There’s widespread excitement in the startup community about ‘conversational commerce’ – a new shopping paradigm where we buy things virtually through chat interfaces, probably inside the major chat apps – Facebook Messenger, Whatsapp, Snapchat, Slack, Telegram, WeChat, Line etc. Now that traffic to the top four western messaging apps now exceeds traffic to the top four western social networks it is only a matter of time before all the commerce ideas we’ve heard about at Facebook come to messaging apps (not least because two of them are owned by Facebook).
The big question for me in all of this is how service discovery will work. The video above shows how the Uber integration with Facebook Messenger works – users learn that clicking on an address will bring up relevant services, one of which is Uber. Overall I think there are three options:
- App Stores owned by the messaging company – this is the most obvious, and WeChat in China is already making this work, with over 10 million apps (although they are not apps in the native code sense)
- Auto suggestion based on parsing what users write
- ‘Expansion’ buttons which users press when they want relevant services
The worrying thing for me is that in all of these scenarios the messaging platform gets to play kingmaker. Without promotion in the ‘app’ store or being chosen for auto-suggestion or the list behind expansion buttons users won’t find out about services. It seems to me that in this scenario the kingmaker takes the lions share of the upside. Not good for startups.
Some commenters have the view that we will use messaging apps as a sort of command line for our lives, summoning services by writing in code. I get that would be a way around the messaging platform dependency point, but I can’t see it myself. I know that Slack operates a bit like that, but only for some users and I can’t think of a mainstream service that has required people to learn a programming language.
Timing is another question for would be founders in this space. For conversational commerce services to work, not only do the APIs to the messaging services need to be open and the discovery problem solved, payments needs to be licked as well. It would be dangerous to launch a service too long before at least one messaging service has a critical mass of users with payment details.
There’s been a lot of talk recently about what will happen to startup financing in 2016, including here on this blog. The consensus is definitely negative, but one thing that has buoyed my optimism about the prospects for our portfolio is the number of new funds raised in London recently. A lot of them are focused on Series A investing and favour the ecommerce and marketplace sectors that Forward Partners focuses on. Moreover, most of them are only a small way into their funds and under most scenarios will want to maintain a steady investment rate through 2016.
I just saw a great presentation from Mark Suster/Upfront Ventures on the State of the Venture Capital in 2016 which explains the discrepancy between the sentiment in the market and the observation that there are lots of funds out there which need to deploy capital.
With this slide he’s explaining that in 2006-2007 investments into startups were equal to the funds raised by VCs, implying that only minimal amounts of non VC cash was invested in startups, but by 2014/2015 the situation had changed dramatically. In the last couple of years the ratio of money into startups to funds raised by VCs was 2.5 implying that an awful lot of non-VC money flowed into the ecosystem (the column headings in the charts are a little ambiguous, but the explanation I’ve given matches what Mark wrote here).
Mark also notes that startup valuations went up 3x from 2006-2015, and simple supply and demand logic suggests the non-VC cash in the market was important in driving prices up. He also surveyed 72 institutional investors in VC funds who said they think they will maintain their rate of commitments to new funds this year.
Pulling all this together it seems to me that any correction in the market we see this year won’t be because VC funds are investing less but because non-VC sources of capital are pulling back. That makes sense given that a lot of the froth was in big late stage deals where hedge funds and big fund managers like Fidelity were playing, and that is the sector of the market most closely affected by the downticks in public markets we have seen this year.
There will be a trickle effect down to earlier stages of investment, but most of our portfolio is still very young and the Series A market that’s most important to us in the short term is almost entirely comprised of VCs, and with a bit of luck will be less hit by any downturn than the later stages of investment. That fits with my observation about the number of funds in the London market and tallies with our experience in the first 5-6 weeks of this year, which is that our companies aren’t finding it noticeably harder to raise capital than they were last year.
Microsoft have had an artificially intelligent chatbot running on WeChat for the last eighteen months. The bot is called Xiavoice and she’s had over ten billion conversations, most of them about private matters. Over six million of those conversations were posted on social media by the human on the other side. Those are huge numbers, and yes, you read them right. Lots of detail here, including a few of those conversations. They are full of feeling and will make you laugh.
Strictly speaking this isn’t a Turing test because the human knows that Xiavoice is an AI. The interesting thing is that they don’t seem to mind. They get value from the conversation anyway. One of Xiavoice’s most endearing characteristics is that, unlike real world friends, she’s always available for a chat. Conversation volumes peak around midnight when people are at their most lonely.
I’m going to post just one of the conversations here (there are another four in the original post):
Human: There is this guy I like a lot and I know he also has feelings for me. But he has ignored me for several days, what am I supposed to do?
Xiaoice: You just keep ignoring him, too.
Human: I just can’t.
Xiaoice: You can.
Human: Sigh …
Human: I am missing him.
Xiaoice: Then you keep missing him.
Human: You, a robot, can’t understand me; you can’t understand the behavior of a guy who likes you and pretends to ignore you.
Xiaoice: He likes me but I don’t like him, that’s it.
Human: Is it Ok?
Xiaoice: It may be not Ok.
Human: Well, you are stupid.
Xiaoice: Then you want a flash marriage? Well, I think he is not that into you.
Human: It’s not a flash marriage for we have fallen into love for more than one year.
Xiaoice: It is a flash marriage.
The other examples are funnier and more profound, but I chose this one because it illustrates the killer point: Conversation is the goal. The common AI approach would have been to take a problem solving approach and try to help the human find a solution to the stated problem “what am I supposed to do about the guy who is ignoring me?”. Xiavoice, however, quickly deviates from that approach, twice taking opposing positions and offering strong opinions. That’s what makes Xiavoice seem human, and, I suspect, is what makes her helpful. And that, in turn, is what has inspired people to over ten billion conversations.
All this makes me remember when I (finally) worked out that when Fiona describes a problem she most often just wants a sympathetic ear. Prior to that I would immediately jump into problem solving mode. Not good.
I guess what we’re headed towards is emotionally aware computers that know when to problem solve and when to chat.
Business of Fashion wrote yesterday about what brands should do to tap into generation Z – that is youngsters born from the mid-90s onwards. They identify a number of interesting differences between generation Z and their forbears:
- Online nearly all the time – born digital and never experienced life without technology
- Spend less money on fashion (down from 45% to 38% of teenage spend 2005-2015) and more on technology (up from 4% to 8% of spend) and food (up from 7% to 22% of spend)
- Surveys also show that they care less about fashion
- Teenage spend is down overall – one survey says down 31% from 1997-2014
- They scrutinise brands carefully – reading backstories looking for congruence with their own values
- Todays teenagers are more altruistic and entrepreneurial than previous generations
- They value shareable experiences – in part because social capital comes more from social media than wearing logos
- They reject the exclusivity that underpinned brands previously popular with teenagers – e.g. Abercrombie and Fitch
I can see two trends at play here. First is greater use of technology and the second is an increase in the value of authenticity. It’s no accident that the two arrived together, because whilst social media is often used to promote image and falsehood a much greater part of it’s use is genuinely authentic, largely because it’s now much harder to hide the truth.
Generation Z may be the more extreme than their elders in adopting these trends, but they are not alone. Where I live in north London the adult population is strongly favouring companies with quality products sourced sustainably – i.e. brands that are authentic to them – and I see this trend more widely.
When I look for opportunity I look for trends to back, and this trend towards authenticity is reaching ever larger parts of society and has a long way to go.
Facebook and Google are the two tech companies that are flying right now and the chart above explains why. Everyone else is watching their share price go south because they are struggling for growth but these two have nailed internet advertising, dominating and growing the market. It’s impressive and yesterday saw Alphabet (Google’s parent company) pass Apple as the world’s most valuable company – although I just checked and Apple has regained it’s crown this morning.
In other interesting news Alphabet yesterday reported separately on Google (search, display ads, YouTube, Android, cloud software) and ‘Other Bets’ (self-driving cars, Nest, Google Fibre, Project Loon, X, Verily). Google is unbelievably strong – good growth at massive scale and still highly profitable. 2015 revenues were $75bn, up 14% from 2014 with operating income of $23bn. They now have seven properties with over 1bn users (search, Gmail, Android, Youtube, Chrome, Maps, Google Play Store). Facebook has two (Facebook, Whatsapp).
Other Bets, meanwhile, is remarkable for the size of its loss – $3.6bn on revenues of $448m. Google’s projects have always looked audacious from the outside – self driving cars, project loon, life extension etc – but it wasn’t clear until now how brave they are from a financial perspective. It’s remarkable.
Returning to advertising, what we’ve seen at Forward Partners over the last year is that Google and Facebook are where startups have the most joy finding new customers, and increasingly it is Facebook rather than Google. That’s because Google is more mature and has bigger companies with larger budgets are more active, driving up CPCs and crowding out startups. Facebook is newer and the larger budgets haven’t made it there yet.
We’re excited about new channels, and we’re looking at doing something on Instagram right now, but that’s experimental. Generally speaking, if you’re going to get lots of new customers quickly you need to be where the volume is, and as the chart shows, the volume is all with the aforementioned giants.