Explaining FNAC: Feature, Not a Company

Posted on Aug 22, 2011 | 34 comments


FNAC. I first heard the term from Chris Fralic at First Round Capital. Feature, not a company.

Click this link if you want to see the video – for some reason the image link isn’t working.

It has always stood out in my mind. Whether something is a feature or a company is clearly subjective. And sometimes features (say, Twitter) turn into companies.

For me it is a useful shorthand for a very clever set of product features that in my mind would be hard to remain a stand-alone business or themselves to generate enough revenue to justify the company’s existence. I sometimes use it as a mental shorthand for teams that really have given no thought to how they might make money some day.

It’s really not as pejorative as it sounds. Sure, it’s intended to shock. It’s intended in a discussion with an entrepreneur to get them to question whether there is really amazing underlying value in the product or service they’re offering. I’m not so arrogant as to say that I’m always right. But in each discussion if I’ve caused the founders to think, to test their resolve – then I think I’ve added value from our encounter.

A few months ago I did a short interview with Dan Frommer who was then at Business Insider (and has since started SplatF, which is well written and worth your reading). It’s about 10 minutes long. We spoke about my interest in cloud computing, digital media and mobile. I talked in specifics about a bunch of my investments including Factual, MongoLab, Maker Studios and Gogii (maker of TextPlus). It’s a fun 10-minute interview that you might enjoy watching.

At minute eight I spoke about group messaging companies as “features, not companies.” This was 20 seconds of a 10-minute interview yet the article title was, “Mark Suster: Group Texting Companies are Doomed.” Actually, I never said that. I never said anything like that. Here’s what I did say,

“Group Messaging is a feature, not a company … there’s a lot of good companies that do it, but they’re going to have to evolve into broader product sets. I have nothing against anybody in group texting.” 

“Just sending messages is a utility product and Apple killed that, not me.” 

But of course tens of thousands of people saw the headline while probably 10% of them or less watched the video.

I guess that’s why people like my pal Trevor Owens felt vindicated by the sale of GroupMe as evidenced by his Tweet to me

What do I think now? I responded with something like “Great product. Well marketed. Group messaging is still a feature.” It’s a market commentary, not a company commentary. I have always been impressed with GroupMe as anybody at TextPlus will tell you. I’ve spoken positively about their design simplicity, their UX flow and their marketing prowess.

I have always been equally impressed with Brew PR who represented GroupMe. I would hire them for any company in which I had invested. Brooke & Dena are simply amazing at what they do and very selective in which companies they will work with.

GroupMe – working with Brew – managed to get an enormous amount of press coverage for a small startup company. This helped propel them and I believe was tremendously important in their customer traction and the awareness that large tech companies such as Skype would have had about them.

So …

Beluga sold to Facebook. GroupMe to Skype. In a word, awesome. Awesome for these talented young entrepreneurs and awesome for their investors. And awesome for NYC that GroupMe will be based there. I love seeing non Silicon Valley markets boom as it broadens our country’s innovation hubs.

Either company had the potential to try and broaden their businesses to turn them into something monetizable whether it be a social network, a telecom company, a gaming company, a media company – whatever. And I believed both teams were talented enough to pull something spectacular off.

But that doesn’t make group messaging a company.

Why?

1. The overwhelming majority of text messages sent are point-to-point, not group. How do I know? I invested in what I believe is the largest free & group texting platform in the country – TextPlus. I see the data. Huge volume is driving our monetization which is approaching a $10 million run rate. (I reveal a lot of TextPlus’s data in the video)
2. Even if group texting can be a really useful feature set, it’s hard for that to remain an independent, financially viable business because Facebook, Google, Apple and Skype see it as an important feature of their broader businesses. And I highly doubt they would charge for it. How do you compete with free if group texting is your only product?)

So two choices, broaden the offering or sell to a bigger player. There is no right or wrong answer. They are personal choices. If I’m in GroupMe’s shoes (and I’ve never met the founders) I think I’d be a seller at the price reportedly paid by Skype.

At TextPlus the management team believes we can continue to build a monster business. They sold their last company for $680 million so the goal post for them is a bit further. If our business in 2 years is predominantly free & group texting then we’ve failed. It has never been our goal or our end game.

Yes, the competition going forward will be strong. Beluga was an amazing product and now has Facebook scale. GroupMe was an amazing product and now has Skype scale. iMessage from Apple will be formidable. Google has Google Voice. As ever, our plan is to skate where we believe the puck is going. It will be an interesting couple of years to watch.

  • http://twitter.com/AndrewBrackin Andrew Brackin

    Does this acquisition not show that GroupMe (although very awesome) is essentially a cool feature. If Skype integrates any of their current features it’ll be the group messaging functionality. Which will mean Groupme will become a feature in Skype.

  • Anonymous

    “good for them! They’ve got a great PR firm.” …boom! roasted!

  • Chris Stewart

    You lost me at Brew PR…Sorry Mark.

  • http://bothsidesofthetable.com msuster

    Um, that was the exact point of the post. Group messaging is a feature. They would have either broadened their offering or sold and become a feature in a much bigger company.

  • http://bothsidesofthetable.com msuster

    OK, I updated the post to try and make it more clear. Let me know if it helped.

  • Chris Stewart

    I was being a dick, Mark! Have never been impressed with their work, but I’ll leave that discussion (rant) for another time/place. 

    I agree with your FNAC stance completely. Is that monthly or yearly $10M run rate? I feel like the only loser in this acquisition is Twilio.

  • http://twitter.com/LsmFatso Lean Startup Machine

    Thanks for the follow-up Mark & great to read your thoughts on this. How much traction would you say a feature needs to start building a broader suite of applications and creating a business? ie. When do you shift resources to other areas or stop focusing on that feature? Judgement call? Especially in GroupMe’s case I wonder what other options they might have considered. I know personally that they had been making headway with brands.

    Overall I’m very impressed by GroupMe’s performance over the last year and I think you’re right that GroupMe did a great job at promoting their brand (something you’re also amazing at). Beyond PR they had great evangelists as well & launching at TC Disrupt also helped. I think I recall @ceonyc:disqus  at one time mentioning that GroupMe was the startup he was most excited about.

    I can only speculate about Beluga but it seems like GroupMe got the better deal in the end, but was it the marketing? the traction? the investors? probably a combination of everything.

  • http://abbychao.blogspot.com Abby Chao

    Hi Mark – agreed that FNAC is intellectually useful, but I’m not convinced that group messaging is a just a feature for a company like Skype. Maybe it’s my bias as an avid GroupMe user, but it seems to me that they’re acquiring a complete, standalone entity. GroupMe has its own category; its users have a fundamentally different problem from Skype users.

    GroupMe provides lowest-common-denominator messaging, which will be a need for as long as SMS is ubiquitous and smartphones are not. iMessage and BBM don’t fill that need, considering their focus on their respective operating systems. Facebook messenger has some channel confusion – when I form a group, am I sending messages to my friends’ FB or phone? Do they need to download Messenger? Skype, I suspect, will have a similar issue. Channels matter – I use SMS to reach people, wherever they are, right now; I use chat for casual conversations when we’re both online, or prearranged meetings.

    With regards to TextPlus, it sounds like TextPlus and GroupMe are playing different games, but that doesn’t mean that GroupMe’s game is invalid. TextPlus may have more users than GroupMe, but the beauty of GroupMe is that you don’t have to be a user. You can use your own phone number, you don’t have to download the app – you basically don’t have to do anything, except add a new phone number to your address book. You can truly reach ANY of your contacts. Again, it’s filling a real need.

    I still believe that there could be a business model behind GroupMe. And if Skype takes GroupMe off the market (which it doesn’t seem like they would do), I’m sure someone will figure out what that business model is.

  • http://twitter.com/_girishrao Girish Rao

    Mark very useful read thanks! 
    Good job Trevor :)While I obviously cannot speak for them, I think Steve and Jared would agree with you that messaging alone does not make a company. From what I’ve heard and read their vision for GroupMe never ended at messaging, but extended beyond that to commerce from the beginning. 

    Groups are naturally social and contextual, lending themselves to offers, and other types of targeted commerce. I think this was always GroupMe’s end game. The Skype acquisition will allow GroupMe to reach these end goals faster.

  • http://twitter.com/leoalmighty Leo Chen

    Did any of these companies begin with the intent of building a feature to sell to a bigger player? Do you think that’s a viable/smart startup strategy? Some features can be of strategic value to the bigger players but are not yet on their roadmap. Many Twitter apps (e.g. tweetie, tweetdeck, twitpic) were built with the goal of being acquired; though it seems wiser to go after a “feature” with multiple potential acquirers rather than just Twitter. 

    Thanks Mark! :)

  • Pramod Dikshith

    Do you think it’s a bad sign that there are companies looking to create features to get sold to bigger companies than looking to build a good product with broad set of features, given the kind of valuations companies have had offlate?

  • Promethee Feu

    Great post!  I think those who have the hardest time with that concept is large companies that have built around a feature. When that feature is offered for free by competitors, the large companies have a hard time adjusting their strategy. I think this describes really well what is happening to the music and movie industries. They used to have a full featured product which was sliced and diced a certain way and which sold great. But increasingly, the song or the film is nothing more than a feature and if you want to sell something, you have to sell a larger product probably some sort of experience which includes that film or song. But the studios don’t want to see that and they are kicking and screaming trying to prevent the pivot at all cost still seeing themselves in the business of selling a movie or a song.

  • Anonymous

    At the risk of putting words in Mark’s mouth, I think the VC / investor PoV is that a feature based company has a ton more risk than a company that is building a new category of offering or a new solution in an existing category.

    A feature based startup can still be executed at an awesome level, but it requires a business model to emerge from the future (inherently adding risk) or it has to be acquired (which,has a maze of risks to judge).

    Investors don’t like to leave risk judgements dangling or dark……

    Congratulations, BTW.

  • Anonymous

    Mark – thanks for the personal validation! I told an entrepreneur (in the late ’90’s) his idea was a FNAC. He violently disagreed with me when I said this to him.

    But, his premise was that ‘anything can be turned into a business, if you add enough value.’

    Did not end up working with him…….

  • http://bothsidesofthetable.com msuster

    Yes, I think all of the things you mentioned contributed to GroupMe’s success. Perhaps focusing on brands (specifically celebrities) was going to be their revenue opportunity?  Another interesting phenomenon – they seemed to get all of the NY angels invested in the deal so it seemed like the entire city was publicly routing for them and since they were a TC Disrupt poster child so, too, was TechCrunch. They seemed to execute on all this perfectly from start to finish.

    As for who did better – Beluga or GroupMe. I’m sure they both did just fine. Financially it always depends on the terms of the deal. Unless you’re an investor you have no idea what the liquidation preferences of Khosla Ventures might have been, what amount of the Skype deal is cash vs. equity, what amount is guaranteed vs. earn out, etc. But no matter how you slice it, a big win for the founders of both companies.

  • http://bothsidesofthetable.com msuster

    re: Brew – just look at their roster: Zynga, Zong, GroupMe, GetGlue, NextNewNetworks, Pulse, Maker Studios … not all have been great companies but all have been excellently marketed and they have some amazing exits.

    re: Twilio – no, I think they won here, too. Sure, they lost a customer probably. But they’ve gained huge awareness through their relationship with GroupMe.

  • http://bothsidesofthetable.com msuster

    Even if I buy your premise that groups are inherently better targeted than others (I’m not convinced, I’d need to see the data. I know it sounds logical but once you have lots of customer data individual targeting is easy) … I still would rather have a much larger user base from which to monetize. The fact is WAY more people send individual texts / messages than those who want to join a group. Just ask Facebook.

  • http://bothsidesofthetable.com msuster

    Sure. That’s a pretty good summary. Not every investor agrees with that. Many do.

  • http://bothsidesofthetable.com msuster

    FYI, TextPlus allows you to use the product with no app and just with your phone number, too. The main difference here is that we built our own telecoms so our cost structure is significantly lower than GroupMe who uses a third party – Twilio.

    re: GroupMe – I agree with you that its users form a totally different use case than Skype’s, which is why it’s additive to Skype’s business. Still, Skype makes A LOT of money from telecoms. That’s their core business. I think any time you have such a big & monetizable revenue stream you’ll always view less monetized portions of your business as features until such time as they add meaningful revenue. I saw this first hand inside Salesforce.com. The company I sold to them in its own right could be a company (we did what DropBox does) but inside Salesforce it has remained a feature since their core business monetizes so well.

  • http://thesistown.com/ thesis help

    very cool post! thanks a lot!

  • http://twitter.com/brooke Brooke Hammerling

    First, while I am so honored Mark calls us out on this post, I do disagree that GroupMe is just a feature – -seen lots of companies come and go that are just that but the substance of GroupMe goes beyond a feature to me. Twitter, Foursquare – -all have been accused of being features in the past.  But they evolved.  GroupMe will remain an independent company and brand and will continue to innovate.

    Second, Chris Stewart – -Please feel free to share with me your issues with Brew?  I am not familiar with you so i find your inner knowledge of our business and how we work fascinating!  brooke at brew pr dot com.

  • http://bothsidesofthetable.com msuster

    It is NEVER a good idea to build a feature to sell to a bigger company. It sometimes works, but it’s a terrible strategy IMO. I think GroupMe likely set out to build an independent company. The offer from Skype must have been too high and the market competition considering Apple, Facebook & Google must have seemed too daunting.

  • http://bothsidesofthetable.com msuster

    Yes, it’s a bad sign. But I don’t think that’s what GroupMe did.

  • http://stevecheney.posterous.com/ steve cheney

    Bunch of stuff we’re doing that’s deeper than messaging and groups Mark
    http://stevecheney.posterous.com/groupme-and-skype

  • Petewinkler

    Mark — Greetings from Prague!  Tony Uphoff pointed to your FNAC post on LinkedIn, so I had to check it out.  I am reading your stuff and think you probably should be running a marketing/PR firm rather than on the dark side as a VC…less coin, but you would be happier existentially ;-).  Hope all is well with you.  Silke says hello also (although she is in Prague even less than I am). –Pete

  • http://twitter.com/davidjblevine David Levine

    Mark

    As ever fascinating insight on a very interesting transaction.

    What strikes me is that here is an example of a larger company (who surely have the bench-strength and discipline to build such a “feature” rather than buy) making the decision to go out there and acquire. 

    I think it’s a really great illustration that even in the face of strong competition (a lot of it free) and where some people may consider group messaging almost a commodity there’s still room to focus on your core and build a great product. 

    Thanks again
    David

  • http://bothsidesofthetable.com msuster

    Brooke, thanks for the message. I just want to be clear about my words so I’m not mistaken … “group messaging” is just a feature, not a company. That’s the extent of my argument. GroupMe is a great product and seems to be an excellent team, although I’ve never met them.

    To be successful GroupMe would ultimately need to evolve its feature set into something broader (e.g. social networking, a marketing platform for brands & artists, a telecoms company, a games company) – I’m sure expanding was part of their playbook. 

    Why am I so anal about this? Because the success of GroupMe, TextPlus, Kik and others led a whole bunch of copycats who thought that group messaging was the end-game.

    I promise this isn’t an attack on GroupMe – quite the opposite. Yes, Twitter is evolving. FourSquare is evolving.  I have always publicly said, “Checkins are a feature that will run its course. FourSquare must have plans beyond the simple check-in to succeed.” And they did. And will.

    When I first heard TextPlus pitch me, I thought, “Ok, so texting is great for customer acquisition, but what comes next …?”

  • http://bothsidesofthetable.com msuster

    Thanks, Steve. I remain with my positioning that “group messaging” is a feature.” I have not said that “GroupMe” is a feature.

    Your article alludes to GroupMe going deeper into either telecom services or eCommerce-like transactions through groups. I look forward to watching the evolution of the company.  I am personally more bullish about the former than the latter because as your article alludes to, the telecoms industry is stuck with “The Innovator’s Dilemma” and that spells huge opportunities for people “at the application layer.”

    I don’t know your founders but no matter how many times I say “I’m not against GroupMe” that’s how it gets translated. Maybe you could pass along that message along with my sincerest congratulations. And to you.

  • http://twitter.com/SwiitApps Locally, iPhone App

    Very interesting and valid post. 

    I would like to know Mark’s thoughts on when the company name is the same as your product name, does one run the risk or is it a sign of creating a FNAC.

  • http://www.thatdrew.com drew olanoff

    And that killer feature in turn makes Skype a killer product, a soon to be part of a company (Microsoft) that’s holding a whole lotta cards right now (gaming, social networking with facebook, etc). So yes.  A feature can spawn something wonderfully if done right.

  • http://www.omnea.com Alex Murphy

    Expanding on what it means to be a feature and not a company …

    In the context of Internet startups and VC land, a Company is an entity that is highly scalable and will be able to stand on its own.  The Company may ‘choose’ to forgo short term profits for long term growth opportunities, but the objective is to build a super sized organization that will be able to generate huge profits resulting in an outsized return.  

    Yes, many companies get acquired, and many never do stand on their own, but the organization acts in a  way that is “profit driven” in the long run.  In the modern day tech world, that means offering a great service that users want to share with their friends, become dependent upon, and are willing to pay money for either in the form of subscription or interaction with advertising.  

    A feature on the other hand is something that a company needs.  

    Now here is the really interesting thing to me.  The GroupMe’s of the world (orgs that build features not companies) are becoming the modern day R&D department for Growth Companies.  Why should skype figure out group texting if there are 10 companies that have a vested interest in the feature they are building, where Skype can then go and pick the best one.  Or if the terms aren’t just right, then Skype can hire 50 programmers to replicate it, now that they have seen exactly what works and what doesn’t.  

    Companies used to invest big dollars into R&D, much of which was spent on projects that went nowhere.  Today, the big companies can pick and choose.  Case and point, Twitter chose TweetDeck, a great feature, and replicated Twitpic, also a great feature.  The challenge will be to see if Twitpic can retain its own relationship now that it is competing with the mother ship.

  • Dave W Baldwin

    Well written and you get it.

  • Dave W Baldwin

    Another great post Mark and I don’t see how anyone can read you being against Group Me. 

    @amurphy59:disqus makes the great point overall.  Be it start ups are part of a bigger laboratory, it shows the need to be as independent as possible.  Also vision forward.  If you do something that is one feature (not saying that’s GroupMe), you’re swimming in a pool of pyranhas. 

  • Amy Higgins

    Great points Mark. It will be interesting to watch everybody and see what will come next…