HOW TO BUILD A BILLION DOLLAR APP Discover the secrets of the most successful entrepreneurs of our time George Berkowski FREE EXTRACT – NOT FOR SALE OR REPRODUCTION This is an uncorrected book extract made available in confidence to selected persons for specific review purpose and is not for sale or other distribution. Anyone selling, reproducing or distributing this sampler will be responsible for any resultant claims relating to any alleged omissions, errors, libel, breach of copyright, privacy rights or otherwise. Any copying, reprinting, sale or other unauthorised distribution or use of this advance reading copy without the consent of the publisher will be a direct infringement of the publisher’s exclusive rights and those involved liable in law accordingly. Contents Part I: Think Big 1 The View from the Inside 2 Mobile Genetics 3 A Billion-Dollar Idea Part II: The Journey 4 It’s Bloody Hard Step 1: The Million-Dollar App: Building a Founding Team, Validating Your Product and Raising Seed Funding 5 Let’s Get Started 6 Solving the Identity Crisis 7 Getting Lean and Mean 8 App Version 0.1 9 Metrics to Live and Die By 10 Let’s Get Some Users 11 Is Your App Ready for Investment? 12 How Much is Your App Worth and How Much Money Should You Raise? Step 2: The Ten-Million-Dollar App: Achieving Product–Market Fit and Raising Series A Funding 13 HMS President 14 Make Something People Love 15 New and Improved Version 1.0 16 The Metrics of Success 17 Getting Your Growth On 18 Dollars in the Door 19 Seducing Venture Capital Step 3: The Hundred-Million-Dollar App: Tuning Your Revenue Engine, Growing Users and Raising Series B Funding 20 A Colorful Lesson 21 Tuning and Humming 22 Getting Shedloads of Users 23 Revenue-Engine Mechanics 24 Keeping Users Coming Back 25 International Growth 26 Growth is a Bitch 27 Money for Scale Step 4: The Five-Hundred-Million-Dollar App: Scaling Your Business and Raising Series C Funding 28 Shifting Up a Gear 29 Big Hitters 30 Scaling Marketing 31 Killer Product Expansion 32 Scaling Product Development and Engineering 33 Scaling People 34 Scaling Process 373 35 Financing at a Big Valuation 383 Step 5: The Billion-Dollar App: The Promised Land 36 Unicorns do Exist 393 37 People at a Billion-Dollar Scale 395 38 Advice from Billion-Dollar CEOs 406 39 Getting Acquired 414 Extract PART I: Think Big Chapter 1 The View from the Inside ‘Until 1916 we didn’t even have any billionaires’ #BILLIONDOLLARAPP Why This Book Is Different This book will help you get inside the head of people who have built billion-dollar apps. It will help you to see the world as they see it – and take you on the journeys that they have been through. It will share my insider’s view of this world with you – along with the interviews and conversations I have been so lucky to have with these amazing ‘mobile’ entrepreneurs. As an entrepreneur – and an engineer – I want to tell you the way it really is. I want to talk about what happens behind the scenes and behind the computer screens. I’ve read enough stories about the glamorous side of technology startups, where billionaires are created overnight as if by magic – but, to hit billion-dollar heights, there is a huge amount that goes on behind the scenes that your ultimate success will depend on. I have been lucky enough to work with and meet some of the most talented, passionate – and lucky – entrepreneurs out there. I have also had the chance to work with some of the most experienced mobile-technology investors in the world – including Accel Partners, Union Square Ventures, Atomico, Index Ventures and Wellington Partners. This book is a distillation of countless late nights, years of hard work and a great adventure. Whether you’re a newcomer to mobile technology, a gifted developer, seasoned entrepreneur or just intrigued by what it takes to build a billion-dollar company in this day and age, this book is for you. It’s not just a theory My bookshelves are piled high with books brimming with great advice about how to build a great business, about how to cross chasms and be an effective executive. Biographies of Apple cofounder Steve Jobs, investor Warren Buffett, Google cofounder Larry Page, Microsoft cofounder Bill Gates and businesswoman and Facebook chief operating officer Sheryl Sandberg peer down over my desk. But, as I reread these books, I keep finding business strategies that no longer work, or principles that, although only a few years old, seem to be already outdated in the fast-moving world of mobile technology. Today, the most successful new technology businesses are rewriting the rules in real time. A new wave of companies is rocketing to success in mobile technology, and a new type of entrepreneur is driving them towards billion-dollar valuations faster than at any point in history. I’ve read numerous accounts of how to build a world class technology company – but no one has yet attempted to package practical, actionable advice about how to build an extraordinary, billion-dollar, mobile-centric business into a single book. Over the last few years building up my own mobile startups, I yearned for such a resource, something that would aggregate all the best lessons, and pitfalls, of fast-growth mobile startups. I found nothing. But I did start collecting all the information I could. I asked for introductions to other mobile startups, and I talked to and interviewed countless people. That formed my own personal guide about how to build a mobile company today. How to Build a Billion-Dollar App is not based on theories. It is not an academic research paper. It isn’t a collage of pithy business stories crafted by a journalist. And it is certainly not a guide that promises success and happiness for a four-hour-per-week commitment. It is about reality. It is based on hard data. The advice and information is based on what it took for a select group of entrepreneurs – a group of people not unlike you – with varied backgrounds and experience took to transform their ideas in global, billion-dollar companies in just a few short years. Combined with my own experiences at Hailo, this book will also capture the very best thinking, experience, insight – and mistakes – from that select group of entrepreneurs who have followed similar billion-dollar paths in the mobile world. My journey building Hailo has given me amazing access to some incredible people and has been indispensible in guiding the decisions that will open the gates to the Billion-Dollar App Club. Now I want to share that information with you. Inside information In writing this book, I wanted to draw on advice and insights from only the best companies and the best entrepreneurs. While advice from any source can be useful, the best and most powerful advice is from those people who have actually achieved billion-dollar success in the mobile-app world. But getting meaningful inside information from entrepreneurs is exceedingly difficult. There are two main reasons for this. The first is that the people building great mobile businesses today are spending every moment of their time doing just that, leaving no time for anything else. The second is that many great entrepreneurs (but certainly not all) are rather coy about sharing too much information about their businesses in case they divulge something that might help their competition gain the upper hand. Personally, I think there is a lot more insight to be gained by actively sharing and soliciting advice than protecting any individual insights I’ve come across. It’s hard enough building an average company, let alone a billion-dollar one. What I’ve sought to understand – and distil into this book – is what differentiates the truly great companies from run-of-the-mill, good companies. I focus on the most spectacularly successful apps – those that have achieved billion-dollar exits, or have undisputed valuations at the billion-dollar level. If you’re an Android or iPhone user then you’ll already be an avid user of some or even all of them: WhatsApp (the messaging app), Viber (another messaging app), Square (the payments service), Angry Birds (the now ubiquitous game), Uber (your on-demand chauffeur), Instagram (the social-photography app), Waze (the mapping and social-traffic app), Clash of Clans (the ridiculously popular game from Super Cell), Candy Crush (the ‘sweet’ game from King), Snapchat (the messaging app where your messages disappear after seconds), Flipboard (the app-based social magazine) and Tango (yet another messaging app). This list is growing all the time, so for the most up-to-date information, visit mybilliondollarapp.com. While their missions, businesses and stories are very different, they do share a remarkable number of similarities that have propelled them to great success. In this book I focus primarily on mobile-first companies – ones that have pure mobile DNA. Why? Because being mobile-centric is a different and entirely new way of thinking – and is possibly one of the biggest business opportunities in history. That being said, there are a number of other billion-dollar technology startups that began as websites or even desktop applications. There’s clearly a huge amount to learn from them, not only from the way that they have adapted to the mobile world, but also because they are great examples of modern companies that have grown from ideas to billion-dollar powerhouses by developing better products, great leadership, constant innovation – and, above all, superb execution. Companies such as Google, Facebook, Skype, PayPal, eBay, Amazon, Pandora, Dropbox, Box, Groupon and Evernote fall into this category. Concrete steps The world of mobile technology is exciting – and daunting. The mobile landscape is constantly changing: every week seems to herald the arrival of a new mobile device – from smartphones to smart watches, to tablets, to phablets (that’s a combination of phone and tablet). We’re also bombarded with new flavours of mobile software – Android’s candy-store options include KitKat, Jelly Bean and Froyo. Apple’s iOS software is yet different and based on numbers – iOS 5, iOS 6 – and the latest one (at the time of writing, anyway), iOS 7, seems to adopt a rather candy-coloured colour scheme as well. It’s all a bit much to keep track of. No need to worry, though. I’ll lead you through all the things you need to know. Part 1 starts by exploring what has caused technology to become so mobile so quickly, and why the biggest, most exciting opportunities in commerce, communications and gaming are happening on mobile apps. I’ll look at why this shift was inevitable – and the social, cultural and psychological impacts it will have. It will demystify mobile technology so that you can grasp why these changes are happening – and be in a better position to anticipate what the near future will look like. Part 1 will also consider what it means – and takes – to think big. Entrepreneurs don’t trip over and fall into billion-dollar business: they see big problems, very big problems that frustrate lots of people, and then create elegant solutions. They do this through a combination of disruptive thinking, solid execution and management of complexity. These solutions are the basis of businesses with huge potential. This section will give you the tools you need to validate whether your idea has billion-dollar potential (and how to adjust it if it falls short). Part II will guide you through the journey of building a billion-dollar app. There are five key lifecycle steps. The steps map to challenges that need to be met and solved to create a great product, a great team, a great business model and a great company overall. I loosely align these steps with valuations and funding rounds to help you along the journey as, in its broadest sense, the model I’ve used reflects how venture capitalists have been looking at technology companies for the last decade. The model I’ve used is not meant to be perfect – or definitive – because the trajectory of every company will be different. However, it is meant to provide clarity and structure – and distil the key challenges you will meet. There is no one-size-fits-all approach in the world of mobile startups, but, by following, or at least being aware of, the steps mapped out at each stage, you will make sure that all the foundations necessary for building a great, billion-dollar company have been addressed. Let’s look at the steps in more detail: STEP 1: THE MILLION-DOLLAR APP. Now that you’ve got your head around a billion-dollar idea, how do you get all the basics into place? I’ll walk through defining and designing the app you’re going to build, finding a cofounder and core team and thinking about how to raise the funding you need to get to the next stage. STEP 2: THE TEN-MILLION-DOLLAR APP. Your top priority is creating an app that is going to wow people. This is when you focus manically on building the best product for the right audience – something called product–market fit. This is a tough stage, but, once you have created an app that people are happy to pay for, your business will take off. STEP 3: THE HUNDRED-MILLION-DOLLAR APP. Now that you have product–market fit, it’s all about attracting users, and refining your business model to ensure you’re a proper, profitable business. It’s also time to get a proper company structure in place – including seasoned management – as your business grows. STEP 4: THE FIVE-HUNDRED-MILLION-DOLLAR APP. Armed with a great app and a reliable way to make money, how do you grow your company quickly and profitably? How do you keep users coming back? And how do you attract users from the four corners of the globe? This stage is all about scaling your business. STEP 5: THE BILLION-DOLLAR APP. The Promised Land. I’ll talk about exits and acquisitions. I’ll also talk about how it doesn’t get any easier – in fact, now that you’re at the top, you’re a target. And retaining pole position is a different game entirely. I’ll also talk about how every single path to a billion-dollar app is different. It’s a Really Big Number Before I tell you something about myself, let’s just look at this monster number that we call a billion. One thing that I find difficult to get my head around is how big a billion really is. It is a modern number. Up until the turn of the last century it was left to the domain of astronomers. Until 1916 we didn’t even have any billionaires – John D. Rockefeller inaugurated the club on 29 September 1916. The world population hit 1 billion in 1804 – that clearly took a while. We hit 2 billion people in 1927, 3 billion in 1960 and the magical 7 billion in 2011. While it took 123 years to double from 1 to 2 billion, it took only 12 years to go from 6 to 7 billion. If you think about 1 billion minutes – well that’s equal to 1,900 years. If we rewind 1 billion minutes we’d be at the height of the Roman Empire. If we think about 1 billion hours – that’s around 114,000 years. At that time we were living in the Stone Age. Our brains function in the billions: we have 100 billion neurons – or the key cells in the brain. And there are at least 100 trillion (i.e. 100 billion multiplied by 1,000) connections between all those cells – called synapses. But let’s have a look at something a little more relevant to our billion-dollar app. At the beginning of 2014 Facebook had 1.23 billion active monthly users, with an astounding 757 million logging in every day. Facebook needs between 180,000 and 200,000 servers (the computers that run their website and apps) to support all those users, according to one professional estimate. Think about what this costs to run. Well, according to one of Facebook’s financial filings, it invested more than $1 billion so far in server hardware alone. But, if you think that number is big, wait for it. Google is spending a few billion dollars – every quarter – on supporting the computers it needs to run all its services. In total it has spent over $21 billion on its data centres. So success is definitely about understanding – and managing – numbers at a billion-dollar scale. Breakfast with three taxi drivers So how was the idea for Hailo born? Well it all started with breakfast on Charlotte Street in London with three taxi drivers. Jay Bregman had previously started eCourier – a courier startup armed with advanced algorithms that decreased the time and cost of deliveries, making the entire process much more efficient. While the company was successful, it couldn’t displace the massive incumbent courier companies. But Jay still had a burning hunger to build a highly successful technology company. Jay knew two things all great entrepreneurs know: first, you need to focus on what you know; second, to build something enormous you need to disrupt and reinvent a service that millions of people around the world use on a daily basis. As eCourier struggled, he focused on figuring out how he might transfer the allocation technology he had developed for eCourier – matching people who wanted to send packages with couriers who could both pick up those packages and deliver them in the most efficient way – to another market. And, most importantly, to a market needing disruption, a good shake-up. After some research, the taxi industry popped up as an interesting candidate. People use taxis all over the world, in big cities and small cities, and, interestingly, 25 cities in the world spend $1 billion or more on taxi fares annually. On top of that, it turned out that taxi drivers were terribly inefficient – spending up to half their time driving empty cabs, searching for fares. Jay cofounded the company with Caspar Woolley (the former chief operating officer at eCourier) and Ron Zeghibe, a seasoned executive with experience in private equity and outdoor advertising. Ron had even taken a company public. And so back to Charlotte Street – and what would turn out to be the genesis of Hailo. Jay, Caspar and Ron were there to meet three entrepreneurial taxi drivers called Terry, Russell and Gary (affectionately known as ‘TRG’), who were trying to get their own business, called TaxiLight, up and running. TaxiLight aimed to match drivers coming in and out of London’s suburbs at the beginning and end of their shifts, with passengers looking for rides in those directions. The strategy was to discount these longer rides and allow the drivers to earn some incremental income, while passing on a good deal to passengers. Jay loved the idea, but even more than that he loved the fact that TRG had already signed up 700 London cabbies who wanted to take part in the programme – despite the fact they had no product or app to offer them. It was at this meeting that Jay presented his idea – one bigger and more ambitious than anything the drivers could have possibly imagined – of a truly global taxi-hailing app. The app would launch in London first, and then it would expand globally. Everyone around the table loved it. Hailo would have six cofounders – three seasoned entrepreneurs and three experienced taxi drivers. The team possessed great collective experience – deep sector expertise, tried and tested technology, years in finance and even a previous working relationship. It was a powerful cofounder mix. For drivers, by drivers What became clear from those very early stages was that having the involvement of drivers at the very core of the business was indispensable. As the Head of Product for Hailo, my role was to figure out what we needed to build – and how to go about building it. I, along with our designer, would work closely with drivers to determine what features should be included in the app, how the pricing should be structured and even the best way to message the drivers. We wanted to create a service that drivers would love. Hailo’s key strategic difference would be its ability to build up a supply of keen drivers well in advance of having any passengers by creating an app that would make drivers’ days better and their work more efficient. The app would provide free traffic information, driver-sourced information about where people are requesting cabs, the ability to securely process credit cards via their smartphones with no additional hardware and comprehensive stats and reporting on the fares they were picking up – all for free. With TRG’s input we started work confident that we were taking the right approach. The core of my role was to understand what drivers really wanted – and how to design that into an app they’d love using every day. I also needed to build a product and engineering team that could actually build a robust mobile platform to support thousands of drivers – and millions of passengers. And I had only a few short months in which to do it. The year 2011 marked another key turning point, before which a mobile-centric solution to the problems of the taxi industry just wasn’t possible. The penetration of smartphones was becoming significant – with broad mainstream adoption. Smartphones were no longer just for early adopters: more and more people owned them. This was the very first wave of BYOI – Bring Your Own Infrastructure. From the onset, we knew that, if we had to buy smartphones for taxi drivers, then our profit margins would be a lot lower – and we’d have to get into the business of maintaining all that hardware. By carefully modelling where smartphone prices were going, we could see that it would be very realistic for Hailo to focus solely on creating the app software – and leave it to drivers to buy their own smartphones. This was a critical decision, as it would allow us to invest more time and money not only developing our software but also focusing more on expanding Hailo to more countries and cities. Had we instead focused on providing the hardware to drivers (as some of our taxi competitors did) we would have burned through a lot more money more quickly, which would have come at the cost of expanding to additional cities. So it was a decision well made. Today this decision has resulted in further benefits for Hailo. In most cities – because of Hailo’s scale – it is able to negotiate great deals on both smartphones and airtime packages on behalf of its drivers. This has actually become a selling point to drivers thinking of joining Hailo, since they can now get better phones, cheaper, and with better packages. It was this focus on building an app that drivers loved which would allow Hailo to get incredible initial traction. And it was extending that same strategy to understand people’s behaviour that would lead us to design a similarly great app for passengers. But ultimately it was about predicting the way smartphones – and the apps on them – would shape daily human behaviour, combined with the massive reach of app store distribution, that would really accelerate Hailo’s journey to becoming a billion-dollar app. Chapter 3 A Billion-Dollar Idea One big reason I wanted to write this book is to encourage people to think big. But I wanted to help you to think big in a structured, realistic way. We can all certainly imagine how we’d spend a billion dollars, but it’s a lot harder to put a plan together about how to realistically generate a billion dollars. There aren’t any guides out there about how to think at a big – a truly huge – scale from the beginning. I’m going to change that. No matter what happens in life, you probably won’t hit your precise goal, but the higher you aim, the higher you are likely to hit. So it makes complete sense to start with the biggest possible vision, so that you stretch yourself from the very onset. Why not shoot for a billion-dollar idea, and then have reality thrust you back to a $500 million one? ‘You will only have one great idea in your life – make it count!’ wrote Eric Jackson in a Forbes article. While I’m not sure if Jackson has ever run a company, he is right: truly great ideas don’t come around that often. So, when your number is called, make sure that you’re so well equipped and prepared that you can really belt it out of the park. That’s the goal of this book – to prepare you for your chance to build a billion-dollar app. Start with Big Problems Any big idea is going to take a while to get there. By definition, if it’s big, and no one has done it before, it’s not going to be 1-2-3, ‘We got it!’ There is going to be a dark period in there, because you don’t know what the key to getting there is. You have to be willing to be in some murky territory, and be prepared to invest, if you really want to do something different.– Evan Williams, founder of Blogger, Twitter and Medium That’s pretty good advice from someone who invented a new format of human communications. During its early days, Twitter was massively criticised because people didn’t understand it. It’s a great example of the intersection of perseverance and luck – but it’s not the best mobile-first example. Let’s dig into the ideas that have borne real mobile-first, billion-dollar apps, and then let’s try to build that into a framework from which similar quality ideas can be built. Jack Dorsey, the cofounder of Twitter and friend of Evan Williams, explains the story of how his mobile app Square came to be. It starts with a friend – glassblower Jim McKelvey – who had a customer interested in buying one of his pieces for $2,000. The buyer then asked whether he accepted credit cards. Unfortunately, Jim didn’t. And as a result he lost the sale. In Dorsey’s mind this generated a huge question: why couldn’t anyone with a smartphone become a card-processing merchant? After all, smartphones had way more processing power than typical credit-card terminals; they also had superior screens and already had mobile Internet connections. The only component missing was the actual card reader. And so the idea for the Square app – along with its cardreader attachment – was born. We’ll investigate Square further later on in the book. Jan Koum was a ten-year Yahoo! veteran. In that time he developed a deep distrust of how ads corrupt the relationship between a company and its users. He believed that advertising was so invasive – and disliked by consumers – that he wanted to build an app that would allow anyone in the world to SMS for close to nothing. Koum wanted to shun advertising entirely, and focus exclusively on utility and user experience. And so he built a simple – but powerful – messaging app called WhatsApp, initially asking users to pay a one-time charge of $0.99 for unlimited text messages (it subsequently changed its pricing and charged that amount per year, as we’ll see later). Within five short years, in early 2014, WhatsApp had 450 million users across just about every country in the world. It was clearly solving a big problem in way that users loved. Facebook acquired them for a brain-melting $19 billion in February 2014. Niklas Hed didn’t so much address a big problem as fill a big hole. When the iPhone arrived and started changing our mobile lives, gaming companies took time to adapt. No one was focused on developing a game tailored for the touch interface of the iPhone. Sure, there were successes such as Tap Tap Revolution (cofounded by Andrew Lacey, a fellow Australian and friend), but the market was lacking something truly novel, international and just plain great. Angry Birds was very specifically designed to scratch that itch. It took advantage of the iPhone as a brand-new gaming platform and became a global phenomenon. Mike McCue and Evan Doll wanted to make content on the Internet more beautiful; they wanted to consume it more as one would a beautiful, visual magazine. When Apple launched the iPad in early 2010, McCue and Doll knew that this was the platform to realise their vision. Everything snapped into place, and they rushed to build a gorgeous social magazine platform: Flipboard. Named iPad App of the Year later in 2010, the app is flipping some 10 billion pages per month, generating big advertising revenues and was valued at $800 million at the end of 2013. Noam Bardin, Ehud Shabtai, Amir Shinar and Samuel Keret were all sick of sitting in traffic. They wanted a real-time, reliable way to report and share traffic information when they were stuck in the middle of it. They created a clever app that allowed users to do just that. Within a few years their app, Waze, amassed 30 million super-engaged users around the world, and developed its own unique mapping technology. Despite the fact that they were making zero revenues, Google acquired the company for a cool $1.1 billion in 2013. Privacy and anonymity have more or less gone out of the window with our increasingly online lives. Evan Spiegel and Bobby Murphy created an app whereby you could share annotated photos with your friends – but, once read, the messages would disappear for ever. The app is called Snapchat. A lot of people dismissed the idea – but then something happened. Teenagers found the idea brilliant. Suddenly they could be themselves, share whatever photos they wanted, and rest assured that each photo would be seen once and then disappear in 10 seconds. In just a couple of years the app attracted millions of users sending hundreds of millions of snaps every day. It’s become so popular that Snapchat turned down acquisition offers of $3 billion from Facebook and Google, according to the Wall Street Journal. We’ll talk more about Snapchat later. All these are great examples of apps that tackled big problems felt by millions of users. They all pinpointed a real need – and then went ahead to address it. While each app started with a single user, they all built large, engaged user bases by focusing on one major issue. What People Love, What People Need One approach to coming up with a big idea is to understand what people love to do, and what people need to do. It’s true that this varies wildly by geography, personality type and a myriad other factors. But, according to Donald Brown, a professor at the University of California, there is actually a common denominator to all human civilisations – a certain set of ‘attributes’ – which makes us fundamentally human. Brown has termed these the ‘human universals’. Let’s use this as a starting point. According to Brown, the human universals ‘comprise those features of culture, society, language, behaviour and psyche for which there are no exception. For those elements, patterns, traits, and institutions that are common to all human cultures worldwide.’ There are 67 universals in the list that are unique to humans: age grading, athletic sports, bodily adornment, calendar, cleanliness training, community organisation, cooking, cooperative labour, cosmology (study of the universe), courtship, dancing, decorative art, divination (predicting the future), division of labour, dream interpretation, education, eschatology (what happens at the end of the world), ethics, ethno-botany (the relationship between humans and plants), etiquette, faith healing, family feasting, fire making, folklore, food taboos, funeral rites, games, gestures, gift giving, government, greetings, hailing taxis (I added this one myself, just to see if you were paying attention), hairstyles, hospitality, housing, hygiene, incest taboos, inheritance rules, joking, kin groups, kinship nomenclature (the system of categorising relatives), language, law, luck superstitions, magic, marriage, mealtimes, medicine, obstetrics, pregnancy usages (childbirth rituals), penal sanctions (punishment of crimes), personal names, population policy, postnatal care, property rights, propitiation of supernatural beings, puberty customs, religious ritual, residence rules, sexual restrictions, soul concepts, status differentiation, surgery, tool making, trade, visiting, weather control, weaving. My point here is that if your idea resonates with a human universal, you will maximise the universal appeal of your app. Solving a ‘universal’ problem creates a much bigger market opportunity than solving a geographically specific, language-related or generally niche issue not shared by a huge number of people. On the flipside, not every human universal maps to a billion-dollar idea. But the list of universals does provide a great checklist, so it’s worth checking to see if you can match apps that correspond to each one. When I was doing this exercise, I came across a fascinating example. I discovered a free app that, despite having more than 129 million downloads5 and massive daily usage numbers, has garnered very little media attention. It is called YouVersion. It’s a free Bible app that offers 600 translations of the Bible in 400 languages. It’s a billion-dollar opportunity that maps directly to the ‘religious ritual’ universal. It doesn’t earn much revenue today, but that just may be a matter of time. A Hundred and Fifty Times a Day We should thank Tomi Ahonen for what he’s done. He publishes an annual Mobile Almanac, and one of the most interesting things he uncovers is precisely what each one of us is doing on our smartphones. According to his research, the average person checks their mobile phone an astounding 150 times per day. Let’s have a look at what those interactions and activities are, and let’s see where the potential billion-dollar ideas exist, or are still waiting to be uncovered. MESSAGING-RELATED, 23 TIMES PER DAY: Messaging is a fiercely competitive space. Everyone from Facebook to Google has a messaging app. But, as a number of players have shown, it is an area ripe for disruption. WhatsApp, Tango and Viber have both built billion-dollar propositions here. Asian apps – such as Line and WeChat – have created massive multi-hundred-million user bases here. And in just a couple of years Snapchat turned messaging on its head – and turned down billion-dollar buyout offers – by making messages more interactive (you can scribble and comment on your photos and then send them to friends and, as we saw earlier, they disappear after 10 seconds – all for free). The takeaway here is that, if the app offers an experience that hits a nerve – a latent psychological or behavioural need (I want to be anonymous with my messages) – then it explodes. If Snapchat can disrupt the market, then clearly so can others. VOICE-CALL-RELATED, 22 TIMES PER DAY: Mobile carriers still carry the vast majority of calls over non-data networks, but plenty of apps have come to eat more of their pie. Skype is a leader in voice calls with its mobile app (200 million active users and $200 million in annual revenue), as is the Viber app, which amassed 300 million active users by early 2014.8 Like Skype, it uses instant messaging and a voice-over-Internet protocol (VOIP). Google has its own Hangouts app, and Apple has its Facetime app built right into the iOS platform. As mobile carriers realise that their future lies in data, they have offered unlimited national calling packages, removing revenue opportunities for apps that want to compete. The majority of the opportunity here is in international voice calls, but that domain has been rich with competition for decades, so the opportunity is no longer clear-cut. What is clear, though, is that voice calls are becoming absorbed into the broader messaging category, with people sending SMSs, chat messages, photos, MMSs, video and audio calls, and even recorded voice messages, interchangeably. CLOCK, 18 TIMES PER DAY: No one has yet innovated on the basic clock in a way that makes money in any serious way. What would make the killer clock app? There is clearly a captive, global audience here. MUSIC PLAYER, 13 TIMES PER DAY: This is a tricky area and there are many opportunities for innovation beyond a straightforward music player. Music lives as a larger ecosystem – from the discovery of good music to the purchase, to the playback and organisation. It’s a very fun space and attracts a lot of attention, but it’s also very competitive for that precise reason. iTunes, Spotify and Pandora have all become billion-dollar leaders in the space, but not without long, gruelling stories to tell. Is there a big, new, fresh opportunity here? Probably. But having to deal with record labels and international licensing agreements is going to be a challenge. GAMING, 12 TIMES PER DAY: Gaming has been one of the most responsive and successful sectors on mobile. It has a long history of working with new and mobile platforms, from consoles to the Nintendo Game Boy, the Sega Game Gear and the Sony PSP, so it was no surprise when the industry jumped on board iPhone so quickly. Angry Birds, Candy Crush, Clash of Clans, and Puzzles and Dragons are all billion-dollar-app franchises. Supercell, the maker of two of these hit games – Clash of Clans and Hay Day – made $892 million in revenue in 2013 and profits of $464 million. There is undoubtedly huge opportunity in app games but, with an increasingly competitive marketplace and gamers with higher standards, it’s still going to be tough to create the new billion-dollar hit. SOCIAL MEDIA, 9 TIMES PER DAY: Currently, this space is dominated by the likes of Facebook, Twitter and newer players such as Pinterest. There are also huge players in Asia, with the likes of the Chinese microblogging site Weibo owning their own markets. Given that the dominant social media have been increasingly integrated into the operating systems at a native level, displacing these guys will be hard. But as new players keep springing up – and blurring the lines between messaging and social media – there is a good chance this will be disrupted. ALARM, 8 TIMES PER DAY: This is a big opportunity. There are lots of alarms apps in the market – and it’s clear we all use at least one of them on a daily basis. One innovation that has appeared in this sector is sleep-related alarm apps, such as Sleep Cycle, which attempt to wake you at the most optimal moment. But no single player seems to be dominating the market at the time of writing, and there is no single must-have app (partially because Apple’s native app is pretty good). Personally, I think there will be a big winner in this space. It won’t be anything obvious and I suspect it will be a very clever mash-up app that takes us all by surprise. CAMERA, 8 TIMES PER DAY: As of early 2014 we’re sharing more than 500 million photos a day. That is on track to double what we shared in 2012 – and that growth is accelerating. Taking photos is universal, and, with more than 5,000 camera-related apps in the App Store alone, the competition is fierce. From the built-in Camera app on iPhone to Camera+ to Instagram, it’s a bit too easy to make a camera app – but this is a huge and fast-changing market. If I were a betting man, I’d bet there’s another billion-dollar app here. NEWS AND ALERTS, 6 TIMES PER DAY: This is another great – and massively fragmented – sector, although you could argue that Flipboard is breaking into this space and has already built a billion-dollar head start on the competition. And, strictly speaking, it’s not just news or alerts, since it is taking a broader magazine approach. There’s also already a mass of other news-reader and news aggregation apps, but none have caught the attention of the public as much as Flipboard. CALENDAR, 5 TIMES PER DAY: I believe someone will launch a billion-dollar calendar app in the near future. Calendars are inherently social, since we do things with colleagues, friends and family all the time. Calendars outline where we want to be at given times, and we expect, and want, them to prompt us with alerts. It’s an indispensable app that attracts a lot of attention and is crying out for disruption! SEARCH, 3 TIMES PER DAY: This refers to actually searching the contents on your smartphone rather than searching the Internet. Trying to compete with a native function that is built into the OS is a big battle and there’s no clear problem to solve here, since the existing solutions are great. And, while I’d love someone to challenge Google at its core business, well, let’s say that’s a pretty tough ask for a new mobile startup! OTHER RANDOM WEB BROWSING, 3 TIMES PER DAY: It’s clear from the data that smartphones are currently highly app-centric for a combination of reasons, ranging from apps’ ability to deliver individual tasks better than a Web browser could to the simplicity and clarity of having a single act best execute a single task. The big question is how this will evolve, and how the next generation of mobile browsers will challenge the current, rather simplistic, app architecture. CHARGING PHONE, 3 TIMES PER DAY: The market for charging solutions and devices has exploded with smartphones. Whether they be simple battery packs or multi-device chargers, solar chargers or even the very cool inductive wireless charging pads (which have yet to catch on in any significant way), there is a clear demand by users to keep their devices full of juice. Given that this is outside the realm of apps (for the near future), I’m not going to focus on it too much. VOICEMAIL, 1 TIME PER DAY: People don’t like checking voicemail – I don’t know anyone who does. As behaviours have changed – triggered by the prevalence and convenience of numerous messaging apps – the relevance of voicemail has diminished. Apple delivered a serious improvement to the voicemail experience with ‘visual voicemail’ (a visual interface that downloads and allows local access to your voicemail messages), whereby an audio file of your message is conveniently downloaded and can be accessed with a single click. Once again, that is integrated into the OS, and took significant effort on Apple’s part to make it a reality (think negotiations with every individual mobile network operator). The last serious attempt at a voicemail startup was Spinvox. Despite blowing through $100 million of venture capital, everything ended in tears when it was discovered that its speech-to-text technology was little more than overworked call-centre employees transcribing the audio messages themselves. Voicemail as we know it is probably not a great opportunity, but the broader messaging arena is where the action is proving to be. OTHER MISCELLANEOUS USES, 10 TIMES PER DAY: This catch-all category represents a good 6 per cent of all interactions with mobile phones. So, while the above opportunities are clear and have attracted lots of competitors, there is still big opportunities around not-yet-invented apps, which have the chance to capture our attention in new and novel ways. Sharing Big As humans, we love to share. It is part of our nature; it’s been ingrained in our psychological makeup. On a practical level, sharing makes sense because we often need the support, skills and insights from others to help us through our day, our jobs and our lives in general. But sharing also just feels good because of the way our brains are wired. According to Harvard University professors Diana Tamir and Jason Mitchell, sharing information about ourselves is intrinsically rewarding and gives us a few squirts of dopamine every time we do it. When coming up with your big idea or big problem to solve, think about whether it is inherently social, or whether it could be made social, thus rendering it a lot more disruptive and a lot more powerful. People love to share rich content – such as photos, news and magazine articles – and this builds very strong network effects. A great example is Instagram. One of the main ways it drove growth from the very first day was by allowing users to simultaneously share their photos on Facebook and Twitter from the moment the photo was taken using the Instagram app. This massively increased the reach of the new app to big social networks – with very compelling photo content. This promotion of the Instagram app on Twitter and Facebook led people to its website to download the app. The success of Flipboard – the social magazine app (see earlier) – is completely off the back of this premise as well. What is disruptive, however, is taking something that was not social and shareable – and reinventing it completely. Let’s take the example of Groupon. When it launched, its premise was simple: if you want to buy a great product at this 50–75 per cent discounted price, you need to get 100 other people to buy it too within a certain timeframe. Suddenly, Groupon created a very selfish – and social – incentive for people to tell others about their sales. Today, more than half of Groupon’s revenues come from its mobile app. And the social component is going strong. Up-and-coming markets such as Asia and the Middle East are sharing a lot more than the UK and the US (11 per cent and 15 per cent respectively) and compared with a global average of 24 per cent. In China about 33 per cent of the population is sharing just about everything online. You can see why we’re seeing massivegrowth and interest. This is more than double the rate of sharingin the United States. Why is this important? It means that bigideas have the ability to spread and take off a lot faster in someparts of the world – and that means very lucrative windows ofopportunity. Disruption Comes in Many Flavours So we’ve already had a lot to think about in terms of getting to a big idea. And, unremarkably, size is not everything that matters. To cut through the noise and capture attention, it’s about being fresh, innovative or, better yet, disruptive. It’s not trying to create something slightly better, with marginal improvements (current apps are well positioned to do that – and will). The key is to have a disruptive idea. A disruptive idea is one that delivers a step change – an idea that is hard for an existing player to copy. This is the wow factor. Wow is going to play a big part in this book, because an idea, a product that wows its audience, is one that can rise to the top and truly stand out. People talk about wow, and people keep using something that wows them. Rethinking how to solve existing problems is how people disrupt. Our stellar apps have been able to disrupt their own markets – and then create their own perfect storms. The press love to paint a picture of serendipity, with stories of an average person who was ‘in the right place at the right time’ and how ‘you too could build a billion-dollar app with $1,000 and no programming skills’. These superficial, romantic treatments rarely capture the true story. The best disruptions appear simple – they are best because they are the simplest to communicate and the simplest to understand by the largest number of people. Mass appeal is a core component of far-reaching disruption. Unsurprisingly, the apps with indisputable billion-dollar status embrace simple propositions. Despite the veneer, simple ideas are rarely simple to execute. Great, disruptive entrepreneurs need to understand the capabilities of the technology available to them, the necessity of building new platforms, how to integrate virality into their products and, perhaps most importantly, the power of timing. Don’t get me wrong: there is almost always an element of luck involved (and often significant opportunity cost). But being an entrepreneur is not for the conservative. Nicholas Nassim Taleb (author of The Black Swan) would question the viability of betting on low-probability, high-impact events, what he calls black-swan events, but that is the business of entrepreneurs: manufacturing opportunities that are rare and complex and ultimately yield huge returns. So let’s take a deep dive into the key disruptions delivered by our billion-dollar apps, and expose the critical factors that you need to take into account. Why hating advertising pays more Jan Koum and Brian Acton both hate advertising. Both were long-time Yahoo! employees who, in 2009, amid the aftermath of the financial crisis, founded a messaging service that aimed to be the biggest cross-platform one in the world. Three years later, they were bigger than Twitter; just five years later Facebook acquired the app for a staggering $19 billion. Jan Koum, WhatsApp CEO, grew the app from 200 million active monthly users to more than 450 million during 2013. That’s the fastest growing company in history; in comparison, after four years Facebook had 145 million users. WhatsApp is a cross-platform smartphone app that lets you send text and picture messages for free, using your data allowance. There are numerous apps and services like this – but WhatsApp is the biggest. As of January 2014, WhatsApp was processing 50 billion messages every single day. That number is more than all the SMS messages sent around the world on a daily basis21 – it’s incredible. What differentiates WhatsApp from the other players is its business model. It does not rely on advertising, nor does it force you to buy virtual goods. Initially it focused on iPhone users and charged a mere $0.99 per download for unlimited use, but the company moved to a $0.99 per-year model in late 2013. When it launched the app on Android, it discovered that those users were not willing to stomach the $0.99 price (more on this later), so it made the app available for free for Android. Even so, the company has hundreds of millions of dollars of recurring revenue still coming in. After ten years working at Yahoo!, Koum developed a deep distrust of how advertising can corrupt the relationship between a company and its users. ‘The user experience would always lose, because you always had to provide a service to the advertiser.’ That’s even more acute on mobile. ‘Cellphones are so personal and private to you that putting an advertisement there is not a good experience,’ he said. Given that we’re using these devices 150 times a day, and given the app’s great success, this argument is clearly valid. And, sure enough, this was a rather amusing discovery on the company’s blog, when it quoted the Brad Pitt character Tyler Durden, from the movie Fight Club, as saying. ‘Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.’ People want a messaging app that is simple, fast and useful. They also want all their friends to be using it. WhatsApp delivers on all those fronts. In an interview with the Wall Street Journal, it is poignant to see Koum focused more on talking about optimising server code to ensure messages are being moved more quickly, more efficiently and more reliably than other hot topics (such as valuations and buyouts). It is impressive that the company still has only around 50 employees in 2014. That is a testament to its clinical focus, and to the calibre of the people it is hiring. Koum points out that WhatsApp has become a key sales proposition for mobile carriers in some countries: people come into stores asking for a new phone, specifically because they want to use WhatsApp. In some markets carriers have even created specific packages that allow users to roam and still use WhatsApp – sending unlimited messages and pictures via the app for just $5. WhatsApp was acquired by Facebook in February 2014 after a fierce bidding war with Google. The $19-billion-price tag represented almost 10 per cent of the market capitalisation of Facebook at the time of the acquisition. Jan Koum’s vision is to put the app on every single smartphone in the world and this goal is definitely one of the reasons that it was such an attractive acquisition for Facebook. WhatsApp is a simple – but very disruptive – company that generates hundreds of millions in annual revenues. It raised only a small amount of funding (for strategic reasons) and has been profitable from the very beginning. As a result it has been able to write its own destiny. Anonymity is worth a lot This is a story about Evan and Bobby. They were students at Stanford University. In April 2011, Evan Spiegel presented an idea for his product-design class: an app ‘where friends could share photos that would disappear – forever – in a matter of seconds’. That app, as we saw earlier, was called Snapchat. It was launched in September 2011 in Evan’s dad’s living room. ‘Everyone said, “That is a terrible idea,”’ Spiegel remembers. ‘Not only is nobody going to use it, they said, but the only people who do will use it for sexting.’ By 28 November 2012, users had shared more than a billion photos on Snapchat. By December 2012 it was being used 30 million times a day, with users sending more than 20 million photos per day. In late 2013 this number reached 350 million per day. The Internet has changed. Spontaneity is now a punishable offence. Instead, ‘People are living with this massive burden of managing a digital version of themselves,’ says Spiegel. ‘It’s taken all of the fun out of communicating. The main reason that people use Snapchat is that the content is so much better. It’s funny to see your friend when they just woke up in the morning.’ And that is how Snapchat disrupted communications. It has made an entire generation – a much younger one – feel liberated again. While the mainstream media continue to struggle with this concept, the app attracts masses of users – and keeps driving eye-popping numbers month after month. You could argue that Snapchat is just a feature. But, goddamn, it’s a great feature! It’s amusing that by June 2013 this company was valued at over $800 million – but that’s because at the time it had 5 million users sending more than 200 million snaps (messages), photos and videos every single day – that’s up 25 per cent from 150 million announced by their CEO in April 2013.That’s ridiculous growth. More recently, they turned down acquisition offers of $3 billion and $4 billion from Facebook and Google respectively. On average, a user uses the Snapchat app 34 times a month. That means by the end of 2013, Snapchat’s 350 million daily snap number matched the number of photos users uploaded to Facebook. In the true spirit of a lean startup, at the end of 2013 the team was still only around 40 people. Snapchat is still a story in progress. But the lessons are clear: it focused on a universal need, messaging, mixed it up with a true innovation, anonymity, and then focused on a great experience and performance. Designed to be touched Angry Birds is one of the most popular games – and brands – in history. It rocketed to billions of downloads, and similar revenues, because of two things: design and touch. The game was the product of Finnish design studio Rovio. The team had been working in gaming for the better part of a decade, making games for other companies, trying their own titles as well, but never making it big. When the iPhone came along their eyes lit up – here was a new platform. That meant a new opportunity. They dreamed of designing a fresh, new type of game that everyone in the world could play. They wanted to exploit the opportunities offered by the big, touch-enabled screen of the iPhone by focusing their user interface on visual, audio and touch elements. They wanted to seduce users with interaction and animation – not with words or text. They wanted to create a game that would resonate with basic human psychology. They took a gamble and wrote Angry Birds specifically for this new amazing mobile platform. A shiny white square Mobile also introduces opportunities for hardware disruption. Smartphones have spawned not only a world of apps, but also an entire ecosystem of accessories, plugins and add-ons. One of the most amazing was created by Jack Dorsey, a cofounder of Twitter, and now the CEO of Square, the payments service. Square, as we saw earlier, was born out of frustration. Given that smartphones have more computing power than any cash register or credit-card-processing machine, surely they could become a device to accept credit cards? Dorsey was a seasoned entrepreneur and found the right people to help build a hardware prototype. White, shiny and in the shape of a thumb-sized square, the Square accessory plugs into the headphone jack of (most, but not all) smartphones. The user can then swipe any credit card through their device, and – hey presto! – their credit card has been debited. Square tackled a big problem, enabling anyone to simply, easily and cost-effectively, become a credit-card-accepting merchant. By the end of 2013, they had empowered more than 2 million small businesses to accept credit-card payments, and had processed over $15 billion in transactions. Summary Things are moving very quickly – and it’s clear that they’re moving in the direction of mobile. As human beings we prefer to be mobile. Advances in hardware, sensors, batteries, operating systems and platforms are now adapting to our lives and the way we prefer to do things. This is a huge shift towards convenience, usability and utility – and it’s a shift that will only become more pronounced. At the same time we’ve seen that you need to focus on big universal problems or needs – combined with a disruptive approach – to kick-start a billion-dollar app. As we’ll discover in Part II, founders of groundbreaking apps don’t just stumble into something great: they have fantastically ambitious visions from Day One. It is a combination of this vision to solve existing problems in novel ways, the refusal to take no for an answer and persevering in the face of scepticism that has launched apps that have changed our lives. You’re now in a great place to understand what the characteristics of a disruptive, billion-dollar idea are. You’ve seen some ideas about how you can develop your own. And, most importantly, we’ve seen why the best chance of achieving success is riding the mobile wave. About the Author George Berkowski is a serial entrepreneur who has built businesses in manned space flight, online dating, transportation and mobile apps. He is one of the minds behind the internationally successful taxi hailing app Hailo where he led the product team until September 2013. George studied rocket science and economics at the Massachusetts Institute of Technology, and business at the École Supérieure de Commerce de Paris. He was Chairman of MIT’s Enterprise Forum in the UK and is heavily involved in the UK and US startup scenes. George now divides his time between London and Silicon Valley. To find out more about George and keep up to date with ever-changing world of billion-dollar apps, visit www.mybilliondollarapp.com. You can also join the conversation on Twitter by following @georgeberkowski and using #BILLIONDOLLARAPP.
