How to Create the Next Facebook: Seeing Your Startup Through, From Idea to IPO

by Tom Taulli

  So why did Digg waste away in the same type of situation in which Facebook thrived? Digg’s problem was that the site’s redesign really did not do much for its core mission. If anything, the redesign was mostly a reaction to emerging sites like Facebook and Twitter. Digg essentially wanted to copy these sites’ popular features, despite the fact that its users were passionately saying that they wanted Digg to be Digg and not some other type of service. Had the site gone back to its original approach or rolled back many of the needless features it added in the redesign, the disaster could have been averted. Loyal users tolerate mistakes, but not if the core focus of the site changes drastically.

  Fun Stuff

  Some products can be too focused on solving problems and, as a result, lack an element of fun. Fun features—even if they do not enhance your product’s usability—can, in and of themselves, lead to added user engagement. In the case of Facebook, Zuckerberg decided to add one particular feature, known as the poke, purely and simply for fun. Says Zuckerberg, “When we created the poke, we thought it would be cool to have a feature without any specific purpose. People interpret the poke in many different ways, and we encourage you to come up with your own meanings.”2

  __________

  2 Dave Copeland, “Just Try Poking Someone Now,” The Daily Dot, September 20, 2011, www.dailydot.com/news/facebook-poke-hidden/.

  And people have! People use Facebook’s poke function for any number of reasons, whether they are using it to meet new people, to flirt with a friend, or to say hello in a fun and playful way. Regardless of how or why it is used, the poke lends Facebook an added layer of character, frivolity, and approachability, all of which are qualities from which any startup can benefit.

  Groupon is another example of a company who has used fun—specifically humor—to set itself apart from its hundreds of competitors. The company sends out daily e-mail messages to encourage users to keep on clicking and buying. Groupon often sends funny offer descriptions, such as the following for a horse ride: “Without horses,” the copywriter notes, “polo shirts would be branded with monkeys and Paul Revere would have been forced to ride on a Segway. Celebrate our hoofed counterparts with today’s Groupon.”3 Given the wit, skill, and diversity of offer descriptions that find their way into users’ inbox each day, it should come as no surprise that Groupon has more than 400 copywriters on staff, which is more than some of the world’s brand organizations.

  A Platform

  For technology companies, developing a platform that becomes a global standard is the equivalent of finding the Holy Grail. In the early days of Microsoft’s history, Bill Gates (who actually was the first person to come up with the concept of platform) was approached by IBM, who wanted him to help them with their personal computer (PC) project. Gates realized that if he could develop an operating system that could run on almost any IBM-compatible computer, Microsoft stood a good chance of owning the rights to the world’s standard-issue operating system. In response, Gates created MS-DOS, and, as he had predicted, the operating system was wildly successful and became the operating system that was bundled for use on all PCs. In fact, the concept of developing a standard-issue platform was so lucrative for Gates and Microsoft that he applied it to Windows and the Office Suite. As a result, even though other players have competed fiercely against these product lines, Microsoft still has huge market shares in the computing and software spaces—even after several decades. Not many tech companies can claim the same.

  Like Gates, Zuckerberg realized the importance of developing something bigger than a single-focused software program or web site, which is why he created Facebook with the end goal of turning it into a platform or even a utility. In essence, Zuckerberg wanted Facebook to be the core for all of its users’ social activities. To turn this goal into a reality, Zuckerberg took some crucial steps. One was to allow third parties to create apps on Facebook, a decision that set the stage for the current Facebook ecosystem and led to the creation of megacompanies like Zynga. Another important step Zuckerberg took was to develop Facebook Connect, which makes it possible for other web sites to register new users via Facebook’s social login.

  __________

  3 David Streitfeld, “Funny or Die: Groupon’s Fate Hinges on Words,” The New York Times, May 28, 2011, www.nytimes.com/2011/05/29/business/29groupon.html?pagewanted=all.

  If you think your company has a platform opportunity, you need to take some important steps. It is critical that you devote an immense amount of resources to providing support services, which entails more than just giving developers access to code and modules. You need to create a developers’ program that has clear-cut terms, training programs, and frequent updates. You should also hold ongoing conferences and meetings to encourage new developer members to join your platform.

  Creating a platform involves a lot of work, so make sure you’re ready to anticipate the potential questions and the possible problems that developers may encounter when using your utility before you launch your platform. If your company is in its early stages, think about waiting to create and launch a platform until your user base has reached critical mass and can grab the attention of potential developers. Consider that Facebook waited 3 years before launching its own program; and even with the wait, the platform still had many glitches in its early days.

  Reactive Product Design

  When a company introduces a new feature or product to ward off the threat of encroachment from a rival, it is engaging in reactive product design. However, fighting rivals on a feature-by-feature basis can harm the long-term prospects of your company. As discussed earlier in this chapter, adding new features just for the sake of keeping up with the Joneses is likely to create confusion and undue complexity for your users. It can also cause you to veer away from your company’s mission.

  Even the best companies, Facebook included, can be found guilty of reactive product design and, generally speaking, it does not work out for them. For example, when the check-in service Foursquare became popular, Facebook launched its Places feature, but the service was a flop and was discontinued in short order. Then, in April 2011, Facebook launched Deals, which looked a lot like Groupon. The service was piloted in five cities but got little traction and it was eventually canceled as well.

  This is not to say that it is wrong to experiment with adding new features from time to time. Keep in mind that even though Facebook’s Subscribe feature—which pushes to your News Feed the public updates of users to which you decide to subscribe—looks a lot like Twitter, the service was a good idea and is consistent with Zuckerberg’s mission. So, be conscientious when you are thinking about adding a new feature and ask yourself: Am I doing this because it’s good for my users or because I don’t want to be left behind? If you can’t genuinely say that the feature will benefit your users, spare yourself the hassle and forget about it.

  Mobile First

  There’s little doubt that mobile is a megatrend and represents a huge opportunity for tech startups. The key driver in mobile is the supergrowth in smartphones, especially in devices running Apple’s iOS and Google’s Android. Table 3-1 includes just a few data points regarding the anticipated growth in mobile from 2011 to 2016. As you can see, the figures are staggering.

  Smartphones and tablets are becoming an integral part of the daily lives of many consumers who are using these highly habit-forming devices to check out the news, shop, get directions, listen to music, and play games. Have you noticed how many people walk and drive while looking down at their smartphones?

  __________

  4 Jeff Blagdon, “IDC Forecasts 1.16 Billion Smartphones Shipped Annually by 2016,” The Verge, March 29, 2012, theverge.com/2012/3/29/2910399/idc-smartphone-computer-tabletsales-2011.

  5 Dan Graziano, “IDC Ups Tablet Estimates, Expects Shipments to Reach 222.1 Million by 2016,” BGR, Jun2 15, 2012, www.bgr.com/2012/06/15/apple-ipad-android-tablet-shipments/.

  6 Jason Ankeny, “Forecast: Consumers Will Download 66B Mobile A
pps Annually by 2016,” Fierce Mobile Content, April 5, 2012, www.fiercemobilecontent.com/story/forecast-consumers-will-download-66b-mobile-apps-annually-2016/2012-04-05.

  7 Jeff Blagdon, “Mobile Entertainment Revenues to Eclipse $65B in 2016,” Fierce Mobile Content, March 29, 2012, www.fiercemobilecontent.com/story/forecast-mobile-entertainment-revenues-eclipse-65b-2016/2012-06-13.

  Mobile users are also increasingly using their devices for social networking, so it should come as no surprise that mobile usage on Facebook has surged. By the first quarter of 2012, the site had more than 500 million monthly active users for its mobile products.

  However, Facebook has struggled with developing mobile products, which thus far have tended to be relatively slow and are packed with too many features. Why is Facebook still struggling with these issues? It could be because Facebook’s DNA is that of a Web-based company that focuses on users’ desktop experience. Creating an engaging interface for the mobile environment is a whole different ballgame. Success in mobile is not a matter of just slapping a Web app on a mobile device; rather, you have to understand how to create a strong mobile experience for your users.

  It should not be a surprise, then, that Facebook plunked down $1 billion for Instagram, a fast-growing mobile photo app that had begun to threaten Photos, a key component of Facebook’s business. Instagram, which is an example of a company with a primary focus on the development of its mobile app (also known as a mobile-first company), understands that when it comes to mobile, simplicity is even more important than it is with desktop apps. When Kevin Systrom and Michel Krieger created Instagram, they first brainstormed all the problems they had with existing mobile photo-sharing apps—and there were many. From there, they wanted to solve three of the most frustrating problems they could come up with:

  Mobile photos don’t look so good. They often seemed to be washed out, most likely because of poor lighting. People wanted better quality pictures from their phones without having to be a professional photographer.

  The uploading process for pictures was too long.

  It was not easy to share photos across multiple social networks like Facebook and Twitter.

  Once Systrom and Krieger had narrowed their focus and identified only the most pressing problems with mobile photo sharing, it was much easier to come up with the solutions to these problems. (Funny enough, it usually is harder to find the problems with an existing structure, not the solutions!) To address problem number one—picture quality—they created filters that made the pictures look beautiful and almost as if they were retro 1970s photos. As for problem number two—upload speed—the duo built the app so it would process the upload while users were doing other things on the app, like filling out photo captions. To improve problem number three, they simply sought to understand and integrate more completely the various platforms into their app.

  Instagram launched on October 6, 2010, and it was a runaway hit. By the end of the year, it had reached 1 million registered users. In April 2012, when Facebook agreed to buy the company, it had increased its head count to 30 million registered users. Although Instagram’s success is undoubtedly remarkable, it is even more so when you consider that there are hundreds of thousands of mobile apps available for download, making it extremely difficult for any one app to stand out from the rest of the crowd.

  If you’re intent on breaking out in the mobile app arena, there are some best practices to keep in mind. Perhaps the most important is to enter into an app category that is known to be habit forming, like photo and video sharing or games, to hook your users and keep them coming back to engage with your app again and again. Speaking of categories, if your app doesn’t fit neatly into one of the available categories on the app store, try to reposition it so that it does. Otherwise, marketing your app may prove extremely difficult. Last, although your app need not be overly simplistic, it should focus on a single function. If you include too many pages, too many features, too much complexity, you will most likely lose users’ interest; so, make your app instantly easy to understand and use. Often, this means sticking to the standards of your chosen app development program, which—as an added bonus—should make it easier for your app to sail through the approval process!

  Stealth Startup

  Although the concept of a stealth startup—a startup that is working on its product in secret—sounds cool and may work for some types of businesses, such as high-end corporate networking technologies, it is often a bad idea for companies that are developing consumer Internet and mobile apps. After all, it is crucial to get user feedback on your product early on. Instagram’s Systrom calls the process of beta testing your product the “bar exam,” which consists of going to a bar and showing people your app. By observing their reactions, you can gain some valuable insights about your product.

  Beta testing proved critical for Instagram. Its first mobile app, Burbn, allowed users to check in to different places, but when they saw that it wasn’t gaining much traction in the marketplace, Systrom and Krieger set out to find out why. After talking to their users about Burbn’s features, Systrom and Krieger realized a common theme kept recurring in their conversations with users: The app’s photo-sharing feature was quite popular. The good businessmen that they are, Systrom and Krieger decided to abandon Burbn and focus on developing their photo-sharing feature into a full-blown app; as a result, Instagram was born.

  In essence, Systrom and Krieger pivoted, which is another word for when a company abandons its original product and moves into another category. Not long ago, pivot would have been another word for failure, but in today’s world, in which the costs of starting a business are much lower, it is possible for a company to make a radical shift in its product strategy or business model. In fact, investors have even come to expect these types of moves. Instagram is not the only company to arise from a successful pivot. Table 3-2 outlines a few other notable pivots of which you might not be aware.

  Keep in mind that after a pivot, it is important to maintain an insane amount of focus on your product when you develop something that strikes a chord with users. Constant pivoting is a strategy that is likely to go nowhere—and your investors will likely go elsewhere.

  Physical World

  For tech entrepreneurs, it is easy to become a slave to the virtual world. But doing so can limit your venture. Hey, people like playing in the real world, too. Look at the kids (and the adults!) who have tons of fun at Disneyland. Or how about a wine tasting tour in Napa? Or a great vacation to, say, Antarctica?

  When brainstorming a new business concept, don’t forget to keep the real world in mind, because companies that meld elements of the virtual and real worlds are already gaining traction in the marketplace. Take Birchbox, for example. The founders, Katia Beauchamp and Hayley Barna, got the inspiration for their company while they were students at Harvard Business School. They wanted to have a way to access a selection of great beauty products, but because of their demanding work schedules and studies, they did not have the time to source the products themselves. Birchbox solves that problem. For $10 a month, members receive a box filled with samples of beauty products based upon their preselected interests. All in all, Birchbox has turned into a great experience for its members and the beauty companies that supply the samples. The service has grown at a rapid pace. Originally, cosmetic companies were finding it difficult to leverage Internet technology to market and sell their products, because it is important for consumers to see, smell, and use their products before making a purchasing decision. With Birchbox, this problem is solved.

  In this chapter, we’ve seen how success in product development is really the result of solving one or two big problems that your customers have. How do you do that? Think about some of the problems that have frustrated you personally and then set out to solve them for others. It’s important to understand, though, that it is not a good idea to spend too much time building your solutions. The real value is in getting your product to market quickly so that you can st
art receiving valuable feedback from your early adopters. In a way, a good product is never really completed; it is always evolving. In the next chapter, we take a look at a hot topic—funding. Even if your product takes off, you still need outside capital to make sure it is built to last.

  Raising Capital

  The lack of money is the root of all evil.

  —Mark Twain

  In a market where speed is critical, outside funding allows young companies to move faster than they otherwise could if they had to rely only on their own revenues to fund product development. Sure, receiving outside funding means you’ll have to give up some of your company’s equity, but over time, the early sting you might feel when sacrificing a percentage of your shares to get your company up off the ground and running will diminish. If you create a valuable company, the initial dilution of your shares is worth it in the end. Even wealthy entrepreneurs often raise capital. What better way is there to determine whether something you have created is valuable than finding someone who is willing to write a check to fund it?

  As we saw in Chapter 2, Mark Zuckerberg made some major blunders with his initial attempts at seed funding Facebook. His original investor, Eduardo Saverin, ultimately froze the company’s bank account! However, Zuckerberg learned from the experience and later wound up raising $2 billion from private investors in an effort that proved critical to Facebook’s success. But how, exactly, do you go about securing seed funding? Do you just call up a wealthy friend and ask for an infusion of cash? In this chapter, we take a look at the different types of investors you might want to approach, the cycles of funding, and some helpful tips on timing your funding efforts.