(A temporary respite from venture capital and micro-entrepreneurship. We’ll return to the topic soon.)

How does traditional targeted direct marketing work?

(click on the drawing for a large, legible version) *

Traditional targeted direct marketing is based on the premise that marketers can control differentiated information and messaging presented to segmented groups of individuals.

• The traditional method works well in a business and social environment where information is obscured, where companies can control messaging to groups of people and where people cannot easily share information between groups.
• If the marketer is wrong in one part of the “person + product + marketing message” equation, the pitch fails. Companies optimize to the system to develop the best answers to this equation.
• Marketing creates the brand by “talking” and controlling the information flow between the company and people.

How is direct marketing changing?

(click on the drawing for a large, legible version)

In an environment where marketers’ ability to dictate the person + marketing message + product equation decreases, the marketing and product approach needs to shift to leverage shifting flows of information.

• In a business and social environment where information flows outside of the normal direct marketing firewalls and companies cannot control the messaging to segmented customer bases, the traditional approach begins to break down.
• The equation becomes a little more fluid and variable as the range of inputs and answers increase drastically.
• Traditional targeted direct marketing still exists; but to a lesser extent, focusing on specific segments or products as dictated by best practices, lessons from the marketplace and corporate initiatives.
• But since companies can no longer control the flow of information as consumers can talk between groups on the same scale as companies, controlling the message becomes an unrealistic goal.
• Therefore the desire to control the message leads to high customer acquisition costs as the traditional channels used to control the message become increasingly ineffective.
• What can still be controlled? Product becomes more important than marketing. Product builds the brand.
• Marketing shifts from positioning to reinforcing.

How can marketers adapt to this new environment?

• The opportunity of “alternative media”, social media, “alternative channels” et. al. is to integrate with traditional media, not replace.
• To understand how to adapt to the new environment, focus on the fundamental shifts in the flow of information; the shifts have rebalanced the efficiency and effectiveness between the various traditional and newer marketing strategies and tactics.
• Marketers still have to understand the intended customer base and the product value proposition to create great marketing strategies. Expose oneself to the new tactics and possibilities of alternative media, but remain focused on creating strategies that achieve the primary marketing goals and objectives. Choosing a particular tactic without first understanding the fit in the strategy and its goals neglects fundamental marketing best practices.
• It’s not an “either/or” decision between traditional and alternative media: the answer is “both”.
• But at the same time, get comfortable with spending less money, not more.**

Direct marketing is dead!

Long live direct marketing!

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* I know my handwriting is chicken-scratch at best. I hope it’s legible…
** Insight by Ethan Bauley.

Evan Williams on evaluating new product ideas:

The key question for evaluating an idea [on the topic of obviousness] is number one: Is it obvious why people should use it? In most cases, obviousness in this regard is inversely proportional to tractability. The cost of [xxx] and [xxx2]‘s high tractability was the fact that they were defining a new type of behavior. The number one response to [xxx2], still, is Why would anyone do that? Once people try it, they tend to like it. But communicating its benefits is difficult. We’re heartened by the fact that Why would anyone do that? was the default response by the mainstream to blogging for years, as well, and eventually tens of millions of people came around. *

While we all understand that changing behavior is a tough proposition for any new product, establishing a new behavior is an entirely different beast with a different response mechanism and value proposition. Taking somebody from 0 to 1 (no to yes, or free to spending $1) is much different than taking someone from 1 to 2 (yes to a little more, or spending $1 to $2), since the decisions being made are fundamentally different.

Usually we can fall back on the “better, faster, cheaper” framework to evaluate an idea, but sometimes we can hit on idea that captures none of the three because the range of true substitute behaviors is so limited.

Therefore there is value in testing ideas in the marketplace. Not every idea needs to have a “proven business model” before it is launched or funded; for many industries and products this simply isn’t possible. The key is for the entrepreneur and the investor to understand the situation and structure their decisions appropriately.

There might be a lot of froth in the early-stage startup world right now: technologies masquerading as businesses, features mistaken as products, adoption and growth misunderstood as fanboy testing. But as long as the entrepreneur and the investor understand this, and stage their expectations, decisions and funding appropriately, what is wrong with testing?

Let the ideas and the intellect hit the marketplace: learn, test, refine, redirect, stop, redeploy. Let the creative cycle of creation and destruction flow…

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* [xxx] and [xxx2] are Blogger and Twitter, respectively, both of which were started by Evan Williams. I removed the company names so that we could focus on the idea and not the products. Fact is we still don’t know the “right” business model for these products…

The recent economic collapse (perhaps the greatest collapse of the financial system in the United States since the Great Depression) has created an enormous amount of questioning and rehashing of what led us to this result.

For some reason, there appears to be some rumblings about the roles that innovation and “strategy” had in creating the collapse…

• Did Innovation Trigger This Financial Meltdown With Fannie Mae And Freddie Mac And Cause A Recession?
• Saving Strategy From the Strategists
• Should Successful Companies Bother with Innovation?
• Why Innovation is Overrated

However, it is not innovation or “strategy” that failed. Instead it a was simple misguided focus on copying tactics; tactical thinking masquerading as strategic thinking.

Copying tactics without recognition of the choices, incentives and actions of other actors and the second-order impacts of your own tactics: that’s not strategy.

Copying tactics without testing, without learning, without iterative design: that’s simply not innovation.

Carrying on the discussion on funding the future of micro-businesses and entrepreneurship… (for background read here and here)

Venture capital needs a fundamentally different, more economically viable model for creating and funding micro-businesses.

Why?

• Declining costs to create and operate businesses: easier, quicker and cheaper to start, implement and scale. How? S3, EC2, Google AppEngine, a wide variety of free software development tools, free and cheap project management tools, easier access to tiered legal and accounting support, the increasing use of “consumer-grade” products to power business infrastructure, an abundance of free business advice. Startup Weekends are proving that people can use these tools to create value in short amounts of time.
• Increasing quantity of profitable niches: as many markets become larger, some become smaller. The same forces of decreasing transaction costs, declining costs to scale and increasing speed, quantity and transparency of information are driving different industries in different ways, creating opportunities for national, international, local and hyper-local businesses in different ways. The rise of the Long Tail is a driver behind localism.
• Ideas have become a free currency to bid for notoriety and personal brands: more than ever, execution is the true differentiator.
• Increasing collaboration, transparency and sharing of ideas: want to learn about what a company is doing, or what people are thinking, or about what customers are saying or suggesting? Read blogs, forums, reviews, collaboration networks, or simply search Google. Content and context are being created every day. Want to get access to use another company’s program or data? Use their published API, check out their open source code, scrape their publicly-available data. The cultural ethos of open-source is propagating throughout the economy.
• Declining ability to use patents, intellectual property or proprietary lock-in as fundamental value drivers: everything can be copied, faster, easier, better. Success is not guaranteed by being first to market, first to a sizable customer base or first to profit: continuous upgrades, improvements and innovation (big I and little i) are requirements rather than goals. With an increasingly networked value chain, innovation will be spread farther and farther out the realm of partners, contributors, consultants, customers.
• The impact of Generation Y in the workplace: the traditional idea of work and career path is changing, prodded by the impact of Generation Y on the workforce. Culture and technological changes are creating the risk of generational conflict as generations begin to disagree on expectations of career path, fulfillment, and degrees of responsibility.
• A shift in seed-stage venture capital: traditional venture capital is moving away from early, seed-stage investing and becoming less willing to take certain risks. Firms like Y Combinator and TechStars, Launchbox Digital and others are filling the gap with a different ethos for proving business ideas and investing in startups, evolving the incubator model past the attempts of the first Internet boom. But once a business is created and achieves the goals of TechStars and Y Combinator, what support exists to sustain and grow businesses beyond these initial stages?

The result is a shift towards more a personal, collaborative and distributed system of value creation, an economy increasingly powered by a long tail of micro-businesses.

Not everyone can be the best, create a hit product, succeed on the grand mass market. Instead, aim differently: find the niches scattered throughout the long tail, each niche with its own winners and losers.

We have already started to see a rise in freelancing and contract labour and a wave of marketplaces for project-oriented contract labour like Elance, Guru.com and Rentacoder are only the start (think it is too long before people find and organize talent or business partners through Facebook?).

But this is a more profound shift, a more organized, valuable and economically viable model of economic organization. It is the long tail of the economy, a networked, linked but unorganized amalgamation of one, two and three-person businesses, each trying to deliver their discrete, individual value, but in the aggregate redistributing the sources of production throughout the economy.

The formation and success of micro-businesses will depend on how our culture and business support systems adapt to the new set of organizational challenges created by these trends.

Usually we are talking about the aggregators of the long tail (e.g. Amazon, Netflix) and their economic models when we are discussing the Long Tail, rather than looking at the perspective of the content and value creators. The real question is whether the producers who live in the long tail will be able to make enough money to create sustainable businesses. It depends: is the goal of the long tail producers to create lives or create businesses? To live or grow rich?

The trends outlined at the beginning are starting to create the cultural and business support systems critical for micro-businesses to thrive in the long tail.

Yet one gap exists.

Venture capital, for one, has yet to deliver a scalable, viable funding and economic model to fit this new model of economic organization. The traditional high-risk, high-reward, high-touch operational and cultural model simply does not fit the micro-business economy, an economy of “lifestyle” businesses based on smaller interactions and smaller bits of value exchange, created out of the need to build lives, not necessarily a business to sell.

Just as everyone is a photographer, everyone can be an entrepreneur.

How can venture capital adjust?

News and updates from RTP Startup Weekend and Bars For Us are continuing to trickle in:

• RTP Startup Weekend will be covered by CBNC at 10:00 and 4:00 EST Friday, on the NBC Today Show 7:30 AM EST Saturday morning, and the NBC Weekend Nightly News at 6:30 EST either Saturday or Sunday. Check on the CNBC News Team on twitter for updates.
• More coverage will be on CNBC.com starting Friday. The “confessional video” is online now.
• Check out (and vote) the video pitch for Bars For Us on TechCrunch
• The Scavenja, MyFriesSuck and Dealcastr teams are continuing to update their products and launch new features and scavenger hunts.

The Bars For Us team is working hard on updating the solution to incorporate a lot of the ideas we were not able to include by last Sunday’s proof of concept launch. We’ll be looking forward to announcing the updated service.

Additionally, the team will be looking forward to start talking to potential partners interested in launching Bars For Us in their city. Email biz@barsforus.com or call 415.287.7610 for details.

UPDATED 7.18.08

• The 10 AM CNBC segment on CNBC.com.
• The Weekend Today Show segment is getting pushed to NEXT weekend due to some breaking news.

UPDATED 7.22.08

• Ron Mott on MSNBC.com
• MSNBC News on RTP Startup Weekend

About Jason Calacanis’ “retirement” from blogging… of course it was only time before his first email newsletter ended up on the web, most likely soon re-published by someone on a blog, with comments, et. al.

I wonder, what was his goal?

We expect that moving his posts to a mailing list will not achieve what he has set out for – and that is to have a conversation with the top slice of his readers. (link)

Really? He knew the email newsletter would end up on the web. He knew the logical progression. It’s unlikely that was his real goal.

What he is really does is address is the “continuous partial attention” of the web by re-creating a form of scarcity. By changing the communication channel and re-setting expectations over his own engagement, he re-frames the conversation and makes it into an exclusive club. The content is delivered to the people on the mailing list because they made it. They feel special; not just once, at the time of purchase, but every time they receive the newsletter. They will re-consider any thoughts of unsubscribing, of exiting the club. Subscribers will read it, with a new-found attention.

He re-frames the conversation between this select group of people and himself.

If content can not be scarce, what can?

Great marketing.

I went down to Raleigh, North Carolina Friday afternoon not entirely sure of what to expect. I returned home late Sunday night on a high. Why?

I came to RTP Startup Weekend with the simple goal of meeting interesting people with similar interests in life and business, more interested in the process of the weekend than any results. I have gotten far more out of the weekend; I am amazed at how a dedicated, high-quality team can take an idea to a working, implemented business in just two days. I’ll leave the weekend with a lot of lessons and some great new friends.

What happened in between?

• RTP Startup Weekend announces four new companies
• News and Observer: Almost-instant business: Just add sweat
• What I helped launch*: Bars For Us, a company that “Takes the guesswork out of finding Raleigh’s best bars”
• What Bars For Us does: the video elevator pitch
• Bars For Us on Crunchbase
• Other companies launched: MyFriesSuck, Dealcastr and Scavenja
• Pictures of RTP Startup Weekend by me, and by everyone

How can you follow what is happening with Bars For Us?

• Use Bars For Us, learn more about the service and the company, and give feedback
• As a bar owner, learn how you can submit your bar for listing and learn about future enhancements to allow you to highlight your listing
• Follow the Bars For Us blog, the barsforus twitter, and the Bars For Us Facebook page
• Interested in learning more, PR and media requests, interested in expanding Bars For Us to your city? Email or call +1 415.287.7610

More about Startup Weekend…

• What is a Startup Weekend?
• More about RTP Startup Weekend on the blog and on Twitter

Big thanks to organizers Jason DiMambro, Jess Martin and Wayne Sutton and all the sponsors of the weekend.

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* By “helping launch”, I mean watching everyone create something from scratch, from an idea to a strategy and an implemented, powerful, easy to use and real application in an incredibly short time.

I’ll be in Raleigh, NC this weekend (July 11-13) for RTP Startup Weekend.

• What is Startup Weekend?
• How can I follow what is going on? Follow the Startup Weekend Blog and RTPStartup on Twitter.

Why am I going? Because, simply, I am looking forward to the chance to meet intelligent and interesting people dedicated to entrepreneurship, solving problems and creating opportunities. I’m not concerned with the output, but looking forward to enjoying the process.

Originally posted on June 4, 2008 to taylordavidson.com/writing, reposted here to provide easier access to fundamental thoughts behind Unstructured Ventures. Click here to see comments on the original post.

Three separate issues / trends that I’m looking at, and hoping to address:

• Entrepreneurship: An increasing interest by younger people entering the workforce to create their opportunities (forming or joining startups or smaller companies) rather than have their opportunities handed to them (joining a larger company).
• Collaboration: Rapidly decreasing startup costs [1] and continued development and usage of inter-company interaction and communication platforms leading to reduced interaction costs and an increasing need to develop collaboration core competencies. [2]
• Venture Capital: A “funding gap” in the venture capital community, where there is a dearth of investors funding early-stage companies in their growth from seed stage to established companies.

All of these trends are addressed far better elsewhere: search for “millennial entrepreneur”, or “venture capital funding gap”, or read John Hagel, Paul Graham, Fred Wilson, Umair Haque or Marc Andreesson, to start.

I’ve touched on some aspects of these trends before, but instead I’ll address a different (although inter-related) set of questions:

• If more people want to be entrepreneurs, will they want to form the same kind of businesses that exist today?
• Does a company have to get big for it to be successful, or can “lifestyle businesses” be a successful end goal?
• And if so, do we need an entirely new structure and economic model for funding new businesses that does not depend on exit M&A-events to create economic value for investors?

Following on, some unstructured thoughts about these trends, issues, questions…

1) Aren’t we seeing venture capital address the funding gap?

The “Y-Combinator Approach”… the buzz is there, not just in Silicon Valley, and not just about copying Y-Combinator. The key in this space is to learn the lessons from the incubator approach in the early 00s. Y-Combinator is an early success story because a) they eschew coddling entrepreneurs to the degree typical of most early-00′s incubators, b) they do a great job of using social media to create deal flow and c) we are in a vastly different cost structure and market environment for startups than we were then, especially in web software.

And angels are in fact starting to become more institutionalized and move up the funding ladder, pursuing later, bigger deals. But from what I’ve seen the interest is more in partnering with institutional money, “validating” their investments, rather than continuing to fund startup risk.

And at the same time, venture capital continues to get farther and farther away from the market it used to serve. Read Haque, Wilson, and a lot of influential and forward-thinking venture capitalists and you’ll see the trend exists; there are a lot of people interested in “fixing” venture capital (and not just from entrepreneurs looking for funding).

2) What happens if people want to create lifestyle, cash-flow built businesses but venture capitalists wants to invest in scalable, big hit and big exit businesses?

It’ll be tough for the two to work together. Entrepreneurs always have the option of bank debt to fund a new company by getting business loans from a bank. While that model still works in a physical asset business, it just doesn’t fit the needs of the bank or the entrepreneur in the digital asset / knowledge / communication industry. And banks have a serious skillset mismatch in funding non-physical asset based businesses. [3]

3) If the model of creating new businesses change, how will the rest of the ecosystem adapt?

I’m more curious how things change when startups get even cheaper to start and maintain, or if/when people truly prefer starting companies to getting jobs (is it fundamental to the Millennial Generation entering the workforce or something more?), or the “value of collaborating” gets higher and the transaction costs between companies get even lower.

What role does venture capital take? What risks does venture capital take on to take a company to scale (market, technology, etc.)? When is money really necessary (what stage)? Will venture capital investors focus on enabling business to scale rather than to start?

Venture and angel investors make money when deals get made – M&A – for the big hit multiple. But what if the goal of entrepreneurs is sustainable, life-style businesses, that for the large part will never have a big-hit M&A event, just annual cash flow, which just doesn’t fit the venture capital economic model. If the risks of starting a company decrease, does the deviation of returns decrease?

Can we make it easier for people and companies to collaborate? When will people start mini-companies, one-person, two-person shops? How do we improve on the freelance / consultant marketplaces like Guru.com and Elance.com? How can social networks help to fill this gap to connect mini-companies?

Is there an alternative route towards funding startups based on a different economic model?

Or am I misguided, overly idealistic (“everyone wants to get rich”), biased by web economics, out of touch with most small entrepreneurs, thinking about a very small niche, or just flat-out wrong? I’m looking forward to finding out.

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[1] At least for web software
[2] Ethan has been pushing my thoughts on “collaboration core competencies”
[3] Maybe venture debt is an alternative viable funding model, but I’m not as familiar (yet) with venture debt economic model or history of returns. Would love to learn…

Originally posted June 12, 2008 on taylordavidson.com/writing, reposted here to provide easier access to fundamental thoughts behind Unstructured Ventures. Click here to see comments on the original post.

Following up on my thoughts on whether we need a new funding model for starting businesses…

How will venture capital and the broader “funding and business support” ecosystem evolve with a changing business and cultural approach to entrepreneurship and collaboration?

• Businesses are learning that developing a “collaboration strategy” is a key part of corporate strategy (perhaps even a core competence) in a world where collaboration tools are increasingly rich, interaction costs are decreasing, and the “unlocked value” of their firms are increasingly in the heads and opportunities of potential partners outside of their firms (e.g. partners, suppliers, customers, prosumers, fans).
• Younger people (currently the Millennial generation) entering the workforce are realizing that few companies offer them the opportunity to take on the responsibilities and audacious goals that they have grown up believing is a birthright. Instead of accepting the established order, younger workers are establishing their own order, creating companies based on their world view. And by doing so, younger people are demonstrating the potential choices to older non-Millennial generation workers.

Given that, will entrepreneurs and investors in new companies realize that the traditional “grow and sell” economic model of startups and venture capital is a poor fit for this new business and cultural environment?

At the very heart of this thought is a realization that there is a fundamental difference between starting a business based on selling time v. selling a product.

Product-based business can scale with increasing returns (e.g. output, profits) to the basic inputs (e.g. capital, time, people). Time-based businesses, however, scale linearly, with returns limited to the fundamental productivity ratio of outputs to inputs.

Meaning: if you’re getting paid by selling hours of consulting, you are limited in your growth by the number of hours you have, the number of people you can “hire out” or the prices you can charge. But if you sell a product that can be manufactured, replicated and distributed to the masses, your growth is created by and bound to a very different set of constraints, limited to your access to capital, labor and market demand.

For many entrepreneurs, their business ideas are based on selling their most valuable resource: themselves.

In a business and social environment of rising entrepreneurship and collaboration built on increased sharing of the value creation chain, there will not always be opportunities to create scalable, product-based businesses. Many interactions will be based on selling time and not products.

Businesses based on selling time can be easy/hard to start and very difficult to grow:

• Easy to start if they are part-time and not a primary source of income.
• Difficult to start as full-time endeavors without sufficient space (i.e. money, and thus time) to give the company time to grow, since the traditional source of funds to give a company space – venture capital and bank loans – do not find these types of businesses the right investment opportunities for their economic models.
• Difficult to grow because they are fundamentally tied to one’s available time or prices. Scaling by hiring people or developing partners is a typical growth model for these businesses, but it can be difficult to execute when the primary value of the company is largely locked in the entrepreneur’s head and non-transferable skills.

The basic cultural and economic blueprint of startups are built on the idea of “millions of funding, thousands of man hours, and dramatic risk”, leading to a binary outcome set: go big or go home.

Why?

Instead, “not all companies are meant to have thousands of employees or a billion-dollar market cap.” Some people are more interested in the entrepreneurial lifestyle. Outsized financial profits are not everyone’s goal; not everyone wants to commit the time or resources of take the risks necessary to create huge businesses.

And why should that be the goal? Why can’t running a “lifestyle business” be a goal? And why can’t we create a funding model to help give “lifestyle entrepreneurs” the space, time, resources and the opportunities to create valuable, cash-flow based businesses?

Why are entrepreneurs not demanding this type of investment structure? Perhaps because they don’t even know it’s an option.

Fund companies, not startups.

Funding startups is how traditional venture capital makes money. The ecosystem is based on an economic model that demands hyper-growth, clear exit strategies and significant valuation multiples due to the simple need to match risk with reward. Since most startups fail, most investments will be worthless, and thus the “big wins” are a necessity for venture capital to make money.

Instead, fund companies. Fund people. Fund value-creating enterprises regardless of their size or growth potential. Entrepreneurs will not be able to bootstrap all the potentially great ventures out there that do not fit the traditional venture capital model.

What should an investor look for businesses created from this environment of entrepreneurial collaboration? (in addition to the usual management, market, product, etc.)

• Invest in collaboration: collaboration can be a core competence.
• Invest in openness: openness of ideas is a signaling behavior. Openness in sharing ideas demonstrates commitment to the idea and a true understanding of the difficulty of execution.
• Invest in value, not potential: growth is merely an option.
• Think about what risks you want to fund. Technology risk can be mitigated through lower startup and testing costs. Market and consumer adoption risks can be reduced in a “stay small”-type business. Management risks can be reduced by investing smaller amounts of money in more opportunities to “test” more entrepreneurs. Exit risk can be reduced in a business based on recurring cash-flow not aiming for large, risky exits to create shareholder returns.
• Scale attention and time according to the required level of investment and support. Not every company in this model requires a board seat and close interactions.

I admit it’s just a start. But realize that entrepreneurs and investors each have the potential to choose new ways to succeed. Pick the type of success you want to create.

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[1] There is an active debate about this… check out posts by Union Square Ventures and Techdirt to understand the debate.