Why can’t Europe get to a billion?

Hi! Aaaaand, we’re back. I shut down this blog first when I began writing more regularly for Business Insider, and then when I worked full time on the launch of my startup, Card.biz, backed by Kima Ventures. Now that we’ve launched our beta, I’m starting PEG on Tech up again.

When I was in New York last week, I had a drink with a prominent entrepreneur who asked me why so few European startups manage to get above a billion dollars in value. In fact, the list is very short: Vente Privée, Betfair, Skype (if you can still consider it a European startup)…

The question caught me off guard, so I gave a bad, bumbling answer, but it got me to thinking. Usually us European entrepreneurs think about the question from the other angle: why is it so hard (?) to start a business here? We don’t usually think about the other side: why is it so hard for businesses to grow very large?

But it is, also, a fascinating question, first of all because some of us in Europe do want to build billion dollar businesses (even billion euro businesses) one day, and second of all, because it is connected to the first one: surely, if there was a “European Google”, the whole startup ecosystem would be healthier.

After thinking about this for a week, here’s what I think matters the most. Most of these aren’t new, but they helped clarify my thinking. I hope it does the same for you. I’ve ranked them from most to least politically incorrect. 😉

• Fragmented market. This is the most obvious one. Particularly in the consumer web, getting to scale is much harder in Europe than in the US because people have different languages, but often also different cultures. Getting to Germany doesn’t just mean translating the site, although that can be a pain in the ass, but also scaling support, recruiting salespeople, maybe opening an office, etc. — and fending off the inevitable local competitors. If you want to sell to ad agencies, you often have to pitch both the European headquarters in Paris or London and to the local offices in various countries; if you want to recruit that rockstar Swedish developer, well, he almost certainly speaks good English as a second language, but is he going to want to move to Paris to interact only in English with other people who also speak English as a second language (and in the case of a Paris-based startup, poorly (sorry guys, but it’s the truth))? And so on down the line. Bottomline, while it takes all the effort in the world for a startup to go Europe-wide, by that time your US competitor has grown much faster, is global, and can pummel you. This is what happened to both web 1.0 portals and social networks, who are just no match for Facebook’s size and attendant network effects.
• Less exits. This is sort of a chicken and egg thing, but it’s the $10M and $100M exits that set the stage for the billion dollar exits. Because they give founders early liquidity so they can embark on more ambitious projects or fund more young upstarts, because they give founders and employees experience, because they make it a less daunting proposition to start your own company, because they give VCs “long tail” returns that help them raise more capital and pump more of it into startups. Why less exits? As I said before, there is no “European Google” to make acqui-hires at $10M a pop seemingly every other day with their sky-high stock (incidentally, it’s a shame that the EU startups that are big are not going public). What’s more, European media and software companies are really, well, afraid of the web. Part of it is legitimate — they got badly burned several times — but part of it is just neanderthalism. Look at the social gaming industry. Playfish (the one European big player) got acquired by… Electronic Arts, a Silicon Valley company! Even though the world’s biggest gaming conglomerate, Activision, is owned by Vivendi, a French company! And now Playdom just got bought by Disney. Both of these are really great deals. These companies are, like all in their sectors, presumably very profitable. These big companies are getting access to a market that is hugely growing, both in profits and “mindshare”, and the synergies from using their awesome brands for new social games are obvious. Euro media companies just completely dropped the ball, here.
• Europeans have less money. This is politically incorrect, but it’s true. We Europeans like to think of ourselves as basically equal to America in terms of development, importance, etc. (and morally superior, of course) but it’s just not the case. GDP per capita in the EU is $33,052 (source) versus $47,988 (source) in the US, and that doesn’t even factor in their much lower taxes. This has many consequences. People are more willing to spend money on new, risky (more on which below) things.  Have more disposable income to buy books online. And, of course, are more valuable to advertisers, which in the consumer web world of dirt-cheap CPMs can make a huge difference — between life and death, or between mere viability and scale.
• Europeans are cowards. This is a harsh way to put it, but bear with me. When discussing why Europe lags the US in entrepreneurship, people often discuss “culture,” and from the entrepreneur’s perspective: less encouragement of risk-taking, a taboo on money-making, on success, on empire-building. All of this is correct. But if you want risk-taking entrepreneurs, you need risk-taking consumers. This is one of the ideas of economist Amar Bhidé’s book The Venturesome Economy. He points out that American consumers are more willing to  just try things. Part of it is more disposable after-tax income, but part of it, I suspect, is just culture. Bhidé takes the example of the iPod. Today we’ve forgotten that for several years after it was introduced, the iPod was not the smash it we now know it to be, but simply a middling product — not a dud, exactly, but not doing particularly well. It wasn’t a great product. And during that time, Apple refined it and refined it until it blew up and Changed Music Forever™. Even assuming a European company had had the balls and the talent to come out with something like the first generation iPod, they would’ve killed it after a year because nobody would’ve bought it. Forget the risk-taking entrepreneurs — you’ll find crazy people (a category of which I proudly count myself) everywhere –, if you want an economy of innovation, you need risk-taking customers. You need at least enough, a small critical mass, of people who will try things, even if they’re not perfect, either because they’re new, or simply just for the hell of it. The most common question I get at a cocktail party in France when I describe some new service like Facebook or Twitter or Foursquare is “Why would I use it?”, at which point I have to bite my tongue not to say “Why the fuck not! It’s free! Try it! You might not like it but why do you need a reason just to TRY it!” By default, Europeans distrust “what’s new” while it appeals to Americans. This is a gross overgeneralization of course but I think in aggregate it holds true. I think this lack of a “venturesome European consumer” is the most non-obvious, important reason why Europe has a third-rate (sorry) innovation economy. The problem is that it also sounds like the hardest to solve.

What do you guys think? Why is Europe behind? Did I get some of these wrong? Are there some other reasons you can think of?

Photo: “Barcelona” by Flickr user MorBCN (CC)

New international seed fund! KIMA Ventures

Boy, have I waited to write about this!

Today is the official launch of Kima Ventures, a venture fund that seeks to invest in startups all over the world at the seed stage, in the internet sector but also mobile, video games and telecom.

Kima is very exciting because of the two entrepreneurs who started it. The first is Israel-based Jérémie Berrebi, founder of Net2One back in Bubble 1.0, a forerunner of Google News, and now Zlio, a create-your-own-online-shop site, and angel investor in countless startups. The second is Xavier Niel, the founder of Iliad, the most innovative ISP in France, and France’s first (and only?) self-made internet billionaire, who has also done some angel investing himself. So we are talking about two major league entrepreneurs and investors creating a fund to invest globally. Kima has set a goal to invest in over 100 startups in its first two years. They are willing to invest alongside other seed funds or angels, and will use their considerable network to help companies progress, including raising additional rounds from institutional VCs if they need to.

I helped Berrebi with the launch of the fund and can tell you a little bit about the vision for Kima. Kima wants to set itself apart from other funds in a variety of ways. First of all, they promise a firm answer within 2-4 weeks, which for anyone who’s been through the maddening dance of raising money is just heaven. Second of all, they will invest all over the world. And finally, they intend to help startups within their portfolio connect with each other to share insights and best practices. The long term goal is for Kima portfolio startups to be a deep and global ecosystem of entrepreneurs and companies.

And finally, Kima’s investment philosophy is openly inspired by charge-for-stuff startup 37signals. They want their investment to help the startup get to profitability as soon as possible, ideally before their next round. No Twitter for those guys! (Even though Niel and Berrebi are both investors in Status.net, the “WordPress of microblogging”)

Given the record of the founders and their ambition, Kima is a really big deal, and I can’t wait to find out about the startups they’re going to invest in.

AppsFire wants to viralize iPhone apps

Ouriel Ohayon is famous among French entrepreneurs as the former writer of TechCrunch France, but he is an accomplished entrepreneur and VC in his own right, who is now based in Israel. He recently left his plush VC gig to start a new company called AppsFire. I sat down with Ohayon on his last trip to Paris to talk about AppsFire.

AppsFire is a simple app that helps you share iPhone app recommendations with your friends. AppsFire has all the trappings of the latest startups, including its own short URL http://getap.ps/ and an API that will come soon, Ohayon tells me. Android and BlackBerry versions are also forthcoming.

AppsFire wants to solve an important problem: there are over 100,000 iPhone apps, and the iPhone app store alone isn’t enough to help discover all the useful apps out there. Meanwhile the iPhone app store is now a billion dollar market and app stores are sprouting up all around numerous devices and platforms.

The company also recently launched PasteFire, an app that lets you share links and other items between your iPhone and your computer — copy something on your iPhone and you can paste it on your computer, and vice versa. Ohayon tells me that PasteFire is superior to other similar services because PasteFire is smart. For example, if you put a phone number into PasteFire, it will recognize it as such and prompt you to call or add to contacts; if you put an address, you’ll be able to look it up on Google Maps, etc.

For Ohayon, the grand idea behind AppsFire is to help apps in every app store become viral and, in turn, become the center of distribution of mobile apps. Ohayon told me his business model is “secret” but it’s not hard to see how such a thing could be monetized. If AppsFire pulls it off, it could be a very powerful service.

Both AppsFire and PasteFire are part of this grand masterplan. Ohayon wouldn’t tell me what the link is between them, but again, it’s not hard to tell: PasteFire suggests actions — apps — based on the links or items you share in it. This would significantly help AppsFire boost the virality of useful apps.

Ohayon was bullish about the future of app stores in general — not just on the iPhone and other mobile devices, but on cars, fridges, etc. His goal is for AppsFire to help spread apps virally within all of the app stores that exist today and will in the future. He’s also bullish about the future of his own company — when I asked him if he was afraid that Apple would copy them, he said he’d welcome it.

He’s not the only one who believes in the future of his idea: AppsFire recently raised a big angel round from first-tier French investors including Marc Simoncini (founder and CEO of Euro online dating leader Match.com), Jacques-Antoine Granjon (cofounder of vente-privee.com), Xavier Niel (cofounder of Iliad, a huge French ISP) and Jean-David Blanc (founder of allocine.com and also investor in Jack Dorsey’s Square).

If Ohayon can bring about his powerful vision of boosting mobile apps’ virality, AppsFire is clearly a company to watch.

Mobile is going to be bigger than the internet

The other day I tweeted that “AdMob selling to Google for $750 million today is like DoubleClick selling to AOL for $100 million in 1996.” I thought about that, first of all, because I admire Kevin Ryan, the CEO of DoubleClick, but most of all because I believe in the potential of the mobile internet.

I think the timing is right. Mobile right now is like the Internet in 1996: we haven’t even scratched the potential. The iPhone (and particularly the app store) was like the Netscape IPO: it was when it became obvious that mobile is huge.

I also think the valuations are right. There will be a lot more money to be made (and lost) in mobile than was made during bubble 1.0. Why? Simply because billions of people have mobile phones, and will soon have smartphones, and because the opportunities, relating to location, but also making payments and distribution easier, are bigger.

I also think the actors are right. AOL was the “blue chip” of the first wave of the internet. They played a huge part in making the internet huge, but their strategy eventually proved wrong. I actually think Google has made most of the right moves so far, but I’m convinced that the biggest companies in this new space won’t be Google, or Microsoft, or Yahoo! or whoever. They probably haven’t been created yet. (Although I think Foursquare has a ton of potential there.)

This is a short post, but I want to stake my ground here. I hope to come back to themes in the mobile space here soon.

The strategic implications of iPad

Plenty of people are ooh-ing and aah-ing about the features of Apple’s new tablet, the iPad. A good summary is here, and a rundown of the minuses (that I pretty much agree with) is here (all via Gizmodo, including the picture above this post).

That’s all fine, but I’m more interested in the business strategy implications of the iPad (other than “it will kill netbooks!” “it will kill the Kindle!”). Here are the things that I find fascinating about what the iPad announcement tells us about Apple’s strategy:

• Apple makes its own CPUs. This is huge! I can’t believe I’m the only one who is fixated on this. We all know Apple acquired semiconductor company PA Semi back in 2008. Everyone assumed that they would use them to design auxiliary power-saving chips for the iPhone, iPod Touch and other mobile devices. But Apple just came out with its own central processor. This is, to the best of my knowledge, the first time Apple has built its own CPU for a device, going way back to the original Mac’s Motorola 68000 (a stalwart of the history of computing!) It is also huge, of course, for Intel. Apple was sort of backed into choosing Intel to provide its CPUs as the G4 architecture kept sliding behind the PC’s x86 architecture. But Jobs knew all too well that couldn’t last. After all, Intel is exactly the same kind of company as Apple: big, secretive, extracting fat margins from its should-be-commodity products through superior engineering and savvy marketing, and most of all, never shy at playing rough. I’m pretty sure Steve Jobs stayed awake at night more than once at the thought of depending on Intel for the core of his products. Now that’s gone. Intel will still power Macs for the foreseeable future, but now Jobs has a whole new negotiating position with them. And of course, it begs the question: while Intel will probably always have a lead in high end processors, how long until Dell and HP buy small semiconductor manufacturers and do the same as Apple for their low power devices? This is potentially a seismic shift in how the personal computing industry functions.
• Apple is now officially a media company. iTunes! Apps! Newspapers! Books! Movies! The original strategy with the iTunes Music Store was not to make money from it, but to use it as a “killer app” for the iPod, where the margins are, and also, of course, for lock-in. In fact, Apple has always been a hardware company using software to sell hardware. Apple makes very little to no money on software and cloud apps such as media stores. Is this changing? We all know how Apple at first rejected putting third-party apps on the iPhone and now is embracing the App Store. On the App Store, like on the iTunes store, Apple at first took a 30% cut expecting only to cover the cost of managing the store, but it is turning out that it is a huge business in its own right. Is Apple shifting to a strategy to making money on content delivery? Which leads us to…
• The iPad is CHEAP. Jobs famously said that Apple didn’t know how to make a piece of consumer electronics under $500 that isn’t a “piece of junk,” and when analysts called Apple’s strategy into question (remember those times? It was a looooong time ago.) he called Apple’s strategy the “BMW strategy”: own the high end through superior engineering and marketing, and make money through fat margins, not big marketshare. The opposite of the Dell strategy, which is why Michael Dell and Steve Jobs openly despise each other, despite everything they have in common: they come at their markets through radically opposite points of view. The iPod was an outlier in that it was both as expensive as a BMW and as widespread as a Toyota, but overall, that was still Apple’s strategy. And now the iPad starts at $499. I’m pretty sure Apple gets fat margins on the upper-end models (there’s not much extra in there to justify the extra hundred dollars), but its margin is probably razor thin at the $499 price point, which is probably going to be the most popular. This is a huge gamble for Apple. First of all, because the iPad could cannibalize its other products where it gets fatter margins, making Apple a victim of its own success. Second of all, because this is a whole new strategy: going for dominance of a new segment instead of just the high end. In fact, I suspect (no way to be sure yet) it might herald Apple turning its strategy on its head: instead of using software as a “loss leader” to sell hardware, using hardware as a “loss leader” for selling digital MEDIA. Again, there’s no way to be sure yet that that’s what Apple is doing, but if this is it, it represents a huge shift in Apple’s strategy, its business and its culture.

Of course, I don’t have to say that if this is Apple’s strategy, and Apple succeeds, this would be bad for open standards and open media delivery. There’s nothing Apple loves more than locked down systems, and you can bet all that media Apple delivers is going to be chock-full of DRM. After all, it’s also the ultimate consumer lock-in. Once you’ve bought all those movies and TV shows on your iPad, you’re going to want to watch them on a big screen, and for that you’re going to have to buy one of those big screen iMacs.

These are interesting times indeed.

(I will now let you return to your originally scheduled iPad coverage: ohmigod it’s so pretty! It doesn’t multitask, Steve Jobs you killed my dreams!)

thesixtyone is awesome

The other day I got a lot of attention for “bashing” Posterous, a Y Combinator company, for having in my view poorer design than its main competitor Tumblr, which is 4 times bigger according to Compete.com, and for saying that it’s because Tumblr is better designed that it is more popular. There was a lot of back and forth related to that post (for those keeping score, Paul Graham disagrees with me, John Gruber agrees), most of it interesting. I used this example to highlight two trends that I still believe are very much real:

• today and increasingly for consumer web apps, design (not just how it looks, but also how it works) matters more than “raw” technology ;
• New York is coming into its own as a hub for startups that care about design and produce great design, something which is often overlooked by Silicon Valley engineer-centric companies and a certain Silicon Valley engineer-centric mindset.

That being said, I never meant to imply, as some took me to mean, that nobody in Silicon Valley understands design, that there aren’t web startups with great design in Silicon Valley or, even more absurd, that Silicon Valley is not a tremendous startup hub. These are all ridiculously false propositions.

So today I want to give back to Cesar what belongs to Cesar and laud thesixtyone, a Palo Alto, Y Combinator company. The company started as a (not really well designed) “Digg for indie music” that helps indie musicians get discovered and make money. Their newest version, however, is a tremendous example of wonderful design.

First of all, as you can see above, it is absolutely drop-dead gorgeous. And unless I’m mistaken, they get this beautiful look through HTML5 and not Flash, so big kudos there.

And second of all, in the design-is-how-it-works category, they refined their mechanics away from simple Digg-like up-or-down voting to Foursquare-like game dynamics, where you get a limited number of “hearts” to hand out to bands and artists and are incentivized do things on the site to earn rewards.

It’s a great discovery system for new music. I’ve been using it for the past couple of days instead of the Hype Machine and Spotify and it is truly a great service (there are a couple of annoying UX kinks but I’m sure they’ll work them out).

So there. Of course there are Silicon Valley startups that understand great design, and thesixtyone is one of them. Now check them out and tell me what you think in the comments.

Steve, go big or go broke

Microsoft’s new strategy under chief software architect Ray Ozzie has been “three screens and the cloud,” the three screens being mobile, desktop and living room, and the cloud being Microsoft’s actual cloud infrastructure, Azure, and presumably the web, i.e. Bing, Hotmail, MSN and Microsoft’s other web properties.

How are these doing?

Obviously, Microsoft is still dominant on the desktop, and will remain so for a while now. Even though web apps are a long term threat to Microsoft’s desktop software, at the high end (Macs) and the low end (netbooks), right now they’re safe, because software can still do a lot of things the web can’t do, especially in the enterprise, where Google can’t get a foothold.

In the living room Microsoft has a very strong beachhead with the XBox, which is fast turning into a social multimedia entertainment center, which is how it should be.

In the cloud it’s too early to tell. Amazon is clearly the dominant player in cloud infrastructure, but it’s much too early to tell who will end up with the biggest slice of the pie, and Microsoft seems to be doing the right moves so far.

When it comes to mobile and web, though, Microsoft is foundering.

Bing is a strong effort, and has been picking up marketshare (largely through deals and not organic growth, though), and if and when Bing becomes Yahoo!’s search engine, that should give them enough scale to really refine their product. Microsoft’s search leader, Qi Lu, is a scarily talented executive. That being said, so far, it’s practically impossible for Bing to present a credible threat to Google search. It is marginally better in some respects, but in order for people to change their entrenched habits, you need more than marginally better. You need remarkably better. And Bing isn’t that, by a long shot.

Meanwhile, in mobile, it’s a disaster. Windows Mobile 7 is a long ways off. Even if it’s a tremendous product  — and while it will probably be better than previous efforts, it almost certainly won’t be as good as Android or OS X — mobile OSes are a platform game. To win in mobile, Microsoft needs tons and tons of apps — developers, developers, developers — and for that it is very, very late to the party. Plus, how does it make money from mobile? Apple makes money on hardware. Meanwhile, Android is free — in fact, less than free: Google offers revenue share on advertising revenue to mobile operators who use Android. Microsoft wants to charge Verizon to put Windows Mobile on its phone, meanwhile Google is paying them to use a  product that is so far superior, and by now proven.

My point is this: these are two crucial markets where Microsoft can’t win through incremental improvements. It must go big or go broke. In search, it must introduce a new paradigm — so far the most promising looks to be what Mahalo is doing. In mobile, some have recommended that Microsoft buy RIM. The two have tremendous synergies from their strength in the enterprise and BlackBerry’s software. That would be a start. In fact, they should also buy Palm, which is struggling in the market, but has better software and hardware and more apps.

I have a few ideas on how precisely Microsoft can win in search and mobile, but they’re beyond the scope of this post. The point here is: Microsoft must go big or go broke. The only thing they have left is their huge size. They should use it.

Carol, Tim and CEO hype

There’s no question that CEOs are a huge determinant of a company’s success. Founders obviously, but also hired CEOs like Jack Welch or Lou Gerstner. And because CEOs are so important (and visible), they tend to get hyped.

A good example of that are the CEOs of Yahoo! and AOL, Carol Bartz and Tim Armstrong. Both are in the same business (selling advertising), and both are taking the helm of companies that have a great past but are troubled, whose position in the market is eroding, and whose future is in question.

And each got a divergent reception in the media. After Jerry Yang’s hapless (mis)management of the stillborn Yahoo-Microsoft merger, Bartz was a woman (it helps), with a previous record of successfully turning around a large company, Autodesk, and obviously had great charm, with her folksy ways and occasional f-bombs. Everyone loved her, hailing her as Yahoo!’s savior.

Meanwhile, after Tim Armstrong left Google, where he was head of sales for North America, there were whispers that he was “just a salesman” (overlooking that he was a two-time entrepreneur before joining Google) of a product that sells itself, who ended up at the right place at the right time, and is too lightweight to really do anything with AOL.

And what’s happened so far?

Well, Carol Bartz’s made a few missteps, notably with her search outsourcing deal with Microsoft, which is so mindbogglingly complex as to be unworkable. Meanwhile Tim Armstrong’s made every right move, from setting out an ambitious (but doable) content-based strategy for AOL, to proceeding with layoffs quickly and humanely, to setting expectations right for AOL’s IPO, to building the new Seed platform, which is an innovative product with lots of potential. His only slip-up to my mind was the horrible AOL rebranding, but apparently (unlike Yahoo!’s similarly disastrous branding campaign) consumers like it. So even his screw-ups were wins.

Now don’t get me wrong — it’s way, way too soon to judge either of them as CEOs. The AOL turnaround is a huge gamble, and neither of them has been around for long.

But I still think it’s instructive to see how differently they were treated by the media, and how Bartz has had significant stumbles while Armstrong has so far been A+. Don’t believe the hype, I guess is my point. Especially not in the business press.

Why Tumblr is kicking Posterous’s ass

Tumblr and Posterous are the two most prominent “tumblogging” sites, i.e. sites that make blogging more straightforward by making it easier to post media. Both were launched within six months. (Actually, Posterous was started later than Tumblr.)

But now Tumblr has been an Alexa Top 100 site for a while and is still growing strong. Meanwhile Posterous has about 4 times less uniques. Yet Posterous has everything to win: it’s a Y Combinator company with top-tier investors like Chris Sacca and Mitch Kapor. Its founders are experienced software engineers with computer science degrees from Stanford. How come it’s eating dust from a small startup started by a high school dropout?

The answer is as easy as it is counter-intuitive: Tumblr is a New York company and Posterous is a Silicon Valley company.

Or, to put it another way: Posterous is an engineered product, while Tumblr is a designed product.

Posterous is extremely well engineered. There’s nothing wrong with it. Every single thing about it is well thought out. But it’s not just that it’s less pretty (though it is). It’s just not designed as well as Tumblr is.

Look at Tumblr’s landing page:

That’s it. Sign up is dead simple. Can you imagine the conversion rates they get out of that page? Moreover, they have one of the best taglines of any service: the easiest way to blog. What else is there to explain? They don’t brag about features like “like”, “reblog” or (ugh) “tumblarity.” Tumblr is the easiest way to blog. Anyone, your mother included, can understand that.

Meanwhile, look at Posterous.

Oh sure, it’s a nice landing page. But, “the dead simple way to post everything”? Sure, it sounds nice, but it’s hard to say what that really is. Is that like Facebook, where you can share all sorts of stuff (videos, links, pictures) with your friends? Is that like Twitter? Or is it like a blog. The “just email us” pun is nice, since all you need to do to sign up is to send an email, but to a distracted user it’s like “What? I have to email them to get an account?”. Then you read all the stuff after that. There’s so much stuff there! A step-by-step explanation, a “who’s it for” (if you have to explain, you’re not doing the right job), a bunch of links and pictures.

In fact, that sign-up-via-email feature: engineering feature. When Posterous came out, that was the thing that set it apart: it’s so simple you don’t need to sign up, just send something via email! Cool! Except — who really does that? Very long signups can discourage users, but if you have only a few forms to fill, is there a single person who wants to sign up for a service, can’t be bothered to fill out a three-item form, but by God, pulling up their email client, finding a picture or a video to post, attaching it, and emailing it to post@posterous.com (or is it new@posterous.com? posterous@posterous.com?), that’s easier! It’s exactly the kind of thing where an engineer thinks “Oh, nobody does that, I’ll do that, that’ll be cool!” but in real life it’s useless. I mean, posting by email is a nice feature. But it’s not a killer feature.

I will give 5-to-1 odds to anyone that Tumblr has higher conversion rates on their homepage than Posterous and 1-to-1 that they’re twice as high.

In fact, everything about Posterous is nice. It’s very nice. I’m not here to bash Posterous, I think it’s a tremendous product and I wish them the best of luck.

But everything about Tumblr is better designed. I used the landing page as one example, but there are tons of features where Tumblr shines by its gorgeous design.

Meanwhile Posterous is typical of the Silicon Valley engineering mindset where everything is measured, ranked, weighted. It’s like Google. And having terrible design like Google is great if you have a technology edge. But if you’re in a market where what matters is design edge, that’s not enough. There needs to be great design, by which I don’t mean looks (though they’re important), but how it works for the end user.

Meanwhile, Tumblr is typical of the new New York startups, that have great engineering talent, but care about design, UI and UX.

Again, I don’t mean to bash Posterous, but to me Tumblr and Posterous are just picture-perfect examples of two very important trends.

The first is that New York has truly come of age as a startup hub, with its own “style”, its own way of doing things, its own mindset, which can sometimes — not always, but sometimes — kick Silicon Valley’s ass.

The second is that for consumer web apps today, design matters more than technology. Much has been written about how the cloud, accessible web frameworks, etc. have dramatically lowered the cost of getting a startup to market, and that’s certainly true, but it also means that since everyone is on EC2 and Ruby on Rails, technology is no longer what differentiates most consumer web apps. What does is design. UI/UX design. Social design. Business model design as well (Groupon and Gilt Groupe, the two tremendous e-commerce success of the past two years, are in Chicago and New York respectively). To be sure, technology is and always will be very important. I don’t want to go back to the startup where the MBA bosses around engineers. And some of the best designers will be engineers (like David Karp, or Mark Zuckerberg). But you can’t just engineer anymore. You have to design.

Tumblr’s success shows that.

EDIT: It’s been pointed out to me in the (interesting) comments at Hacker News that Posterous has been growing faster than Tumblr. While that’s true, Posterous is growing from a smaller base and Tumblr is still much, much bigger, and their growth has barely slowed, so I think unless something unexpected happens, Tumblr is still going to maintain a strong lead over Posterous.

Curmudgeon is bitter he didn’t cash in sooner

Bo Peabody, the founder of Tripod (remember Tripod? I have an homage to it up there) and now a VC at Village Ventures (no, never heard of it either), wrote an op-ed in the Washington Post to say that social networks like Facebook and Twitter aren’t, and will never be profitable, that the advertising and freemium business models don’t work for social networks, and that it would be best to run social networks as non-profits, a la Wikipedia, rather than businesses, because it’s in the nature of social networks that they fail.

I’m all for contrarianism, but — leaving aside for a moment that the guys who started Facebook and Twitter probably wouldn’t have started them in the first place without the profit motive — Peabody’s argument would probably sound better if he hadn’t written this now.

Peabody writes that News Corp and AOL screwed up by acquiring MySpace and Bebo respectively; while AOL clearly overpaid (yes, technology is the only sector where boneheaded managers make stupid acquisitions), MySpace would’ve probably hit $1 billion in revenues in the year after it was acquired if it hadn’t been for the financial crisis, and kept growing like wildfire if the management at FOX Interactive hadn’t frozen product development while Facebook ate their lunch, stuck a finger in every pie, and generally made a mess of things. But more than all of that, what complicates Peabody’s thesis is that the two companies he holds up as exemplars of the impossibility to make social networking profitable, Facebook and Twitter, are… profitable.

Facebook has been profitable since last September and its revenues are growing rapidly. Twitter is now also profitable thanks to its licensing of its real-time search firehose to Google and Microsoft, and has left most other revenue sources untapped by choice, not inability. Saying that social networks can’t be profitable, and using Facebook and Twitter as examples of that, right after those two companies become profitable, probably isn’t the best way to make yourself look smart.