why we should all stop reading techcrunch

I’m in the tech industry, therefore I read TechCrunch. Not only do I read TechCrunch, I follow it semi-obsessively. I go to the website every day, follow Michael Arrington on Twitter, and have them in my Google reader. I went to extreme lengths to get an offline version of the site so I could read TechCrunch in the muni tunnels in SF. For awhile, I felt the more I read TechCrunch the more “hooked-in” I was in Silicon Valley, and the better I would be as an employee and entrepreneur.

So why the headline?

If you don’t follow TechCrunch, you might not know that recently Michael Arrington has come under fire for being the editor of TechCrunch while also starting a technology venture fund and having several investments in startups that TechCrunch covers. Arrington defends himself, claiming that these investments do not influence TechCrunch coverage, and in no way is the impartiality of TechCrunch in jeopardy. MG Siegler, a TechCrunch writer, wrote this morning that TechCrunch writers are all so independent that even if Arrington did try to influence them, it would be “laughable”. Siegler concludes that the end of TechCrunch as we know it may be at hand from Aol’s responses to the criticism.

Well maybe we should hasten the end’s arrival.

To quote the old comic books, “with great power comes great responsibility”. By building such a successful source of tech news, Michael Arrington and the rest of the staff at TechCrunch have amassed huge power. They now hold influence over the success of startups around the valley. To quote Robert Scoble, “Every startup I talk with worries that they will miss their ‘Techcrunch article’…”. Working in startups, TechCrunch coverage is a milestone to consider. When you’re covered and in what light can heavily influence the success of your launch. Like it or not, TechCrunch has grown beyond collective tech blogging, they’re now a major force in the world of journalism.

“Journalists (with a big ‘J’…)” understand the influence they have on other people and how that influence can be abused. That’s why they have strict ethical guidelines regarding investing in companies they cover.

Here’s just a few guidelines :

NPR : “NPR journalists must, at the time they are first assigned to cover or work on a matter, disclose to their immediate supervisor any business, commercial, financial or personal interests where such interests might reasonably be construed as being in actual, apparent or potential conflict with their duties”

NYTimes : “Journalists who regularly cover business and financial news may not play the market: that is, they may not conduct in-and-out trading, speculate in options or futures or sell securities short.”

Boston Globe : “No staff member may own stock or have any other financial interest, including a board membership, in a company, enterprise or industry about which she or he regularly furnishes, prepares or supervises coverage.”

American Society of Business Publication Editors : “Editors and staffers should not invest in, or hold stock of, any company that they will cover or be likely to cover.”
There are surely many more, but I’m already spending too much of my day researching this.

I also want to quote this particular article from 2001 from the US Department of State : “Those covering the ‘new economy’ for the ‘new media’ seem especially mystified about why it’s such a big deal if they invest directly in industries they cover…These are not, after all, ‘new economy’ issues. Selling out has been a temptation for journalists since the Republic was a pup.” The article goes on to tell the story of R. Foster Winans, who in the 1980s used his influence at the Wall Street Journal for his own personal financial benefit.

The reality is, rules and guidelines exist to prevent us from buckling to temptation. We make rules to prevent ourselves from doing things we fear we might otherwise do. They’re not in themselves enough to prevent us, but they do set certain parameters. No amount of organizational independence or cultural superiority is going to immunize TechCrunch from human temptation. This is why the rest of the journalism community has set strict ethical guidelines regarding personal investment. It’s too enticing to sacrifice integrity and use the power of the pen for personal gains.

Arrington and Siegler can whine for days and days (and they have been) about how they have integrity and how their organization is different, but until they layout the guidelines for their ethics, there’s no way for anyone, and especially not the general public, to judge their actions. Ironically, this has been Arrington’s battle cry the whole time. He criticizes the New York Times for their wishy-washy rules about disclosing investments, and complains that differentiating investing in the Red Sox and tech startups is a “slippery slope”. If you want to criticize their rules, write better ones first.

So, if you agree, stop reading TechCrunch. MG Siegler put it perfectly (once I replaced all the pronouns with nouns from other surrounding sentences), “If they [people] don’t think they can trust it [information] from one source, they’ll find another way to get it.” Stop reading TechCrunch, maybe it’ll make them better.

And TechCrunch, please don’t hold this article against me. I wouldn’t want unfavorable coverage for one of the startups I work for just because I wrote this.

groupon's ipo filing

In case you’re just tuning in, Groupon filed their S1 forms yesterday to raise $750 million through a public stock offering. They’ve opened up the books and the public can now see how they’ve been faring. At first glance, it’s disconcerting and the blogosphere is exploding with criticism. I’d like to weigh in with a small comment.

About two years ago, Groupon launched an amazing service that grew like wildfire. They caught the imagination of early adopters with a solid business model that quickly enlisted a huge following and grew a large revenue stream. With $645 million in revenue from 83 million subscribers in Q1 alone, Groupon is on track to earn an incredible annual average of well over $30 per user, making it possible to spend huge amounts to acquire users and still maintain profitability.

So why am I concerned? Because Groupon is burning through margin to earn revenue.

Groupon’s business model has been to pre-sell local merchandise at a discount. As a price for the service, Groupon has been taking 50% of the remaining margin from local businesses. Similar to a high interest, short term loan, the business gets a huge check on day one and then has to pay off the loan through merchandise as buyers return with their Groupons. This 50% service charge has proven untenable for many businesses who are already giving their customers a huge discount. With already low margins, for many businesses, the math just doesn’t make sense. For Groupon, however, inventory is essential. Every deal they can acquire through their massive sales force is worth a huge amount of revenue to them. The rumors now abound that in order to maintain inventory, Groupon is now negotiating it’s 50% cut. I can’t cite anyone on this, but it’s not surprising. There’s a ton of lash back (see here, here, and here) against daily deal sites, and Groupon needs the inventory. Cutting margin is an easy way to maintain inventory.

The Groupon business was an amazing discovery. Putting together struggling local businesses with hungry deal seekers was genius. Unfortunately, there’s very little defensible about this model. Unlike Google or Apple, there’s no amazing technology that keeps competitors from creating clones: an email system is easy to create and not all that difficult to scale. As a customer, you don’t have anything on the site that ties you to Groupon; there’s no Facebook-ish social graph or eBay-like buyer profile. No, Groupon defends itself with a salesforce and business relationships, but they’re far from the only company with those relationships. A successful business model always attracts cloners and Groupon clones abound. Companies like Scoutmob, Thrillist or the SF Chronicle have created daily deal clones to monetize their existing business relationships. As the clones have emerged, acquisition costs have skyrocketed. Search terms that were once cheap have skyrocketed in value as competitors enter a spending war. The daily deals land grab has left Groupon paying exorbitant costs to acquire a user, and the number isn’t going down. Competition is also driving up the cost to acquire inventory, creating the need for Groupon’s roughly 4,000 salespeople and all the costs associated with a team of that magnitude.

Revenues abound for Groupon, yet the company is still deep in the dark red as their margins are being squeezed on both sides. Not only is Groupon giving up margin to acquire inventory, their cost of acquisition is increasing. In Michael Mace’s article on RIM, Mr. Mace illustrates how the death kiss for RIM is a similar downhill margin treadmill. RIM, hoping to go “mainstream”, decreased their prices to accelerate growth, reducing margin and losing profit to maintain a consistently growing revenue stream. Eventually, this process burns out and revenue plummets. The key factors that really matter are not revenue growth or subscription rate, both of which can be manufactured, but the cost of acquiring and maintaining revenue. In this article, David Sinsky presents an investigation of Groupon’s situation in Boston based on their S1 filing. My key takeaway is the falling revenue per customer. Groupon is on a spending treadmill and the figures point to the situation only getting worse.

An indefensible business model is dangerous, especially with massive growth. As soon as competitors smell the revenue, they attack like hounds, tearing away at margins and increasing costs. For Groupon this has lead to increased costs both to acquire inventory and to acquire customers. Groupon is now in a tough situation, hemorrhaging money to keep the revenue stream growing. I’m certain that Groupon’s IPO will be successful, largely due to the huge amount of hype behind the company, however, I’m eager to see how it all plays out in the end. Perhaps Groupon is building a moat that will defend them against their competitors, however, from my first experiences, I don’t think Groupon Now is it.

UPDATE 06.08.2011

Just read another great article on the topic. Well worth the short read.

on startup culture

The startup culture has become a thing of legend. Decades ago, startups began filling their offices with scooters, zip-lines, and ping-pong tables. Today, perks like free massages, catered lunches and “beer fridges” are common place, even expected. 1pm - 4am has become an acceptable workday. Men wearing kilts or employees with crazy piercings or neon colored hair are frequently seen in the halls of technology companies of all sizes. Even larger companies like Google, Netflix, Apple, and Zappos are renowned for their unique “startup culture”.

I’ve now worked for three different startups in as many years. I have also interviewed, have friends who work at, or met with leaders of many other startups. As such, I’ve gotten a pretty good sense for a variety of very different startup cultures. My company, Spot, with only five employees, is a tiny team. As we discuss scaling, however, I’ve started to spend a lot of time thinking about the kinds of things that differentiate a startup’s culture, how to cultivate the good and how to avoid the bad.

A startup’s culture is, to me, as important as anything a startup strives to create. Startups must be nimble and innovative in order to be successful. They have no hope of outspending or outlasting an established company and so they must outpace and outthink their larger competitors. In essence, the startups primary advantage is their culture, an environment where creative, passionate, hard working employees can thrive.

In the earliest stages, this is relatively easy. The first employees are friends of the founder or hand picked candidates. In the beginning, the founder can make it a priority to focus on culture. As the team scales, however, and the demands on the founder increase, he or she becomes further removed from the process of building and maintaining culture. At this point, the startup must be like a crystal, so imbued with the culture that as it grows it maintains the same core structures and values. The culture must become, as our advisor James Currier once explained to me, “part of the company’s DNA”.

So, what culture should a startup strive to create? What structure best establishes the culture “into the DNA”?

I believe there are four high level ideals a startup should strive for. Some of what follows might be obvious, other parts unfounded. These are my beliefs based on my anecdotal experiences, so pull out your salt.

1. A Rigorous Hiring Process

Your team is your culture, and for most startups, your team is your product, so this is by far the most important point. I firmly believe that a good employee is worth at least 15 decent employees and an infinite number of bad employees. Don’t throw bodies at a problem, get your best and brightest to work on it. Consider a three month trial period for new employees. It might be scary for some applicants, but committing to a job is a lot like a marriage: shouldn’t you try living together first? Develop a rigorous interview process and cultivate interviewing skills in your employees. When hiring, look for potential and eagerness over experience. Invest in getting your team together outside the office. Bonding experiences are invaluable. Try to build a team of people who genuinely like each other. It’s not easy, but when it works, it’s an amazing thing to be a part of.

2. Transparency

In my experience, transparency is empowering, while opacity is frustrating, confusing, and frightening. Share your information. Share your problems and you might be surprised where the best solutions come from. Share your successes to improve morale, but share your failures to make sure you learn from them. Don’t be afraid to share bad news. When you’re in charge of sharing information, you control the tone it’s shared in. If you try to bottle it up, it will leak without the proper context. Employees are apt to return the favor, sharing information up the chain if they feel it’s reciprocated. Information leaking outside the company is a serious threat, but if you can’t trust your employees, you have a bigger problem.

3. Employee Ownership

It is standard practice in startups to share equity with your employees, but there is more to ownership than just stock options. There is pride in ownership, a drive to show off, to accomplish something real. The closer your employees are to their work, the more of themselves they can see in it and the harder they will work to accomplish their goals. Listen to your employees ideas, if they’re good, put them in charge of implementing them. If they’re not good, try to convince them. Give employees high level goals and let them determine the details, they’ll be more apt to put all their heart and soul into working on their own solution. Don’t be stingy with equity. You can’t do it alone and you’re already sharing the risk. Share the reward too.

4. Flexibility

One of the benefits of working for a startup is the flexibility to work when and how you want. Startup work is mentally and physically demanding and it is easy to burn out. If you force your employees to work on your terms, you risk getting substandard work from exhausted and discouraged employees. Trust your employees to get their work done on their own terms. Also, be flexible about how your employees solve their problems and what problems your employees are solving. There are always higher level goals a company needs to accomplish, but a good employee left to play may well stumble upon something amazing. Twitter and Gmail are likely the two most famous examples but it happens all the time in varying degrees.

Speaking of Twitter, I recently had the opportunity to speak with Jack Dorsey about the culture he is trying to create at Square. He described managing a startup as an editorial role (fitting since they share offices with the San Francisco Chronicle). Much like a reporter, individual contributors should be able to pitch ideas for projects, and managers, like editors, should direct their contributors with high level suggestions. I think this is a perfect model to try to emulate. Rather than worrying about the details of the business, managers should work to maintain a consistent tone and vision in their product. Contributors should be given the flexibility to set their goals and should be given access to all the tools available to successfully accomplish their goals. In the end, it is the contributors who are on the ground, who experience the battle day to day, and who write the stories that define your product.

Building and maintaining a culture is an ongoing process. A startup is an evolving, ever changing entity and your culture will be too. Don’t expect your culture to evolve overnight or to arise from a single change. If you consider the culture, however, as you make decisions, and if you strive to create a great team with transparency, flexibility, and ownership I think you will quickly begin to reap the rewards. It’s not easy work, but nothing in a startup is, and your culture is well worth the challenge.

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