (which is basically a crawler added to Lucene) has had tremendous help from the Lucene project being now backed by Yahoo in a big way, but even they have admitted to having problems once it reaches a large sized data set, even after using Hadoop. And that is where the Google IP kicks in, because the magic in making it scale to that level is what has worked in the company’s favour. The magic is not that they have a huge index.

Wikia IP and AWS does not even merit a comparison. AWS is built atop Amazon’s massively (proprietary) distributed computing framework (which is not free either), Wikia search is looking towards generous users to lend them bandwidth and processing. I do see Wikia threatening Mahalo at some point, but I really don’t see how can they come even close to threatening Google.

Hmm.
1. Does Google have IP? Where does their IP lie? Very few people know that. We know for a fact that their algorithm is not patented and it stays out of public knowledge. There is no point talking about something which is not even known. Needless to say, not everything about the company’s intellectual assets are known, which leads to “proprietory” assets. Which goes back to my #1 in the list.

2. The Web is a very nascent field. The comparison to a web company, I dont know… I wouldnt go for it. Does IP help? Well, look at any traditional company, and it makes sense… always.

3. My example in the post (being Microsoft) is a product company. Google, like most internet companies, is a media company. Once again, different verticals.

4. Dont know about Wikia, Google or Mahalo. Quite honestly dont care. I know eventually they’ll all make life simpler. Doesnt make an ounce of difference as to who’s better and who’s doing what – that’s pretty much the same level of loyalty I have with my newspaper company.

So, “Does IP help provide an advantage”, seems to be the topic, and I still stick to Yes.

>> “Giving away everything for “free” has been the trend and slowly people are going back to pricing models”

I was doing some research on different kinds of pricing models used by Web 2.0 Applications and Content sites. I found the pricing models to be broadly based on the following themes:

1> Paid model: Usually following a short trial period. Only applies to Applications serving niche verticals (like Stock trading, Hosting), I haven’t come across many (any?) general purpose webapp that has managed to successfully applied this model. Content sites serving high quality professional/research material sometimes use this model.

2> Freemium model: A basic free version coupled with a full featured paid (Permium) version, where revenue is a function of the percentage of the premium user base. (Ex: Flickr, google enterprise and many others come to mind)

3> Cost per sale based affiliate model: Strictly based on revenue sharing contract, where the affiliate is awarded with a certain percentage of revenue brought from a sale/acquisition, and not through charging charging the users/visitors. This scheme suits web applications and content driven sites equally well. (Ex: Amazon associate program). Here revenue is more often a function of number of page views/traffic to site.

4> Cost per click/impression based advertising model: Ex: Google AdSense based revenue. Profitable(?) only for high traffic content sites, and again monetization is through ad placements and not from the user-base directly.

5> Build to Flip Business model: Opposite of “Built to Last”, were web 2.0 companies are formed with a sole intention to get acquired within 12 to 18 months. Most of the Paul Graham incubated companies come to mind.

All the above are very true WRT global context. But talking about Indian context, I am hard pressed to find good Internet co’s that have mastered #1 and #2. Perhaps, Indians are psychologically not yet ready pay hard cash for anything virtual?

I would like to know your opinion on this.

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