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Is The Daily Deal Backlash Overblown?

15 Sep

According to the business maxim, you can always tell who the leader is in a given market: it’s the one with all the arrows sticking out of its back.

While this axiom is applicable across the business landscape it is particularly relevant in the startup world given that most leaders in an emerging market end up taking as much incoming fire from me-too startups coming up from the rear as they do from incumbents threatened by the continued advance on their territory.

I raise this point because I’ve been surprised in recent weeks at the backlash in the media and across the venture landscape against daily deal sites, most notably Groupon and LivingSocial.

To be sure, the daily deals business has become ferociously competitive. There are now dozens of venture-backed businesses pursuing some configuration of the daily deal/social buying/demand aggregation business model. To this number add the emerging group of established web companies now brand extending into the deals business–Facebook, Yelp, Travelzoo, OpenTable, Amazon, and Google, to name but a few.

The birth of any new industry is rarely elegant, planned or pretty. With little argument, whenever one is dealing with the kind of torrid growth that both Groupon and LivingSocial have experienced one will find plenty of areas to criticize. However, I think some of this criticism is misguided. To call a marketplace with hundreds of competitors vying for consumer dollars emerging might be an oversimplification, but emerging it very much is. Let’s not forget that like the early days of social networking, the winning model in this space has not yet been fully realized. Constant iteration is underway, all being attempted at the breakneck pace one would expect in a marketplace still decidedly in its land grab phase. This means things are going to break — loudly and often. This is not altogether bad.

The daily deals space is the kind of web phenomenon we have seen before: Explosive growth, high user engagement, huge cash flow implications for the companies, lofty valuations, investors elbowing their way into funding rounds, and lots of media attention to fuel the frenzy.

In this environment, Groupon and LivingSocial have broken out as the market’s de-facto leaders and built robust businesses. Revenue growth has been nothing short of spectacular. In turn, the companies have responded by raising sizable funding rounds to further consolidate their positions and extend their reach into new markets. Investors and employees have every reason to be proud of these accomplishments. So far, so good.

This, however, is far from saying that their status as perennial leaders is a fait accompli or that they cannot be felled by either other participants or by their own strategic missteps. Indeed, it is still early days. This is perhaps why I find the latest hand-wringing over Groupon’s recent stumbles in the media somewhat disconcerting.

Massive customer churn is to be expected. Explosive growth, particularly as relates to web companies, raises the notion of the shiny new object theory. This notion should inform us that exponential growth and buzz brings huge consumer curiosity which, in turn, brings an influx of users that will try the product/service once and never return. Is this a reflection of a company that has provided a poor user experience? Or, is this simply the realization that 30-40% y/y revenue growth is likely unsustainable and that large swings in customer churn will be in evidence for a long time to come? I am in this latter school of thought.

The “churn” issue so often cited by critics is not simply a matter of consumers being fickle but one of SMBs and merchants as well. They are still trying to figure out how to work with deal sites and whether such marketing campaigns are right for their specific businesses. This will take time.

The Spaghetti Test. Additionally, daily deal sites are incented to build vast Rolodexes and cover wide areas of terrain to extend their brands. This means lots of offers are being written across broad categories of SMBs where the suitability of the daily deal model is still not thoroughly understood and where there is little historical frame of reference. While most managers are loath to admit it, the Spaghetti Test of  ‘throw it against the wall and see if it sticks’ inevitably drives a lot of iteration around determining which offers resonate and which do not. This results in a lot of mediocre offers that don’t perform well which can leave merchants and consumers with a poor experience.

Work to be done. Critics are right to point out that there is still a lot of work to be done in elevating the daily deals business to deliver on the full promise of its massive potential–both for consumers and for businesses. Merchants need better post-deal monitoring and CRM-like tools to help with yield management and provide better tracking and analysis. Merchants also want more control and flexibility over how offers are created, sold and redeemed so they can maximize profits while minimizing the impact on their organization when the “crush” of redemptions comes. [Fortunately, startups are already innovating around these themes to fill precisely these voids.]

Consumers, for their part, are demanding better offer targeting, more consistency in pricing and redemptions, and less intrusive appeals in order to fight against emerging deal fatigue now evident across the space. Personalization software needs to catch up so that users can better tag offers of interest and opt-out of those that are annoying or redundant (Cupcakes? Again?)  Also, Hyperlocal and Location-Based-Targeting need to demonstrate that they are more than just elegant theories.  Too many service-oriented SMBs (i.e. hair salons, etc) have gotten burned in money-losing offers for premium services to out-of-town customers with whom there is no opportunity to develop a long-term customer relationship. That kind of mismatch is being corrected but hyperlocal offer targeting has a ways to go.

Ultimately, the scale that Groupon and LivingSocial have achieved has likely put them beyond the reach of most competitors. The battles ahead, therefore, will be over how best to go vertical. The winners will be those most savvy at customer segmentation and in finding unique offerings positioned against specific themes and product categories. Predictably, there are numerous companies doing precisely that — tweaking group-buying mechanics and applying them to niche, premium markets and making a successful play in those areas. In another market in another time, this “go vertical” approach may have doomed a company to a market insufficiently large to support its efforts. However, as companies such as Gilt Groupe and One Kings Lane have demonstrated, the daily deals market is large enough that even pursuing a niche approach and a narrow customer segment can prove to be enormously lucrative.

Why VCs Rarely Back “Family” Founders

29 Aug

I recently met with a promising startup led by a husband-and-wife founding team. This was not a standard investor pitch meeting. I had known the husband of the duo for several years and agreed to meet informally to be brought up to speed on progress at the company.

Admittedly, it is not often that I meet with a founding team composed of individuals connected via bonds any deeper than college, a previous work experience, or a long-standing friendship. Truth is, start-ups founded by husband-and-wife teams or by those connected through familial bonds amount to a tiny fraction of the companies that successfully raise venture funding each year.  On the one hand, this fact might appear odd given how signficant “mom and pop” businesses factor into the nation’s economy and, indeed, its economic history. The cliché that small business is the backbone of the US economy is only accurate because “mom and pop” or family dominated businesses comprise the greatest number of vertebrae in that very same backbone. The dearth of family-founded venture-backed start-ups, therefore, makes for an intriguing discussion.

To be sure, there have been family-founded or husband-wife startups that have raised venture money and gone on to be quite successful. WebMethods is one such company. However, the bias in traditional venture circles against investing in husband-wife and family-run startups is long-standing and rooted in some uncomfortable realities.

1. Idiosyncratic risks in a husband-wife or family-dominated team. It’s axiomatic that investing in young, unproven companies involves a great deal of risk. To be successful, a venture investor must adroitly balance that risk. That involves making choices and tradeoffs over which risks are tolerable and acceptable as part of the venture process, and which risks are not. What differentiates family-run or husband-wife startups to a venture investor is that they introduce risks that are unique by their very nature.  Hence, these risks are idiosyncratic and not in evidence at startups backed by the more common assemblage of former colleagues, college roommates, and friends.

One such risk is that of divorce in a husband-wife team or a severe disruption in a familial relationship in the case of a startup team dominated by family members. Both can cripple management effectiveness.  Any venture investor who has been involved in the removal of a founding member from a portfolio company can attest to how complicated and disruptive that process can be. Add to that the aspect that the co-founder being removed could be bound by marriage to another co-founder–with the common circumstance that one co-founder is engineering the removal of the other–and one can quickly see what a morass this situation can become. Sons firing fathers or brothers firing brothers play out no less dramatically and painfully for the companies and the investors involved. The emotional fallout in such disruptions can all but disable a company.

2. Recruiting difficulties. For any emerging growth company to scale effectively, it must attract a world-class team. However, top management talent interested in advancement and increasing responsibilities will typically avoid a husband-wife or family-dominated startup where decisions on hiring, promotions or compensation could be colored by family relations or other marginalia. Accurate or not, the perception will persist that a talented manager will be unable to ever take the top leadership post at a company where the competition for that post is likely a family member. Additionally, few people who ever sat through a tense Thanksgiving dinner of their own relish the idea of ever getting in the middle of a familial or matrimonial spat, much less on a daily basis.

3. Lack of defined roles. Finally, there is the touchier discussion about the importance of clearly defined roles in both the business context and in the familial/marital one. Couples and family members that go into business together too often learn that this is a decision that can damage their underlying romantic or familial bonds in ways they never imagined. The bluntness and constructive criticisms that must occur in order for there to be efficient business communications can often fray emotional connections and strain relationships, sometimes permanently. Roles get convoluted. Spouses and siblings lose their identities in service to the needs of the business and find they have trouble talking about anything outside of work but work itself.

As any management textbook will attest, the effective management of teams requires clear leadership, objectivity in decision-making, some reasonable approximation of “professional boundaries” and a clear demarcation of roles and responsibilities. The blurring of lines that comes from founders and/or managers having one role at the office with their “colleagues” and another role at home too often flies in the face of that reality for venture investors to ever become sufficiently comfortable in order to proceed with an investment.

When Investing Too Early Isn’t “Wrong”

28 Jun

I recently had a twitter exchange with early stage venture investor Mark Suster over the issue of being “too early” as a venture capitalist and what that means in the current climate. While I genuinely like and admire Mark and am not one to publicize my disagreements (or would that be disa-tweetments?) with other investors over what are primarily philosophical matters, I thought the content in the exchange was valuable and supported some re-examination.

Mark made what I would consider a somewhat sweeping statement–namely, that investing too early was the same as being wrong. I responded that this entirely depended on the perspective being considered. Let me explain.

There scarcely exists a technology sector that became vibrant and consequential that did not experience a great deal of stops, starts and stalls early in its evolution. Most of the early “failures” in a space — i.e., companies that had a piece of the solution figured out but perhaps not the entire solution — were venture-backed companies. Many of the same venture investors in those early failures learned from the experience and went on to back later entrants that became juggernauts in that given sector. Were those investors wrong? Would those investors have developed the insights, market knowledge and ecosystems critical to their becoming investors in the eventual market leaders without those early experiences? Would the sector have developed as it did without the flame-outs?

My answer to those rhetorical questions is emphatically “no.” As has been evident  across technology markets for decades, technology advancement occurs in waves of innovation that beget other waves of innovation, and so on. The early failures provide formative experiences for the investors that were involved and for future entrepreneurs behind new entrants in that sector that can plainly see what worked and what didn’t for the previous class of market entrants.

Take, for example, the notion of Pattern Recognition among venture investors. Much has been written about the concept, including an earlier piece in this forum. Tangential to pattern recognition is the idea that a venture investor’s early forays into a sector provide a great education — wanted or unwanted — about what will ultimately be successful in the space and what simply doesn’t work. It also provides the investor a great deal of market knowledge and an ecosystem of supporting companies and entrepreneurs that will serve that investor well for years to come in his or her chosen area of investment, and even in other areas. This is called active cross-pollination and it is critical for long-term success as a venture investor.

To pull on that thread a bit further, venture investing is not a discrete, narrow vertical exercise. Good investors are constantly influenced by outside factors, parallel markets, advancements in technologies that appear unrelated until an epiphany occurs and interesting combinations can result. From the embers of a previous failed investment can come a dormant technology or a seasoned manager that can be re-potted into a new venture and can enable that venture to become enormously successful. The point I make in raising this is that the future success would not have likely occurred without the early mis-step. I have several examples of this in my own career.

There is an oft-told piece of black humor among attorneys about a veteran attorney counseling a young protegé. The senior attorney remarks, “When I was a young attorney like you I lost a lot of cases that I should have won. Now, with my years of experience, I win a lot of cases that I should probably lose.” No one is suggesting that venture investors new to a sector should message to entrepreneurs that they are “learning” on their deals. That said, to maintain that experiences on early investments do not positively inform decisions made on later ones is simply folly.

So, can one be “wrong” by investing too early in a sector, as Mark suggests? Most definitely. This occurs when an investor develops an investment thesis, makes an investment in a company against that thesis, leaves the sector after that company fails to never invest again in the space and never leverage the lessons learned from that experience into other investments. Hopefully, this does not occur very often among professional venture investors. The mere statement that anyone invested “too early” in a sector implies that the given sector did ultimately develop into something substantial. With any luck, the earlier investors that helped shape the sector with early bets were able to prosper by participating in the eventual winners. Historical venture returns seem to bear that out.

Taking Stock of Our Netscape Moment

22 May

The LinkedIn IPO came out with a bang Thursday and in the intervening 72 hours the offering has already provoked sweeping re-assessments and re-appraisals of technology markets in general and the prospects for consumer web/social media IPOs in particular. It is hard to argue with success; and LNKD was nothing if not a wildly successful offering. Capital markets elites will bicker over some of the “inside baseball” issues having to do with “small float” mechanics or allegations of mispricing, but such quarrels are really just noise in the overall discussion.  LNKD was the largest technology IPO since Google in August 2004 and provided the much-needed confidence builder for the technology sector that market participants were hoping for. While there have been a number of well-received tech IPOs in recent years – OpenTable, Green Dot, to name a few — LinkedIn was arguably the highest profile name to go public in the past seven years and, as it happens, was one of the fabled five horsemen of consumer web/social media fame — a loose group which typically includes Facebook, Zynga, Twitter, and Groupon – that garner the greatest amount of attention from the media and the highest trading volume in the secondary market.

To be sure, it is hard to overstate the serious ramifications of a failed LinkedIn IPO. That the LNKD offering was an unqualified success bodes extremely well for the long-awaited offerings of Facebook and its peers and provides the proverbial rising tide to lift the respective boats of many lesser-known names in technology. The market validation accorded the LinkedIn offering will have a coat-tail effect across a broad swath of social media companies and venture investors will fast-track plans to find a public exit for many of these companies.

While it is still too early to divine what the long-term impact will be of the LNKD offering, it is undeniable that the morale boost it gave to founders and stakeholders is palpable. The IPO window for tech had been so constrained for so long that there will be some natural reassessment of IPO plans for dozens of companies that were all but assumed to be eventual M&A targets. This is a good and healthy exercise. The notion of “being a public company” has taken a drubbing in the past decade for any number of reasons — too expensive; too much regulation; required disclosures that would only help competitors; plenty of capital already available to good companies in the secondary market; management attention would be siphoned off to cater to Wall Street/institutional demands, and so on.

While the debate over being a public company vs. staying a private one is perhaps a topic for another post, I am in the camp that believes that many of the anti-IPO arguments most often raised in recent years are either overblown or are rapidly losing their relevancy. There are intangible benefits of being a publicly traded technology company that most criticisms — even the valid ones — fail to adequately counter. In the case of LNKD, getting a lofty public market valuation — and, by extension, validation — was critical for the company and for the dozens of social media/Web 2.0 companies that will all but assuredly follow LNKD into the public markets over the coming year or so. The LinkedIn IPO validated recent secondary market valuations of the company and provided the critical corroboration that venture investors and secondary buyers were not simply drinking their own Kool Aid. In time, owning a position in LNKD will become important for many large financial institutions and asset managers, which will in turn support the company’s and the sector’s long-term valuation as well as buoy the prospects of other talked-about social media/consumer web companies as they consider wading into the public markets. And that is a very good thing.

A Bubble over “Bubbles”

28 Apr

 

Perhaps no subject in the venture/tech start-up ecosystem over the past year has received greater attention–and been the focus of more collective hand-wringing–than the issue of bubble/not a bubble. With little argument, there are varied opinions on this and fairly good analysis on both sides. For my part, let me come right out and say it: Yes, we are in a bubble–it is primarily a bubble of prognosticators and market participants of all persuasions tripping over themselves to be the first to call what is occurring in technology markets a “bubble.” Taking a position on this subject might be great for bloggers seeking to drive traffic and for talking heads and Wall Street analysts looking to increase their respective profiles by saying inflammatory things but it hardly gets anyone closer to a reasoned understanding on what is occurring on the ground and, more importantly, on what lies ahead.

Like all good arguments, there are core issues worth having a spirited debate over; and then, there are lots of sideshow marginalia that have little bearing on what is actually going on and what actually matters. [AngelGate, anyone?]

FDR was on to something when he announced that the only thing we had to fear was….(wait for it)….fear itself. FDR knew something about the power of language. The power of language is particularly relevant here because I believe one cannot have a meaningful discussion about current market conditions and the behavior of some market participants without first clearly defining our terms. There are healthy, albeit heated, markets and then there are bubbles, and one does not necessarily beget the other.

I think I speak for many tech market participants in declaring that “the B-word” will be inextricably linked to the 1998-2001 boom/bust cycle that came to define the technology/venture landscape for many participants that were there to experience it first-hand. As such, given the negative connotations and the fairly brief historical context we are dealing with, the word “bubble” is loaded and, hence, problematic. This is not to suggest that one cannot use the word; I simply believe that tossing the word around cavalierly whenever a market becomes heated and — egads! — frothy is overkill and, as it happens, not terribly descriptive.

Fortunately, there have been a lot of smart, experienced people developing thought leadership on this issue. Diverse voices such as Mike Arrington, Howard Lindzon and Forbes’ Eric Jackson have all made impassioned arguments worth reading. I could get into an itemization of points and counter-points on where I am coming out on the question of bubble/not a bubble, but it would be a lengthy exercise and, at the end of the day, something of a transient position given the fast-moving environment we are in.

However, I am fairly confident that while there are some broad similarities between the current environment and the 1998-2001 period, few of the underpinnings behind the ’98-’01 bubble appear to be in evidence in the current environment. In short, there are far more dissimilarities than similarities and those differences are profound: much better companies, real (and often, huge!) profits, better monetization and distribution, true scalability, lower development costs, and on and on.

Additionally, the market froth that exists today concerning valuations is still contained within a relatively small segment of the broad technology landscape and among a select group of (largely) professional investors. By their very nature as “consumer-focused” enterprises, consumer internet companies capture the public’s imagination and garner the greatest amount of attention from the media. [Last I checked, no one was planning a major Hollywood film about the founders of SAP.]

Additionally, much of the current froth in valuations has been primarily directed at a handful of high-profile companies (Facebook, Zynga, LinkedIn, Groupon, et al). While it is true that we are now seeing soaring valuations for some very immature companies across the consumer web space, there is little evidence to suggest that this is driven by anything more than healthy competition among investors and by excitement over the rapid pace of innovation. Given the boomlet in new seed stage firms, “super” angels, and in legacy venture firms that have recently augmented their efforts in consumer web investing, this is to be expected.

All this aside, this does not suggest that I am somehow Pollyanna on the current state of consumer internet investing. There are certain areas that I am watching closely and I do have some concerns. As Fred Wilson has suggested, some investor behavior has become alarming. To my mind, certain investors — but still a minority of them — are getting skimpy on diligence and on the need to be methodical in an effort to move quickly to win certain hotly contested deals. Other investors are caving too quickly on terms or agreeing to extremely generous provisions for founding teams in order to win coveted deals. Again, this is just my opinion and is largely anecdotal, but I am hearing enough similar things from other investors that suggests that I am not alone in that view.

I am also wary about the rapid evolution of the secondaries market and with some of the private stock trading platforms that allow early investors/employees to sell their shares. I think these services are, by and large, great tools for investors and for start-ups but some discipline needs to be employed here so things don’t get misaligned. No doubt, regulatory agencies will get more involved as these secondary “paths” get further institutionalized and begin to bump up against current outmoded regulations concerning investor limits and the like. On balance, however, I think these issues, while concerning at times, are self-correcting.

In summation, I think the consumer web is perhaps three or four innings into an extended period of growth with the lion’s share of attention and the highest valuations being accorded companies that are innovating well and rolling out products and services that consumers are passionate about. Jeff Bussgang posited recently in a post that he felt we were in a “bubble,” but that perhaps the question we should ask was where in the bubble cycle we were–perhaps 1996, versus 2000. That is a clever way to nuance the issue although, again, I think employing the term bubble implies that once this market surge cools there will be catastrophic consequences. While there is reason for pragmatism, discipline and caution, given what I am seeing today in the marketplace, I am not finding evidence to support that.

The Art of the Pivot

16 Mar

With little argument, there has been much written recently on the revival in consumer internet. While there is no shortage of micro-themes behind the current innovation boom in companies focused upon the consumer sector, one area of particular interest has been on “older”, Web 1.0-vintage companies that have succeeded in two critical ways – (1) navigating and surviving the bruising post-2000 tech downturn; and, (2) continually innovating against rapidly changing market dynamics and consumer behavior to emerge as market leaders.

In many cases, the characteristics behind succeeding at point #2 lies in the ability for a company to pivot–jettisoning an initial business model, hypothesis or core focus for another approach or business that appears more likely to be successful. A quick scan of leading companies in the Web 2.0 sphere, broadly defined, reveals a high number of companies already on their third or fourth business model. Some of these pivots can be considered modest iterations on a principle strategic direction while others were wholesale changes to an earlier business model and a dramatic shift in focus.

Athleon, an online suite of coaching and team management applications focused upon the collegiate and prep sports market (where I serve on the Board of Directors), executed a fairly mild but ultimately essential pivot in late 2009 as it abandoned its freemium model for an all-pay platform. Predictably, some feathers were ruffled and there were early adopters upset at the change in policy and direction. That said, customer churn was modest and the change proved essential for the success of the business. 

In an example of a more extreme pivot, a Citron Capital company which began life as an image recognition software provider applying neural nets technology to eCommerce (i.e. finding every e-tailer offering, say, red cardigan sweaters with black buttons) dropped the eCommerce focus in the aftermath of 9/11 and became a security software company applying its facial and image recognition technology to help screen passengers and automobiles at high security checkpoints (i.e., airports, border crossings, etc.) 

Cases of successful pivots are myriad. As such, given the frequency with which early stage companies are often faced with the challenges inherent in pivoting, it is important to explore this topic to uncover lessons from successful pivots and best practices to follow when contemplating a pivot. Here are a few things to consider:

1. Everybody pivots. There was a time not long ago when the notion of pivoting was perceived in some quarters as an unmistakable sign of failure. Fortunately, with the recent and open discussions by founders and early employees about pivoting that went on at some of the biggest names in technology, this stigma has seemingly passed. There is seldom anything more destructive to a company’s long-term prospects than a management team clinging to a failing business model for fear that changing direction would be perceived as weakness.

Companies no less esteemed than Flickr and PayPal started off in very different businesses but pivoted to what the market was responding to and went on to become juggernauts in their respective areas of focus.

2. The initial idea/hypothesis about the business is probably wrong.  Yes, this is true whether or not the founders raised capital against the strength of that idea or not. Experienced angel and venture investors understand that a fair degree of iteration will occur at an early stage company and will, in most cases, support management’s plans to allow the company’s strategy and even its purpose to evolve dramatically provided those plans are well-reasoned. Just as there is seldom anything more destructive to a company than a management team clinging to a foundering strategy, there are few things more damaging than investors that insist that the company pursue the strategy that was the basis for the investment when all evidence seems to support that that strategy is not winning in the marketplace. Fortunately, most investors are properly aligned, first and foremost, with seeing the company succeed regardless of whether the strategy that ultimately works was the one that persuaded investors to initially commit capital to the company. (As a side note, this is why entrepreneurs hear so often how important the team is to an investor. The right team is what motivates an investor to participate in a company. As I like to say,  ideas are easy; execution is hard.)

3. Align Motivations, Not Just Incentives. In start-ups, particularly those with a prominent engineering-driven culture, one common problem can be that some at the company become enamored with building “cool” products first and a successful business second. This, of course, is never actually verbalized. Instead, it is something that becomes evident when the products are built, they are indeed “cool”, but few consumers outside a niche-y, tech-savvy community really care about them. As such, the management team might have succeeded on a technical level – i.e., can they build great products that actually work? – but at the expense of developing a business that is filling a market need and appealing to a broad base of paying customers. In these cases, the pivot has to happen simultaneously with a candid examination of company culture to ensure that everyone at the start-up has the proper goals in mind and are defining success along the same lines. Those that are not “on board” with the new strategy inherent in the pivot are not likely to be happy with the new direction and should be allowed to leave the company.

4. Once the pivot is determined, it should be executed quickly. While careful deliberation is critical before a pivot, once that analysis has occurred, and a new approach is determined, and the team is re-aligned or reconstituted along the lines of the new strategy, the pivot should be put into action quickly.

5. It’s OK to focus the business more narrowly . In many cases a pivot involves honing down a business to fixing a particular problem or serving a particular need. This does not mean the business opportunity is smaller, however. Often, a company launches (and receives funding) because of its focus upon a large market that is in dramatic transition. Almost by default, this means that the company is awash in opportunity. As the company evolves, however, it begins to learn the idiosyncrasies of its market and begins to identify areas where its solution will be most successful and where it will find its raison d’être. This allows the company to avoid the problem of boiling the ocean and/or trying to do too many things. Few start-ups fail because they were too focused.

Some Thoughts On Transparency

28 Feb

Last week I had one of those conversations that kept re-asserting itself in other discussions in the days that followed. The conversation itself was not confrontation nor was the subject matter particularly uncomfortable. Briefly, a colleague and I got into a broad discussion about companies leveraging user-generated content (UGC)–specifically consumer user reviews of and feedback on companies, products and professionals–in particularly novel and innovative ways. While it’s axiomatic that there are significant businesses being built collecting, analyzing and publishing this content (and a great deal of value being derived therefrom), we both struggled with some of the issues coming to light around the impact of this kind of information when propagated without strict quality controls and proper diligence to ensure authenticity and accountability.

With little argument, the notion of delivering “transparency”  — in whatever form – has been at the underpinning of so many web-based business models in recent years. Additionally, with few exceptions, that goal has been a noble and appropriate one. Opacity has been the bane of so many consumers in so many markets that it scarcely makes sense to examine whether or not technology-enabled solutions seeking to open markets to greater and fairer competition have delivered long-lasting value to consumers.  Let’s stipulate that they have and just move on. 

Where things get sticky for me–and, I would imagine, for a growing number of investors and market participants — is the notion accepted almost as religion in some quarters that transparency is always and everywhere a market good. Heretical as it may sound, I think it is time that many in the venture and start-up community have an adult conversation about where and how full transparency is appropriate and about whether enough companies are living up to the weighty responsibilities that come with publishing information that can profoundly damage the reputations of businesses, professionals and/or their products or services.

Regular readers of Adventure Capitalist may recall that I have raised these issues in some form before, particularly in a piece on the state of online reputations. In that post, I drew some examples from the current legal (at least at that time) problems facing Yelp and similar sites from aggrieved small businesses. While I give Yelp and other sites credit for continually refining how reviews are collected, filtered and published, it is clear to me that we are a long way from being able to glean the true benefit of anonymous user reviews and feedback without exposing people and businesses to the risks that reckless and unfair user comments can pose. I remain deeply committed to the notion that platforms that enable users to call out by name and rate/review businesses while those users remain comfortably concealed behind the cloak of anonymity creates a sweeping invitation for mischief.

In the months since that original post on online reputations, I have received an alarming number of reports–both confirmed and anecdotal–about consumers engaging in troubling practices akin to extortion whereby demands are made for deep discounts and freebies that those consumers are not entitled to from local businesses. The not-so-thinly veiled threat is that the consumer(s) will trash the online reputation of those businesses if the demands are not met.

Again, I firmly believe that the majority of users and contributors to online review/reputation sites act responsibly. That said, more work has to be done by companies that reside at the intersection of online reviews and reputation so that all participants are held to the highest standard of ethics and accountability. 

My hope is that this post will spur a discussion. I don’t purport to have an elegant solution to the problem inherent in user-generated reviews and feedback but I am becoming increasingly mindful of the backlash brewing in the small business community against online reputation and review platforms. I am also seeing some of the limits of transparency in specific marketplaces when the end result of that openness is not greater efficiencies and fairness in a given market but, rather, the same kind of unfair leverage, collusion and monopolistic power that transparency was meant to eradicate.

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