Lunarstorm vs Playahead: Network Effects vs Target Group Segmentation

Conventional social-networking wisdom is that once a platform has market leadership it is extremely difficult for others to compete because of network effects. A widely cited example is Friendster of course, however, there it was perhaps more about doing things the users just didn't like.

Sweden has another interesting showcase with leading Lunarstorm and up-and-coming Playahead. Lunarstorm is one of the earliest social networking platforms aimed at a teen / young tween audience. The company appeared to have a tight grip on the Swedish market and over a million users (which is significant knowing that Sweden in total has 9M inhabitants). Clearly one would have thought that such a penetration of the target group precluded any competitor from entering.

However, Playahead still launched into this setting. I heard (unconfirmed) that Playahead has 450,000 active users, i.e. 40-50% of Lunarstorm's size. Playahead's positioning differentiated itself as a cooler, more partyoriented site. Correspondingly, it's user base is primarily in urban areas. So Playahead targeted a sub-segment of Lunarstorm's user base, and created a sizable community around it. When I recently had a a chat with Hjalmar Winbladh of Rebtel, I certainly got the sense the Playahead has momentum and buzz going its way, in the way of "if you are cool, you have to be on Playahead".

The Alexa chart below indicates that Playahead established itself firmly vis-a-vis Lunarstorm, and supports the relative sizes noted above. Interestingly, what we can't see is that Playahead ate into Lunarstorm, as Lunarstorm's traffic pattern didn't really change all that much as Playahead grew. What is interesting to note is that both sites don't grow all that much anymore, which suggests that both of them hit the ceiling in their respective target groups.




I'd submit that the bottom-line of this is that sub-segmenting a target group beats network effects. A tight offering designed specifically for a well-defined target group, can cut out a significant community even though the overall target group is already locked down by a larger social networking site. Secondly, like in "the real world" communities are subject to buzz, momentum, and coolness factor, which can turn audiences to one platform or the other. Certainly, I can relate to this from my non-web youth. One day, the coolest guys in our class showed up with Adidas sneakers. Then it took a while then everybody was wearing Adidas. That ticked off the coolest guys, so they moved on and started showing up in Converse Chucks. And on and on.

If I think about this from a venture capital point of view I think this is encouraging news in that we will probably see more new players in the social networking space. The things to think about is size-of-target-group (since ever sub-segmenting yields smaller and smaller target groups), and a potential faddishness of sites (particularly with younger target groups).

World of Warcraft vs Guild Wars: The Dance Contest

Check out THIS! Animated dance session in WoW and GuildWars over MC Hammer beats. FANTASTIC.

DEMO Conference: Renowned Tech Conference coming to Germany

(DEMO), one of the top tech conferences in the US and launchpad for new technologies is coming to Germany. The event will take place 15-16 October 2007 in Munich.
DEMO has a pretty significant history in the US. It's goal is to show new emerging and potentially breakthrough technologies. In recent years, companies like SixApart, xfire, Digital Chocolate, Roku, and our portfolio company RealEyes3D.com presented new products there that were about to launch in the US market.
IDG's Computerwoche in collaboration with MagniGroup is bringing this to Germany. I have accepted to join the board for which they assembled a solid group of individuals such as Hagen Hultzsch (former CIO of Deutsche Telekom), Dr. Michael Pesch (CEO arvato systems), and Prof. Ulrich Buller (Fraunhofer Instititute).
Now the task is on us to invite 25 cool technology companies to present at DEMO Germany. Qualifying companies can be from anywhere in the world, and should be about to launch their product(s) in Germany. DEMO can be a good launchpad with free PR. If any entrepreneur / company is interested I'd welcome you to send me exec summaries to mgazecki@atlasventure.com.

Computerwoche Roundtable: Roundup of the German Start-up Scene

I participated in a roundtable that IDG's Computerwoche, a leading tech magazine in Germany, organized. They did a great job of bringing together entrepreneurs, big industry, and venture capitalists to discuss the state of the nation as it relates to start-ups and entrepreneurship. Participants included Robin Schoenbeck, who recently sold his business to Lycos, Hagen Hultzsch (former CIO of Deutsche Telekom), Richard Seibt (former CEO of SuseLinux). The bottom-line wasn't much surprising: "Still many things are not super-duper for entrepreneurship in Germany, but there are significantly encouraging signs." The article can be read here at Computerwoche.

Since it is in German, I thought I'd flesh out a few themes that we discussed.

1. The rubber doesn't fully hit the road in Germany because innovation doesn't translate into new, large and world-leading businesses. Germany fares very well compared to other countries when comparing the number of patents for example. However, taking this innovation into products and then marketing these products on a worldwide basis is where the issue is.

2. A second interesting observation was made by Heiko von Dewitz of Intel Capital. He suggested that the age of German university graduates is too high for them to be taking risks. In Germany, it is not uncommon for graduates to be 30 years old and potentially married. In such a circumstance, it is not necessarily easy to be taking a start-up risk. Their US-counterparts are frequently 22 upon graduation and have a significantly higher tolerance for risk. Prof. Kollmann, who leads a chair for entrepreneurship at University Duisburg-Essen, pointed out a piece of research that showed that entrepreneurs that got started with the "me thing" between ages 25 to 35 have a much statistically relevant higher chance for success that they eventually hit it big. When I take these points into consideration it is not surprising for me that German WHU and HHL are the most active in producing entrepreneurs. These universities have a pretty strict system of getting their students out within the standard four years. And secondly, these schools by now have great role-models in the Samwer brothers and Lukasz Gadowski of Spreadshirt.

3. We need to celebrate the successes even more. I'll suggest right here that the German government should pay the Samwers and Lukasz for a tour across Germany nstead of distributing money like with a watering can across the entire country hoping that a tech-cluster emerges where daisies are growing today.

4. If you look at the VC-backed succcesses in Germany, there is actually quite some good news: Over the past two years, Germany contributed a good number of venture-backed successes with values north of $100M. In fact, when compared to the ca. 12% share of VC-investments in Europe, the number of exits is overproportional. When you peel the onion a bit, the most significant cluster is around internet and digital media with examples like Jamba, mobile.de, interhyp, and ciao. A second cluster is in clean-tech with companies like Q-Cells and Conergy, although one should consider that this is a sector that the German government subsidized early on then. In other sectors there are to date only sporadic successes like Gate5 in telecoms, and SuseLinux in software.

5. Serial entrepreneurs is something that was much talked about in the past - but not much had. Now it is starting to happen. The Samwer brothers had alando and jamba. Christian Vollmann did iLove and myvideo. Christophe Maire did Gate5 and plazes. The Cellity guys did Elkware, OpenBC, and Skype. Jochen Fuerbeth and Joerg Kuehnapfel did dtms and now ntrexx. And on and on.

6. Those successful entrepreneurs, like Richard Seibt and Oliver Jung, who don't become serial entrepreneurs are now active angel investors. This is equally good. Now actually quite a few angel investors are active in Germany, and provide seed financing to young entrepreneurs.

Jürgen Habichler goes Cleantech

My good colleague Juergen Habichler, who worked as an Associate and Principal with us at Atlas Venture from 2004, is now setting up a dedicated Cleantech fund called Mountain Cleantech. So he joins Conny Boersch's clan, which has a similarly expressionist website at Mountain Partners :-). All the best Juergen!

Largest German Newspaper (Bild) is Rated X in the US

Last week I flew to the US for our annual partners meeting. During a short stop-over in Charlotte, NC, I checked emails and a few websites while having a bite to eat. I was amused to find out that BILD(www.bild.de), the largest German newspaper with a circulation of 3.5M units is rated X in the US. See the Wikipedia entry for BILD for more info (unfortunately only in German).

American IQ and Video-Gaming

I'm reading a book called "Brands & Gaming" (check it out at amazon.com). I quote from there: "Between 1943 and 2001, average American IQ scores rose by 17 points at a rate of 0.31 points per year. However, what is instructive is that this increase was not at a steady rate, but of a curve that climbed steeply in the 1990s to 0.36 points per year - exactly the same period in which computer and video games were gaining a hold on the nation's leisure habits. The IQ score gain was most marked in tests for abstract reasoning and pattern recognition, two skills which we might expect practied gamers to perform well at."
I should stop writing this and go play a game, although the authors rightly note that there may be other factors at play.