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TSquared, Predictions on Jack’s second act
For a variety of reasons, companies can sometimes become disconnected from their visionary founder. Rarer still, a few companies manage to reconnect with that same founder following a hiatus. Think of Steve Job’s return to head Apple after being fired in 1985. While there are far more differences than similarities between Apple/Jobs and Twitter/Dorsey, I believe the stars are nonetheless aligning to produce perhaps an equally watershed and triumphant return for the Twitter founder. I see the makings of a masterstroke.
I believe that Twitter will (should) acquire Square, Jack Dorsey’s social payments start-up, forming a combined company that I’ll call TSquared. I’m going on the record as stating that TSquared would go on to create greater enterprise value than Facebook. Why is TSquared likely to happen?
1. Fixing the Cap Table. Jack created one of the web’s most important companies in Twitter. Yet, unlike his peers Zuckerberg (Facebook), Pincus (Zynga), Mason (Groupon), he’s not Twitter’s largest shareholder. No matter how you cut it, that can’t feel awesome. Further, it was likely a cause of some of the leadership carousel within Twitter’s executive team over the years. But, as Steve Jobs attests, leaving a company you founded might ultimately be a good thing (if you learn a lot and go on to found NeXT/acquire Pixar or found Square). Acquiring Square would in all likelihood propel Jack back into the position of largest single shareholder in Twitter.
Less than a year after launch, Square reportedly processes greater than $1M in payments per day which implyies a revenue run rate exceeding $20 million per year. I understand that revenue is growing by more than 35% per month, driven in large part by an exploding merchant base exceeding 100,000 new merchant sign-ups per quarter. In January of this year, Square closed a round of funding valuing the company at a reported $240 million. All of these indications point to Square being valued at $500 million – $1 Billion by the close of 2011. Twitter is presently valued at $3.7 billion (per its last financing) and over $5B in the private markets. Twitter’s acquisition of Square at these valuation ranges would rectify the Twitter cap table problems for Jack.
2. Mobile + Local + Social + Commerce. While addressing the cap table issues would appear to be of personal importance to Jack, Twitter and Square investors wouldn’t support such a deal if it didn’t make strategic sense for both businesses. TSquared would revolutionize the social networking space, eventually overtaking Facebook’s dominant social networking revenue position, supplanting the likes of Paypal and outruning the horde of local and social deal companies in the process. Why?
Twitter’s mostly open interest / discovery graph is arguably the web’s most powerful. Twitter is largely dominant at the rare combination of mobile, social and local. While Facebook is further along in several categories (users, revenue) Twitter is much more mature on the five key building blocks for web’s next revolution: Open user content, Discovery, Mobile, Local and Social (I’ll coin that ‘ODMLS’). Connecting Twitter’s ODMLS graph with Square’s expanding graph of local merchants, products, inventory and purchasing habits will allow TSquared to compete (read: dominate) the web’s most important and lucrative emerging consumer business sectors. Consider an example use case:
- Today: Let’s say you want a coupon or discount to local merchant. You’ll likely visit one of the horde of local deal or coupon sites. Then you’ll buy the deal by entering your CC or Paypal. Share the deal with your friends on Twitter or FB to help get enough people to buy and trigger the sale. When you get to the local merchant, sometimes you’ll check-in (Foursquare or FB etc.) then redeem your coupon. Did you have a great time? If you did, you’ll probably use Twitter or FB to tell your friends.
- TSquared: After entering your payment information in TSquared one time, when you want a coupon or discount to a local merchant, what will you do? The entire local deal process described above: promotion, coupon redemption, checkin, purchase and sharing would be reduced to a couple of clicks inside a single mobile application. Mind you, the use case described above powers Groupon, Gilt and hundreds of other deal companies, but those companies don’t control much besides distribution lists. With TSquared, when you want a discount, a location based Tweet will act as combination checkin/coupon/promotion.
There’s not really any technical reason that users couldn’t “pay by tweet”. Your favorite restaurant promotes a deal with the following Tweet, “Get #40%offdinner @burgerjoint today”. If a user retweets that message and has a CC or bank account connected to TSquared, they just bought a deal. Tweeting URL shortened #couponcode to @merchant simply charges your card or bank account. TSquared sets up local deal watch accounts that users who want deals can simply follow. Because merchants can load Square with inventory and pricing means that the combined company will inevitably develop a material position (read: lead) in the local inventory category where Milo & Retailigence play today.
Ponder those things for a moment. Square knows what local merchants have in their inventories (supply) coupled with Twitter’s massive graph of people indicating their visits to, interest in, demand for and purchases of brands, stores and products (demand). This combination holds the promise of disrupting many businesses that live and thrive on a businesses’ inability to forecast demand (Groupon + Gilt Groupe). Square is presently growing local merchant sign ups at a rate exceeding 100,000 per quarter. I won’t even venture to guess the number of brands, retailers and local businesses already using Twitter. If TSquared gives businesses better ability to promote product and services and forecast local demand for products and service, then surplus supply is inevitably reduced. If a retailer doesn’t have too many shoes for a given market, then there’d be no shoes to put on sale for 50% off later. By knowing who wants what, from where and when coupled with knowledge of which retailer has what item, where and at what price is the holy grail of local commerce.
Simply stated: Twitter knows who wants it, Square knows who has it. Together, TSquared will own the transaction and disintermediate all of the companies currently making billions off of this friction. TSquared will, for these reasons, catch and surpass Facebook’s revenue and enterprise value. Facebook is basing their long-term growth strategy on payments, not ads. 500 million+ users were only generating about $1 billion in ad revenues as recent as 6 months ago. Facebook hopes to own your identity and payments, but iTunes / Paypal maintain a massive blocking effect against Facebook on payments for web services.
TSquared has a clear path to dominate local merchant payments, leaving Facebook with minimal room to maneuver blocked by Apple, Paypal and TSquared. After all, what are FB users going to buy? Why give FB your credit card when FB doesn’t have online inventory or local merchandise, FB hasn’t licensed any digital content for you to download either. Facebook is trying to form a ‘beach head’ with OAuth sign-ups, but all OAuth end points ultimately have the same capability. I should probably give separate consideration in a future post to the possible (likely) introduction of NFC chips in mobile devices and the effect it would have on these predictions, but for now, let’s stay on this core thesis. TSquared would cause a precipitous slowdown in Facebook’s revenue growth in the payments category, forcing FB to rely more heavily on display ads. Facebook, like AOL and Myspace before it, will founder if it relies largely on advertising to monetize.
3. Twitter stand-alone. Let’s face it, Twitter’s revenue model is not hitting the hockey stick on a stand-alone basis. The data is there to build a big business, but the company likely can’t go public right now without strong revenue growth. Wall street would not be kind to the company’s stock price. If revenue growth was strong, would there have ever been a Dickbar? What’s the big idea for Twitter monetization in the absence of payments? Promoted Tweets? Throngs of users must be clamoring to follow Internet Explorer on Twitter, right? Wrong. These ideas cannot power the revenues necessary for a multi-billion dollar business.
I believe that we’re witnessing what may come to be remembered as the web generation’s equivalent of Job’s return to Apple. Whether or not TSquared sells to a Google, clearly desperate for a new revenue driver and with a massive war chest would be an open question. An early sale would, of course, negate TSquare’s chance to become a global behemoth. It seems likely that Google, for many different reasons, would be all but forced to make a massive offer for TSquared and try to combine it with their Android + NCF plans. Whatever happens, it’s going to be great fun and I’m glad to have a front row seat.
What Color can learn from March Madness
There’s been no shortage of commentary from the peanut gallery about the recent $41 million investment in Color. Therefore, I’m going to withhold my meaningless, baseless comments on bubbles, bad investments and the like. I do however, feel compelled to share my meaningless and baseless opinions on what I perceive as the real problems facing Color.
By most accounts, Bill Nguyen, Color’s founder / CEO, is one of the smartest and most successful technology entrepreneurs out there. Having had the pleasure of spending time with him, I can also attest that he’s also one of the nicest. Bill isn’t a person you want to bet against. Color’s lead investor, Mike Moritz of Sequoia, is no slouch either. I’m highly confident, without access to any privileged information that Color is pursuing a gigantic idea.
Color’s problems lie in mismanagement / miscalculation around two fundamental and well-documented challenges that have plagued many start-ups focused on the consumer web / mobile space: PR/D1 — Public Relations and Day 1 (a.k.a. the ‘Ghost Town’ Problem). Let’s consider where things went wrong for Color in each of these two areas.
Public Relations
There’s a saying in sports that if ‘talking could win a championship, there would be no need to play the game’. Never has that been more self-evident than this year with an NCAA Final Four consisting of precisely zero #1 or #2 seeded teams. The so-called ‘little guys’ got on the court and kicked the assess of much ‘better’ teams on paper. They earned their trips to the Final Four.
Color, like all pre-launch start-ups, hasn’t ‘earned’ anything. It’s a new application competing for user eyeballs, engagement and adoption just like the application of an unfunded start-up operating in a garage. The quote attributed to Mike Moritz that Sequoia hasn’t “seen a company this transformative since Google” can be read like a seasoned VC that’s found the next big thing. But his comment can also sound like the braggadocio of a hot-shot coach or athlete “guaranteeing” that his team will win a championship and insulting a lot of people in the process. There’s a lot of other teams, some much further along than Color (Facebook, Twitter, Zynga etc.), some that might even be in Sequoia’s portfolio, which might take issue with the statement that Color, an application with ZERO users at the time the statement was made is ‘most transformative’ since Google. Big talk is never bragging, provided you back it up, but it’s rather embarrassing if you don’t. Plus, you make your cause hard to support and cheer for.
Silicon Valley might not be populated with the world’s greatest athletes, but our community is nonetheless very, if not hyper-competitive. There’s a bunch of brilliant, hard working people with big egos (myself included, at least on the ego part) building companies, some of those companies are growing rapidly and a few are even making boatloads of cash. Yet, I can’t think of another consumer app start-up that’s had the luxury of starting life with $41 million dollars in pre-launch investment. I wasn’t privvy to Color’s pitch and I stipulate to the fact that it was amazing. But Color doesn’t actually get to operate in a “we said it’s awesome, therefore you will agree its awesome” multiverse. It operates in an ecosystem, specifically an early stage technology ecosystem. Consumer apps don’t succeed by pissing-off early adopters. Who are ‘early adopters’? Many of them are no doubt early stage entrepreneurs and their teams at companies in the valley and around the world. The very same people busting their asses and building real businesses without the luxury of $41M and without heralding the second coming of Google.
I found it very telling that now roughly a week after the color launch, with 700 ratings on iTunes, a full 490 ratings give the app a 1-star rating. What type of people are likely to be using Color in the first week of it’s life? My mom back in Memphis (since we valley-types use ‘moms’ to represent the faceless, non-tech savvy masses) or the tech community in the valley and elsewhere? Color is guilty of essentially ‘talking trash’ before the game. And it appears that many of the other teams that play the game don’t like it.
With such a brilliant, all-star team of 27 people and $41 million in the bank pre-launch, Color needs to go out of their way to ‘play nice’ and do something awesome. Color has the tech equivalent of ‘Duke’ level talent, a bunch guys who are 1st round draft picks and their team has the biggest endowment in start-up basketball. Color’s Coach Mike Moritz, basically when on ESPN and said, ‘we’ve assembled the greatest start-up basketball team since the undefeated 88 win UCLA teams under Coach Wooden’. Color, might have the best team and the best idea, but Color still has to play the game. Color might in fact one day be bigger than Google. But today, only Facebook (maybe one or two others) has earned the right to make that claim and mind you, Facebook hasn’t really made that claim. Color needs to learn the importance of being considerate of all the other teams (entrepreneurs) playing the game.
Compare Color’s launch to Square, Jack Dorsey’s high-profile start-up. After founding Twitter, Jack had earned the right to attract massive venture investment, press and perhaps to even talk a little trash. The Square idea is gigantic, potentially revolutionizing the way we buy and interact with merchants. Plus, Square makes money. Yet, the Square team went out of their want to downplay expectations. They also were effectively in private beta for many months only giving readers to the number of customers that they could give an awesome experience. Color crashed repeatedly on my first night using it. Square even had a bit of a false start, but the team remained humble. Square has Kansas talent with Butler or Virginia Commonwealth sensibilities and work ethic. As a result, Square has kept themselves easy to root for. The Color team did the opposite and have launched in such a way that their product is despised by the very people Color needs to adopt it at the earliest stages.
Day 1 (The Ghost Town Problem)
The primary reason a start-up shouldn’t ‘talk trash’ is that there’s still a game to be played, fought and won. The ball doesn’t always bounce anyone’s way. The ‘game’ consumer web start-ups play is user adoption. The score is measured in user attention and interest. Engagement is the equivalent of a crowd-rousing slam dunk and awesomeness, a game-winning 3 pointer.
While I’m sure in an office of 27 people using the app, Color must feel awesome! After all, everyone in the office is likely interested in each other and their activities. However, I work in the heart of the tech community in SF. With Twitter, Instagram and 100 other start-ups within mere blocks of my office, I have yet to see more than 1 or 2 photos in the Color feed at anytime. Color delivers an almost non-existent user experience. While “elastic social networks” might be a multi-billion dollar idea, Color has focused too much on the elastic ignoring social. Whatever the Color team is experiencing at their offices isn’t translating to the public because without either the ability to locate my online friends OR a critical mass of Color users within a 150 feet — a $41 million elastic social network that’s not social is bafflingly pointless. My pre-loaded iPhone camera application delivers superior experience.
Adding in witty warnings to the app download page can’t fix it. $410,000,000 can’t fix this problem for that matter. There’s the story of the entrepreneur that pitches a VC saying “with one million users, we’ll make a billion dollars”. The VC responds, “I agree, but you never told me how do you’re going to get from zero to 1 million users?” Coach Moritz apparently didn’t ask this question. My suggestions? Team Color, please scrap the 150ft thing. If your application is a ghost town for me at lunch time and I work in middle of South Park/Soma in San Francisco with Centos and Little Skillet literally in my building (these places attract the tech community like moths to a flame), what’s Color like for people in other parts of the country? If there’s only 2 pictures online in my area, what’s it like for a person trying Color in Denver or Dallas? If my feed is empty when the Instagram team is only 2 blocks from my office, who’s having this great Color experience? You’d assume Instragram’s team would be taking hundreds of pictures with Color, even if just to figure it out for competitive reasons, but it appears not.
Allow users to add their friends. Expand the radius to a mile or more. Color, please put some damned points on the board! Acquire and engage users, show us a good experience. Do something awesome that reveals the magic of your application — then role out the finer, more esoteric portions of your vision, shrink the radius or whatever.
Think of it this way, have you ever been to an empty party? I have. Now, have you ever had a great time at an empty party? I haven’t. Moritz essentially said that Color is throwing the web’s biggest party since Google. Everyone I know wanted to check out the party. We all went, but it was lame. I wanted to invite my friends to the big party, but Color effectively closed the guest list.
I’m cheering for you guys and the entrepreneurial community in general. But, if I’m allowed to be honest and still be a fan, I haven’t seen anything awesome yet. My advice, tone down the rhetoric and big talk. Quit bragging about the size of your raise and world-changing promises. At this point, I’d be impressed by seeing something more than 1 or 2 context-less photos of some random dude I don’t know and could care less about. Be a good citizen in the start-up community and show us a good time with your app. We get that you’re the best team, but now give us a reason to cheer for you, to fall in love with your product and not roll our collective eyes when hear hear your name. When the final buzzer sounds, everyone will have forgotten about your pre-game shenanigans and Color willl be judged on how it plays the game.
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