The first e-commerce wave brought incredible convenience, endless choices and great prices to our desktops. It revolutionized the retail industry, first by disrupting and then annihilating traditional retail of commodity products such as electronics, books and CDs. Soft-goods retailers had a bit more breathing room to figure out their e-commerce strategies, but now, for example, clothing and home goods are the two largest e-commerce verticals, and retailers that have innovated are thriving, but those that didn’t adapt are dead. The recession of 2008-2009 accelerated extinction of merchants with undifferentiated product and channel, see Mervyn’s and Linen ‘n’ Things for detail.

Now, with more than half of America using smartphones and tablets, we don’t even have to step to our desks; stores are in our hands round the clock, and new technologies make shopping even easier. Phones fully equipped with high-resolution screens, real-time notification and easy-to-use interfaces, browsing and fulfillment …shoppers’ budgets best watch out, the shopping experience is good. I spent last Black Friday curled up by the fire with my iPad rather than in a parking lot at 5am, and I wasn’t alone. 18.3% of all 2011 Christmas Day shopping came from mobile devices, which was 8.4% higher than 2010. (Source: Retail Industry)

There is no doubt that mobile commerce will continue to rise dramatically. We are more likely to leave the house without our wallet then without our phone. It’s predicted that by 2015, mobile shopping will account for $163 billion in sales worldwide, 12% of global ecommerce turnover. (Source: ABI Research, 2010)

So how are consumers using their mobile devices to shop?

Content to Commerce

Mobile shopping, especially on tablets, mixes the lean-back leisure of flipping through a magazine with the lean-forward capabilities of search to help a shopper buy both the items she knows she needs with the delight of surfacing things she didn’t yet know she wants. As retailers have taken the mantle of defining style by mixing in editorial content, as for example, at Net-a-Porter or StyleMint, they close the cycle between consideration and purchase.

Appointment Shopping

Flash sales and auctions have spurred the use of mobile to catch the deals. Hot mobile apps like Gilt and RueLaLa have seen more than 20% of sales coming from mobile (Source: Internet Retailer) and master auction site eBay attributed $5bn to mobile sales in 2011, more than 2x the previous year (Source: Mobile Marketing Watch). Consumer shopping habits can be stoked at the stroke of the hour, even during a pesky meeting or long commute.

Show-rooming

Are mobile phones turning into the new sales clerk? 66% of US smartphone owners use their phone to aid in shopping. (Source: Leo J. Shapiro and Associates, 2012) Whether that is reading reviews, looking at competitive prices or seeing if it comes in another color, consumers are turning to their phones and tablets to make an informed buying decision.

Coupons

Clipping coupons has gone mobile. 21% of consumers search for a coupon on their mobile device while in a store (Source:Mobile Audience Insights Report from JiWire, 2012) and 55 % of consumers express an interest in mobile coupons but only 10% have actually received one from a merchant (Source:Mercator Advisory Group, 2012). Missed opportunity? Definitely.

These innovations are driving emerging opportunities for mobile commerce, mobile marketing, mobile commerce infrastructure and mobile payments. Perhaps this Black Friday, I’ll be curled up with my iPad, DocuSigning a termsheet for a company leading the way in mobile commerce. Or sooner.

“You have to learn the rules of the game. And then you have to play better than anyone else.” – Albert Einstein

Over the past couple of years, I spent a lot of time playing games at work. I reached level 888 in Mafia Wars. I built a sprawling metropolis in CityVille. I played countless rounds of Words with Friends.

As a general manager at Zynga, I also watched, in exquisite detail, as hundreds of millions of other players did much the same. Zynga’s games generated over 16TB of player data a day – data that was mined to understand exactly what was, and wasn’t, working to keep players engaged. I came away in awe of the power that best-of-breed game mechanics could have, especially when coupled with the social web.

Can the same game mechanics that propelled Zynga’s rocket-like growth also help non-gaming companies scale at warp speed? Yes! In fact, the companies that have built social and viral game mechanics into their products or services are already enjoying an outsized advantage over their rivals.

“A good game makes us long to play it again.” – Wolfgang Kramer, German Board Game Designer

Even if you aren’t a gamer, it’s worth thinking about how to flesh out the “inner game” of your products to make them more fun, engaging, and – dare I say it – addictive. Game mechanics, employed correctly, are massive turbo-boosters for growth.

When determining what game mechanics might work best for your product, consider how your users engage with it. Think about… What makes using your product fun? What gives people a reason to keep using it? What does progress and achievement look like over a day, a week, a month, a year? What are the rules of this game? What are the payouts? What are the moments of delight? How do you challenge your users? What obstacles do they need to overcome? Where can your product provide suspense or surprise? What makes your consumers’ adrenaline start flowing? What does an “epic win” look like? The moment a user puts your product down, what’s going to drive them crazy to pick it back up again? What’s going to make a consumer want to get all her friends using your product, too?

In other words, harnessing the power of games is not about checklists of “game-like” things to add. It’s about asking questions that force you to figure out the gaming elements that are truly authentic to your product.

Winning Game Mechanics

1. Locks and Gated Content

   Games thrive on locking content from users until they complete actions or attain goals. This runs counter-intuitive to what we’ve been taught about e-commerce: make it easy for them to buy! Yet when Groupon first launched, its locked deals were a key to its early traction – consumers were presented with a Groupon offer but each offer needed a minimum number of buyers to “unlock”. This encouraged consumers to tell their friends about deals and started a positive viral cycle. Similarly, Gilt recently featured a promotion where an item was offered for 70% off, but the offer was locked until the item was repinned 50 times on Pinterest.

2. Surprise and Chance

   Many enduring games contain an element of chance – a roll of the die, a draw of a card, a spin of the wheel. This adds excitement and suspense and elicits stronger emotion than a purely predictable game. Google scored a big win in its early days with its “I’m Feeling Lucky” button. Consumers were able to take a chance, be surprised, and ultimately (because Google was so good at what it did) experience a winning feeling when they landed on exactly the right page for them. While used by a minority of visitors, “I’m Feeling Lucky” reinforced Google’s brand brilliantly: you could bet on Google and come out a winner.

3. Level Ups

   Success lets players “level up” and experience more power, prestige, status, and access to even better content and gameplay. When eBay was looking to create a reputation system, it hired game expert Amy Jo Kim to help design its feedback and PowerSeller system. Far from being a tacked-on leaderboard, the feedback system enabled sellers to level up to different PowerSeller status. A seller’s success on eBay was significantly linked to their PowerSeller level as top PowerSellers received preferential placement, better support, and a host of other benefits that helped them stay at the top of the pack. As a result, sellers focused hard on attaining and keeping the best status, resulting in strong lock-in and retention. (Frequent Flyer programs have a similar dynamic: top tier members rarely switch airlines due to the strong benefits of their elite status.)

4. King of the Hill

   Multi-player games often pit users against each other to control certain parts of the game board. FourSquare created a similar dynamic with its Mayor position – many players worked hard to be Mayor at a certain location, and kept investing in the app to keep on top.

5. Competitive Status

   Online games have long allowed players to compare statistics with other players; this player-vs-player competition can be a strong force driving Type A personalities to keep playing. On Twitter, for example, gaining followers is both intrinsically satisfying and can become a competitive game – comparing which celebrity or industry pundit has more followers is a popular pastime. (Speaking of which, please pardon this shameless plug: follow me @Tilenius to get my latest news and updates first.)

6. Decoration and Personalization

   Lest you think of games as purely competitive, some very popular games (including CastleVille, CityVille, and FarmVille) make decoration a key part of the game – players are encouraged to build game boards that reflect their personalities, passions, and interest. This is most fun in a social context when your friends and others can see what you’ve created. Instagram did a great job with this, enabling people to both be creative with a few clicks as well as helping them share their creativity with a broad network: decoration is most powerful as a game mechanic when it’s easy to share with others about whose opinion you care.

Envisioning products through the lens of gaming is truly an area where business leaders should “learn the rules of the game” then “play better than anyone else.” The prize for the winners is enormous.

To that end, I am excited to have joined the Scale VP team as an Executive-in-Residence. I look forward to helping both portfolio and prospective companies in mobile and consumer Internet, harness the power of effective game mechanics to accelerate virality, engagement, retention, and monetization… and ultimately create an epic win.

At ScaleVP, we love spending time with entrepreneurs. In particular, we have benefited from bringing entrepreneurs into our offices to spend time with us as executives- in-residence. What are we looking for when we do this? We want relevant and fresh insight into markets that are growing differentially. It’s also important to do that with people we know and whose opinion we trust. That is why we are happy to announce that Eric Tilenius, former Zynga GM and long-time friend of ScaleVP, has joined us as an Executive-in-Residence. Eric has been responsible for growing some of the biggest social games and as an experienced executive, complements our approach to helping companies scale and grow into long-term companies that matter. While here, Eric will focus on sourcing and evaluating new companies within our core focus of mobile and Internet; he’ll also bring his scaling expertise to our existing portfolio companies.

We are thrilled to have Eric on board as the latest in strong series of EIR’s including Zack Urlocker, Pam Smith and Daphne Carmeli – all of whom left a legacy with us and are part of our network. Working with experienced executives within our core sectors has been a successful way to deepen our investing and scaling expertise. Eric’s past mobile and Internet experience will only further bolster the success we have seen with BeachMint, Everyday Health and Glu Mobile to name a few. Welcome, Eric, to the team…we will stay tuned for more from you.

Author’s Note: A version of this article first appeared in Inc.

This is not what you want to hear from your largest customer: “If you can’t handle our business worldwide, then we will have to look at other providers.”

That’s exactly what one of our portfolio companies heard, from its biggest client, three years ago. The portfolio company provided internet marketing services to US companies. When customers started expanding into Europe and Asia, the company’s network of overseas contractors was quickly stretched thin. That’s when the company (which we’ll call PortCo, for portfolio company) got the ultimatum: You have twelve months to build a real presence in all the geographies we want to serve. If you can’t do it? We love you, but you’re out.

Investors and managers talk about growth as an option, but often, it’s a necessity. This is especially true for companies that sell to businesses rather than to consumers. Almost every large business on the planet has a couple of key imperatives right now. Going global is one. Reducing the number of vendors they use is another. The combination means that if you become a key vendor for a U.S.-based company, you have to expect that, as they go global, you will be expected to follow. A company can have multiple suppliers of office supplies worldwide, because office supplies are not strategic (sorry, Staples). But if the product you are selling is strategic to your customers and makes a difference to their business, they are going to want to roll it out worldwide. You have to be there.

Not that it’s easy. In the year before PortCo’s largest customer laid down the law, 98% of their revenue was from the U.S. and rest came from Canada. Customers had been asking them to expand, but frankly, they didn’t listen. The money wasn’t there. They were busy. Now, there wasn’t any choice didn’t have a choice. And if you haven’t been listening closely enough, you may not have one either. Here’s what our company did:

1. They held a frank discussion with our customers, and they listened. PortCo sat down with their customers and tried to get a sense of what they wanted, and what they could provide. This was key. The customers knew PortCo was taking their concerns seriously. And it allowed PortCo to set up a moral commitment, if not a contractual one. If they invested in Europe, the customers would invest in them.
2. They raised money and bought a company. They considered building an overseas division from scratch, but they were lucky: There was already a local company that had been doing a great job reselling their product.
3. Other entrepreneurs may be able to take some baby steps toward going overseas if their customers aren’t pressing them as hard as PortCo’s were. A distribution agreement with the right partner can get you in front of customers. An outright partnership – again, carefully vetted – can also be a good place to start. But if your customers want a single worldwide vendor, these arrangements are really just placeholders.
4. They adapted to a new way of doing business. Sometimes they do things differently in Europe, and that’s okay. Other times, PortCo had to have the conviction that their way of doing business was just as valid in Europe as in the U.S., and they pushed their new colleagues to do it their way. In the U.S., many of their mid-size clients bought over the phone. In Europe, those customers wanted face-to-face interaction. PortCo is now using mostly telesales for this group – but it took a year of experimenting to make it happen.
5. One of their founders relocated. Integrating the acquired company was made enormously easier by having a founder live overseas as part of the new team for the first year. You cannot afford to have a team 3,000 miles away feel they are second-class citizens.

International revenues are now 30% of PortCo’s total, and represent the fastest-growing part of their business. They have offices in Asia and Latin America as well as Europe. More important is what did not occur: They did not lose key U.S. customers to a competitor or a subcontractor. That’s something that could easily have happened did they not realize that growth was not a choice, but an imperative.

Sometimes a year flies by almost without notice….that hasn’t been the case for me. Over the last 12 months, I have had the opportunity to tackle the problems in the IPO markets alongside passionate entrepreneurs, learn from peers throughout the ecosystem about the workings of the securities markets, and see a result that I couldn’t have imagined in my wildest dreams – a bi-partisan bill, called the JOBS Act, passed today in Congress and now headed for the President’s desk for signature.

A year ago on March 23rd, the Treasury Department held a conference called the “Access to Capital for Small Companies.” On the topic of access to public capital, my panel identified the decline in IPOs as a long term issue for the US economy. Anyone familiar with the data knows that IPOs have been dropping steadily since the late 1990’s. Why should we or anyone in Washington care? Because emerging growth companies create jobs. A report by IHS Global Insight shows that 92% of a company’s growth occurs post IPO. The proceeds for an initial public offering are used to fuel continued growth as a number of CEOs noted in an August survey, and yet an IPO is difficult to achieve.

Since there is no single regulatory culprit that created the problem, my recommendation last March was for a diverse group to work together to develop solutions that were pragmatic but meaningful – and with that, the IPO Task Force was born. We included CEOs, public and private investors, former regulators and accountants. Each of us had to leave our preconceived notions at the door. Any solution had to work for the whole ecosystem and particularly for those who make the market – the institutional buyers of IPO stocks. The goal was to increase the rewards that come from more job-creating IPOs without taking on undue risk in the markets as Bob Samuelson eloquently points out in his recent article.

The resulting work – called “Rebuilding the IPO On-Ramp” calls for changes that were meaningful but tailored. It provides a short term “on ramp” to the full regulatory scheme that the very largest companies must comply with. It phases in a small number of expensive regulations that were acceptable to the buyers of IPO stocks. Emerging growth companies still have to comply with most regulations right away, but should expect to see a 30-50% drop in the $2.5M average cost of an IPO.

We also tackled the problem of modernizing investor communications. The securities regulations designed in the 1930s focused on investor transparency, but had been amended over time in response to various abuses, with the unintended result of making IPOs incredibly opaque – not a good outcome for the buyer or the seller of these securities. With the goal of making tailored recommendations, however, we carefully left all the core investor safeguards in place like the Global Settlement, Reg AC and the FINRA codes of conduct.

The result is a something that makes it more feasible for entrepreneurs to build a company and take it public as Jon Callaghan points out. At the same time, it allows public investors to achieve the investment returns they earned when companies such as Apple, Cisco and Intel went public as Josh Kopelman discusses.

The best thing about this past year, however, has been the chance to return something to the entrepreneurs who work so hard to drive the innovation engine we all benefit from. At Scale Venture Partners, we believe that the best thing about our job is to be able to work with smart, passionate entrepreneurs, who are willing to take the risks to potentially build something big. The comments from entrepreneurs have been overwhelmingly supportive, like what we heard from Brian Gentile, the CEO of Jaspersoft.

As I have told people I’ve met with in Washington during the last year, it isn’t only the pre-IPO companies who are encouraged by the JOBS Act. Since it includes a set of changes that improve the access to capital throughout a start-up’s life, it is promising to even the earliest-stage entrepreneurs as you can see by the >5,000 entrepreneurs who signed the Angel List petition a week ago.

Will there be a tripling of IPOs next year? No, and that is probably a good thing. Will it mean that more entrepreneurs with good ideas decide to go for it, and try to build the next Google or Starbucks? You bet… and that is a good use of a year.

Kate with Scott Dorsey, CEO of ExactTarget and Josh James, former CEO of Omniture at the White House for the signing of the JOBS Act bill plus subsequent WSJ coverage on Kate’s efforts on the JOBS Act.

President Obama signing the JOBS Act bill.

The Senate is considering the JOBS bill this week. The bill looks to make it easier for companies to go public by reducing some of the cost and complexity involved in the IPO process. By making it easier to go public, the idea is that companies will go public earlier, and hopefully grow more quickly. Senate Democrats have concerns, and are afraid this represents a rollback of legislation designed to “stop the next Enron”. They also see advocates of this bill, including venture capitalists, as looking to profit by taking companies public and selling them off to unsuspecting investors at inflated prices.

On much of this discussion there is little new to say.

All parties would agree, because the facts prove it, that small businesses do not provide job growth, and neither does “Big Business”. What provides job growth are small businesses that grow fast to become big businesses. Apple, Cisco, Genetech and Home Depot, all started small, grew quickly, and went public. They and companies like them have provided all the job growth in the US for the last twenty years.

All parties would agree, because the facts prove it, that despite a recent slight upturn, there have been less IPO’s in the most recent decade then the prior one. I would then assert that given less of the one thing that used to create all the jobs, it is no surprise that there has been less job growth in the past decade, than in the prior one.

All parties would agree that regulations such as Sarbanes Oxley imposed cost and delay on small companies looking to go public but also mean that companies that do go public are on average longer established and have better systems and controls.

The substance of the debate, and where the parties clearly do not agree, is whether the above trade off is worth it. Is it worth it to have less IPO’s and have them happen later, if in return, those IPO’s that do take place, are less risky? I don’t think so.

The Sarbanes Oxley Act tries to protect investors against the kind of corporate fraud that sank Enron, Tyco and Worldcom. It does this by requiring a layer of cost and compliance that is manageable for a large Fortune 1000 company but can be easily 10% of the profits of a typical high growth IPO. The debate ignores the fact that none of the poster children for corporate fraud were the type of early stage high growth companies that would be the beneficiaries of the reduced regulation in the JOBS Act.

High growth early stage IPO’s absolutely are risky investments, but not because they have or do not have Sarbanes Oxley (SOX) type controls. They are risky because high growth companies are intrinsically risky and for every Apple that works, there are five apples that didn’t. The most significant impact of SOX on smaller companies in the last ten years, is that boards have decided to “wait a year or two” before going public so as to be bigger and more established before exposing the company and the board to the costs and risks of being a public company.

The result for public investors has been they have had less opportunity to lose money in risky high growth start ups in the last ten years. To that extent the regulatory mission has succeeded. The bad news is public investors have made less money too. Cisco, Apple and Yahoo all went public relatively early in their lives, and made public investors great returns, more than enough to cover losses incurred on less successful companies that went public at the same time. By contrast, Facebook is going public with $ 4 Bn in revenues and valued at $50 Bn plus. The upside has gone to the insiders not the public investors.

This illustrates the least understood part of this debate. When IPOs are scarce, private investors end up make more money not less, although the returns take longer. In general the current SOX regime has been a negative for early stage investors – by making exits take longer – and a positive for the much larger group of late stage financial investors, – by eliminating competition from the IPO market. This is precisely the wrong result from a policy perspective.

Public investors know this. Large mutual funds the work for the average investor have started to “reach down” into pre public rounds because they know that is where they can make the return that their customers, individuals saving for retirement, want and need. Do opponents of the bill recognize that they have put mutual fund managers between a rock and a hard place? They have to find high growth companies but unless the system is fixed, they can only find them in the private market, with much less investor protection.

It is clear that the trend to delayed IPO’s has cost the investing public in terms of lost investment profits. It is harder to prove the direct impact of SOX and the dearth of IPO’s on jobs. However I think the burden of proof on this issue is on the other side. When you can point to a process (IPO’s + high growth companies) that has created almost all the job growth in the US since the 1980’s and Congress passes a law that visibly impedes that process, and then job growth subsequently stalls, surely the burden of proof is on the other side? How can the AFL-CIO even think about voting for another jobs decade like the last one ?

All regulations, including the ones that the JOBS bill is looking to reduce, have both costs and benefits. For large public companies I believe SOX compliance is a manageable cost and a worthwhile obligation. For high growth IPO’s the benefits of SOX are light and the costs, have been significant. IPO’s have been reduced, job growth has been lower, public shareholders have been shortchanged and the benefits of the American economy have once again been channeled to a smaller group of investors who can work the system. It is time to change the law.

Last week saw overwhelming bipartisan support from the House of Representatives for the JOBS Act, a bill that would help small businesses raise capital. The bill passed 390-23 in the House and is now being debated in the Senate for a vote tomorrow. Unfortunately, the momentum coming out of the House is slowing as activists and union leaders rally support against the bill.

The JOBS Act includes two major elements:

1. It would make it less onerous for companies with less than $1 billion in revenue to go public, and
2. It would allow companies to raise up to $2 million in capital by soliciting small investments from many individuals (crowd-funding).

Both of these reforms are critical to encourage more capital to flow into young, innovative companies. Importantly, the JOBS Act accomplishes this within the context of the current regulatory structure, not outside it. The fundamental premise of the JOBS Act, as Harvard Business School professor, Bill Sahlman, has explained, is that the benefit of having more new companies formed and able to go public outweighs the potential costs of isolated bad behavior.

Please get involved and communicate your support for the JOBS Act today. The National Venture Capital Association has a page which allows you to sign a letter to the Senator of one of ten states where a senator’s vote could make a difference in the bill’s outcome.

Author’s Note: A version of this article first appeared in Inc.

It’s hard enough to find the right price for your product or service — without everyone lying to you about it.

How hard a game is pricing? Learn from my example.

Many years ago, I ran a manufacturing company that supplied a number of large U.K. and U.S. retailers. Our customers beat us up all the time on pricing. Sometimes I gave them breaks, mostly out of fear. Eventually, in the recession of the early 90s, I had to close the business. A year later, I ran into the buyer for our largest customer. She told me how sorry she had been to see us close, because she had been unable to find a product similar to ours at a similar price. All of her alternatives were much higher-priced.

She was trying to be nice, but I went home that day knowing I was a fool. By allowing customers to push me around on price, I had been leaving money on the table–money that might have kept the business alive. I had priced myself into an early grave.

If you don’t want to join me there, you need to take a hard, hard look at pricing. Pricing is where the rubber meets the road – where your internal costs smack up against customers’ willingness to pay. Marketers love to talk about the four Ps: product, pricing, promotion and placement. That makes price one of four elements in the overall mix. That’s a fine way to think about marketing, but not about pricing.

If your business needs to make a profit –and most do– the price per unit sold times the number of units sold has to be greater than the total costs, fixed and variable, of running that business. That’s it. In this simplified but realistic view of the world, the CEO knows a good deal about his or her cost structure but much less about the real customer demand. The trick is to turn the dial on pricing to see if you can make the inside and outside realities line up.

The inside reality

This is the actual cost structure of your business. Sure, you know how much it costs to provide your goods or services. That’s just the start. To really understand your cost structure, ask yourself these questions:

1. How much variety is there between customers in terms of what they cost you? I bet some of your customers are cost hogs and others are wildly profitable.
2. How do your costs vary with volume? Once you’re up and running, how much does it cost to make an additional unit? For a software company, each incremental copy of a piece of software costs a negligible amount to produce. Or does the 10,000th widget cost you almost as much to make as the first one? That’s the problem auto manufacturers often have to deal with.

Once two or more of your direct competitors have made a big improvement in costs, you have to match them or you are no longer viable. Price can cure many ills, but it is the rare company that can use price to cover for an uncompetitive cost structure.

The outside reality

Now you need to do a 180-degree turn and forget entirely about your cost structure. Instead, step into the customer’s shoes. What is your product worth to them? The customer doesn’t know what it costs you to make a product, doesn’t need to know, and sometimes doesn’t even care. What matters is the perceived value of your product and how much someone is willing to pay for it. More precisely, you want to figure out how many customers you’ll lose for every percentage point increase in your price.

It sounds easy enough to find this out, but unfortunately everyone you are dealing with will want to lie to you. Science fiction writer Robert Heinlein once wrote that everyone lies about sex. Well, in business, everyone lies about price. Your customers want to pay as little as possible, so they are not going to tell you what they will really pay. If your sales team is paid on commission, they see lower prices as a way to get deals closed. They don’t suffer (at least not right away) if the business loses money. They too will lie.

Your only option is to continually push the limits on price, testing the customer and monitoring the result. You have to find out what the real “walk away” is. If you’re selling to consumers, there are a myriad of ways to do this, using marketing, A/B testing, focus groups, graduated pricing schemes and even Groupons. If you’re selling to businesses, you have to be willing to push the pricing to the point that you will indeed lose some deals. And when you do lose a deal, you need to understand the real reason why you lost it, and not just automatically chalk up the outcome to price.

Finally, sometimes there is pricing version of the Hail Mary pass. If you have a business that is losing money, then the last step before giving up should always be to raise prices. This is the no-lose, last-ditch play. If it works, then you know your pricing was naïve, and now you’ve fixed it. If it doesn’t work, then you know that the world does not value your product enough to pay the costs required to produce it. You don’t have a business, but at least you know why. Don’t wait until it is too late.

Trends that grow exponentially for an extended period of time are always important. One trend that we have been following is the rapid increase in the number of API’s (application programmer interfaces) over the past decade. It took eight years to reach the first 1,000 API’s. The web is now adding 1,000 API’s every four months! It is likely that the next 1,000 API’s will be added in under three months.

What is an API?

An API is a description of the interface that two software components use to talk to each other. As browser applications have become more dynamic and interactive, the need for more complex interactions has grown. In most cases, API’s define the connective tissue of the web and facilitate the exchange of data between the various components of an application.

Like many trends, the initial euphoria around ‘mashups’ (applications comprising a variety of web services) flared up in 2008 but then petered out. Enthusiasm was dampened, in part, by unresolved technology issues of whether to use REST or SOAP for integration points between websites, whether the response should be formatted in XML or JSON, and a host of other arcane issues.

By 2010 web engineers had finally converged on RESTful architectures as the preferred method of integration. As we enter 2012, the simplicity of JSON and its natural fit with ubiquitous client-side Javascript has led to it becoming the widely accepted response format. Over 3/4 of new API’s now use a combination of REST and JSON. Standardization, as always, is a precursor to adoption.

Implications

Developers have been quick to realize the power of API’s. Instashirt provides a good example: by connecting Instagram’s photo API to Zazzle’s custom product design API, users can order T-shirts emblazoned with their favorite Instagram photos. By allowing unaffiliated developers access to their API, both Zazzle and Instagram have benefited.

Yesterday, Nike announced that it is opening an API for NikeFuel, the metric for tracking physical activity. The API will allow third-party music developers to add NikeFuel features into their apps. And now you can share your workouts with the mobile app, Path via their API. Will all these be successful? It’s hard to tell but allowing other developers to experiment with and add value to the FuelBand is bound to lead to success that the original designers probably never envisioned.

A well-designed, accessible API can be a tremendous point of leverage for startups. By harnessing the passion of developers startups can rapidly add value for their customers. This has become even more important in a post-web world where services are increasingly accessed via a multitude of tablets and smart phones. Mobile applications have been the fuel on the API fire. Looking at the Zappos metrics, it’s clear that mobile devices have been a significant component (40%) of their API traffic.

The needs of mobile developers differ in some important ways, though. Mobile applications tend to make many more requests but with a smaller data payload. As these needs collide with API’s designed for browser-based access, API’s will have to become more complex, allowing developers to filter data more efficiently on the server.

API analytics will eventually give enterprises an important view of their data. While web analytics gave enterprises insight into user behavior, API analytics will allow them to intersect their users’ behavior with the value of their own data. Organizations will gradually begin to distinguish between strategic and incidental data. Netflix, for instance, likely values their database of user movie ratings far higher than their database of actors and movie titles. The former will remain strategic to Netflix but the latter will be open-sourced.

Tom Mornini of Engine Yard described the significance of API’s as the final realization of the dream of reusable code. It may be that open source data is an even bigger side effect.

ScaleVP invests across a broad spectrum of a company’s lifecycle, and sometimes it’s hard to explain what we’re looking for within “in-revenue tech deals in our sectors.” We co-led an investment in BeachMint in June 2011, and that team just earned a new round from Accel, Goldman Sachs, New World, and others in January of this year. Our original investment is a great example of how we work.

First, we focused on emerging ecommerce opportunities in the first half of 2011. We thought that with major product categories coming online at scale, there would be numerous new companies and categories spawned in the next generation of ecommerce. ScaleVP spent months meeting startups and incumbents, companies with mature business models and hypothesized ones, in narrow categories and broad horizontal markets. We studied financial and market share trends. Internet Retailer is a great resource as was our network of industry contacts at eBay, Amazon, Wal*Mart, Guthy-Renker, and in BeachMint’s case, Columbia House and Bertelsman’s subscription businesses.

Throughout our research, a few themes emerged that we wanted to tap into, which are described in more detail here.

1. Curation. The value of Web 1.0 e-commerce was availability. Amazon won by having tremendous choice. In many categories, the choice is overwhelming. See The Paradox of Choice
2. Subscription business models. This is the part of BeachMint’s story that matured rapidly in the six months between the two rounds.

Of course, we also were keen to find entrepreneurs who were right for the job, and Josh Berman and Diego Berdakin at BeachMint bring a unique combo of access to both celebrity and technical talent. Who else has Joe Green and Joe Simpson on speed-dial?

We invested in BeachMint after their seventh month of revenue. To us, that is early in the “scaling” phase, just our sweet spot when those seven months provide a strong trend. BeachMint showed consistent progress in their metrics. We cared not just about “up and to the right” total revenue, but more about the underlying drivers of long term growth: cost of customer acquisition (CPA) and lifetime value (LTV). Both those were headed sharply in the right direction. Our analysis caused us to pour over their detailed monthly results, and to compare them to industry benchmarks, see this related post. But to really see the LTV, you need more time; since BeachMint sells a subscription; the certainty of “lifetime” value grows every month. By December 2011, they had twice as much information about the value of a subscriber as they did when ScaleVP first invested. That knowledge became incredibly valuable in attracting later stage funding, because the marketing spend and company scaling became much less risky. In a matter of six months, BeachMint jumped from being early in revenue to being a predictable later stage grower.

BeachMint proved another big upside between the two rounds, that they could scale multiple categories. At the time we invested, JewelMint was their only live site, but they had plenty of product in the hopper. They launched StyleMint three months after we invested, then later that fall launched ShoeMint and BeautyMint within a couple of weeks. These new sites launched with strong metrics, leveraging the expertise they’d built on JewelMint.

Josh and Diego not only attracted celebrity talent to build the new “Mints”, they dramatically built out the management team in those six months. New people joined to analyze results, acquire consumers, seek out and secure new “Mints,” build the technology and service the growing customer base. ScaleVP typically invests when key members of management are still to come, but we need to see that the leadership team is going to be a magnet for quality talent across disciplines.

BeachMint’s round ScaleVP led had classic hallmarks of our investment strategy and process:

1. We had a “prepared mind” on the space before working on the investment. (Great term from Accel.)
2. We’d sought out the team early, before they were raising a round, and had got to know them and their business outside of the intensive investment process.
3. We knew what data we needed to make an investment decision, were time efficient for BeachMint, and asked them questions they were just asking themselves. Those analyses later became
   standard reports.

ScaleVP is delighted to see BeachMint thrive, along with other portfolio companies we selected through similar processes, including Box, Axcient and uTest. Those founding teams have what it takes to scale.