Twitter: How do you keep customers coming back? The importance of switching costs

Twitter, twitter, twitter. The microblogging tool that has been the consistent topic of the echo chamber and the mindshare of the early adopter tech community has had less than a stellar track record. The site has been host to frequent site outages, slow server response time, and just flat out bad site architecture. The site that simply asks you, “what are you doing?” reminds me more of Friendster (because of their epic fall from US dominance because of slow site speed) than any other service I have seen as of late.

Consistently you’ll see the daily blog post from someone stating that walled gardens are bad for all parties involved and data portability is the next evolution for the net. If you’re a consumer internet company and if you aren’t down with data portability, you’re square.

But are walled gardens that bad for someone like Twitter? Or is data portability just a fad that everyone signs up for but poorly implements so that it doesn’t work, kinda like OpenID?

Imagine if everyone could port their Twitter profile, friends list, and content over to another site that was more reliable than Twitter. It would take a quick note on Techmeme, and the mass exodus would occur. I am exaggerating a little bit, but what incentive do startups have to make it easier for people to leave? On the flip-side, I’d love to make it easier for sites and people to move data into my network, but it would pain me if I made it a little easier for my competition.

Even start-ups that have some traces of profile portability, Friendfeed, has some believing that the conversations are shifting over because of the unreliability of Twitter. What has kept them in the limelight are the significant switching costs with social networking sites. Would full data portability erode these switching costs? Many, myself included, thought Myspace was going to be dead and gone by now for the next new fad. Although other sites have gained significant traction as of late, Myspace is still king of the social networking jungle.

In thinking about launching a company, some of the things that I have to be cognizant of are the potential downtimes in the site. It’s just par for the course, especially if you don’t have a CTO ninja to keep everything stable. I intend on establishing a wordpress account that will deal strictly with site uptime/downtime issues, as suggested by Allen Stern of Centernetworks. Loic of Seesmic did a phenomenal job, in my opinion, of admitting to his mistake of downtime issues, despite being called out by Arrington. I hope to be that good when the stuff hits the fan.

Update: MG over at Venturebeat has a good post up on Twitter’s employees admitting to the fact that they don’t know what’s going on.

Update 2: With all of my smack talk, Twitter just closed a $15MM round of funding at a reported $80MM pre-money valuation ($95MM post-money)

Google Health Launches Beta. Should we be scared?

Today’s announcement that has the echo chamber a buzzing is Google’s launch of their health vertical, known as Google Health. For those that care about this space, we expected Google to launch this platform towards the end of February. As you can see from the image below, this is an ambitious plan to become the de facto standard for web based health applications.

Google aims to provide:

• Tools to find a doctor
• Tools to import medical records
• Profile to house any and all medical information you choose to publish (privately), including previous test information

As you can see in the image below (credit Techcrunch), this can make some people uneasy. People are terrified about having their medical history on a third party host, and we all have no idea how Google aims to monetize this service. Are they going to use this data to help deliver ads to you? Who knows.

What we do know is this, Google is taking a bold stand to take on an industry, that is so stuck in its ways. Someone needs to take the first step, deal with the PR questions and get us to think differently about the end goal of this sort of service. This can be really advantageous for sites such as SavvyDoc, since we don’t have the resources to answer all of these questions (outside of the savvydoc blog), but we can explain how Google’s vision is the future of medicine. I’m excited with this release, and hopefully we can move forward to enabling all of us to make more informed decisions. Whether we decide to participate is our own choice, and not one I can or should judge, but giving those the opportunity is what I’m excited about. Not everyone should participate for a slew of reasons, but we need to take the first step in improving this broken health care system.

Is the accredited investor rule unfair for today’s Internet entrepreneur?

In the Securities Act of 1933, the definition of the accredited investor came about, which defined who can make investments within high risk securities such as hedge funds, private equity funds, and various other unregulated investments. In essence, it was designed to protect lower income individuals from being preyed upon by upstarts, who can exploit their supposed lack of sophistication. The Act defines those who’s annual income is less than $200,000 ($300,00 with spouse) and at least for private equity funds, they will not allow you to invest unless you have a net worth of at least a million dollars. Technically, if you are starting up a company, you cannot take funding from those who don’t fit the two hundred grand annual income or one million dollar net worth criteria.

I think that the act is definitely important to protect people from being exploited. The problem that I find lies in their determination of a sophisticated investor. As an entrepreneur attempting to get something off the ground, my fund raising to the proof of concept phase could be enhanced by attracting small investments from various friends and family who may not fit the criteria. With Internet companies becoming cheaper and cheaper to fund, a few dollars here and there from friends may be extremely helpful. And at least for my friends, these are people who will undoubtedly be able to fit the criteria outlined by the Securities Act in a couple of years, but technically, I cannot have them involved as investors only today. These are all college educated (some with grad degrees) from top-tier institutions and engage in heavy investing within the secondary markets of the various security exchanges.

I don’t claim to fully understand the Securities Act of 1933, but I think the definition of sophisticated investor should be changed to incorporate the vast amount of information that we now have at our disposal. Blogs, RSS feeds, vertical news shows and the like really have done quite a bit to make the learning curve reasonable for a wide range of people, many who aren’t worth a million dollars. In fact, several grammar schools teach their students about the stock market. I wonder if we’d be better off if there was some sort of standardized exam to get certified as an accredited investor. Does everyone follow this accredited investor rule? No, but as it was preached in my business school courses, I’d love for the Act to be changed to be more current with the times. I think the more people we have investing in start-ups, the more innovation we can expect, and as we all know, it’s the small businesses that move the U.S. economy forward, not the large corporations.

Web 2.0 Valuations: Not a hard and fast science

In all of the business school courses in entrepreneurship, venture capital/private equity, and finance, one of the overarching take aways is that valuating a company is not an easy task. The four major types of valuation methods we learned were the VC-method, free cash flow model, industry multiples of revenue, and using comparisons with other companies in your space to ballpark your company’s net worth. In class, the great thing about what we learned was that we used companies with predictable revenue growth/expectations, in industries that have been in existence since the beginning of time.

For example, a lampshade manufacturer is fairly easy to evaluate from an income statement and a cash flow statement. For anyone evaluating the company, you can uncover opportunities to create more value, and if inventory turns aren’t commensurate with the industry standard, you may be able to uncover additional value. For anyone looking to raise venture capital, the expectation is that the founding team maintains 60% of the company after the Series A, 45% after the Series B, and less than 30% after the Series C. In the new Web 2.0 world, I wonder if this benchmark is still accurate.

In this Web 2.0 world, the business school classroom strategy flies out the window, just as it did in Web 1.0. P/E ratios are outrageous, valuations based on multiple of revenues are unbelievable, and it’s virtually impossible to reasonably valuate a start-up, let alone a company with any bit of revenue. We have heard many months ago about Facebook being worth $15 billion, on less than $200 million in revenue, to Slide.com, the widget maker worth half a billion dollars, on revenue less than a couple million. Today, we learned that LinkedIN may command a $1 billion valuation. All early adopter Web 2.0 techies know this but the fact remains, my mother does not know what a widget is, and most students in my business school class have no idea what is a widget. In one of my favorite shows, Entourage, one of the main characters, Ari Gould says “What the [bleep] is a widget?” when his assistant told him that his widget had the accurate temperature. That response is similar to what I get when I ask most of my friends or family about widgets.

Henry Blodget over at the Alley Insider has attempted to valuate the top Web 2.0 properties, based on many different factors, with revenue/net income not being the primary driver. Interesting. With all the companies listed, I dare anyone to say that any of them makes over $200 million in revenue, but the list starts at valuations of $50 million all the way up to $9 billion.

If I brought that list to my business school professors, they would have a cow and cry irrational exuberance, deja-vu, dot-bomb, and a whole list of other permutations of late 90s buzzwords. Although I am highly biased, the Internet is here to stay, and it’s not about how much money you’re making today, it’s about the opportunities and value you’re creating to impact tomorrow. Today, my mom doesn’t know what a widget is, but tomorrow, she’ll realize how impactful it will be in advertising and distributing content. Even my mom joined Facebook today and “friended me”, something I would have never imagined in my wildest dreams just 18 months ago. The Internet is moving fast, and there are still so many untapped opportunities.

Henry Blodget did set himself up to be a topic of major conversation, but I commend him for getting the conversations started. With a weakening economy that still has yet to hit the bottom of where it’s going to go, it’s encouraging to know that social networking spending will continue to increase, to help fund the next generation of disruptive companies. I’d probably get roasted for saying this, and I am highly biased, but revenue should not be the primary driver of Internet valuation today, it’s the potential value that has been created to impact our lives tomorrow. Silicon Valley has understood this, and keeps to fund these projects out West, let’s just hope that in places like Chicago, our VCs can see the potential value that’s being created and take calculated chances to affect change in our tech landscape.

Putting Health Care IT into Perspective

republished from the SavvyDoc blog

For those looking for faster adoption of IT in health care, Aetna is taking a nice step forward with their new plan to electronically alert doctors to patient care needs. Using Aetna’s claims information on patients the health insurer will be able to inform a doctor if a patient is allergic to a medication recently prescribed or if a patient is due for special tests. For example a patient with diabetes needs an annual exam with an ophthalmologist, when the Aetna system realizes an annual exam has been missed it will alert the patients PCP so that an appointment can be arranged. This is a great system, and its good to see the insurance companies leading the way with regards to implementing health care IT. Admittedly the system is not perfect, alerts will be made through a special physician website but physicians will also need to be notified via phone, fax or e-mail but even as currently constructed this is helping physicians to run a more efficient practice.

One of the issues that has come up recently with implementing technology into health care is the unrealistic desire that systems like the one Aetna has created, electronic medical records, Google Health, or SavvyDoc need to be perfect technologies. This can range from questions of integrating into other systems or questioning the usefulness of technologies simply from each specialists perspective. Each of these issues and others need to be covered by new technologies but this will happen in time and will require a period of trial and error. As the medical field is one of perfectionism, and rightly so, there tends to be resistance or a wait and see attitude for new technology. But even the most dangerous drugs, have to be tested on humans at some point and I believe we have reached this threshold with health care IT. Waiting for the perfect technology is a lot like waiting for the proverbial magic bullet cancer drug. Additions to the framework of already useful technology will make for an awesomely powerful IT solution but they are the icing on the cake and should not be viewed as barriers to implementation. When IT is able to adapt seamlessly to various specialties or patient situations and fully integrate across electronic medical records, billing software, appointment software, personal patient records etc. then the health care IT space will truly be mature and we at SavvyDoc will need to find another cause in health care to champion.