How to Build a Billion Dollar App
ESCP Business School‘s EXEC MBA, in collaboration with the Creativity Marketing Centre, hosted a talk on “Entrepreneurship & How to Build a Billion Dollar App’” with speaker George Berkowski, Founder & CEO of Ice Cream, Author of ‘How to Build a Billion Dollar App’, and graduate of the Specialised Master in Innovation and Entrepreneurship, 2002.
The event took place on 9th June, 2015 at ESCP Business School’s London Campus and brought together 150 participants from Executive MBA and MSc in Marketing and Creativity programmes, along with industry practitioners.
George’s broad experience comes from mainly working at Hailo – a successful taxi app that operates in 18 cities across Europe and Asia, and a few start-ups that he grew and sold. He raised a list of companies that are top players in the mobile industry and built amazing businesses, all worth a billion dollars or more. They include: Uber, WhatsApp, Snapchat, Kakao Talk, Candy Crush Saga, Square, Clash of Clans, Angry Birds, Waze, Instagram, Tinder, Tango, Viber, and Flipboard.
It took 11 years for the creators to make Candy Crush what it is today. King has around 152 games in the app store and Candy Crush is responsible for 85% of their revenue.
Since 2007, since the iPhone, the industry is almost 9 years old and the life cycle of smart phones is focussed on re-invention. Itis less about designing brand new things and much more about executing and translating offline.
Before Instagram, Kevin Systrom created Burbn (first attempt at Instagram)- which did not work. While on holiday in Mexico, he was tracking photos with his phone and he thought there was a need for an app like Twitter for photos. His girlfriend said there is no way that she would post her photos on Twitter as they were not of good quality. That night, Systrom coded X- Pro II (what would be an Instagram Filter) and asked his girlfriend if she would post this photo publically with a filter to which she said “Oh yes totally! “He used his network to get 25,000 people to sign up to Instagram before it launched, and then it was just a simple case of why don’t you tweet a photo that actually looks good. He built up a big movement before he launched.
He managed to double the value of his company by striking a deal with Facebook. At the time Systrom said Instagram is worth 1% of Facebook (worth USD$ 100 billion dollars then), Zuckerberg agreed, and the contract was signed.
Jan Koum was a system administrator at Yahoo for many years. He had USD $400,000 in savings, got his co- founder to raise USD $250,000 and he created one of the world’s most valuable apps. Its initial focus was status updates, whether someone is busy or not. He circulated this app and feedback from his friends back in Ukraine told him that it would be great if the app would also be able to send messages. There were no messages in the first 9 months of WhatsApp.
The messaging component was attractive because sending international SMS at the time between the US and other countries was very expensive. So Jan charged USD $1.00 to download WhatsApp -in exchange users could send unlimited texts for free. It was built for the iPhone first and allowed people to send texts from the Ukraine to the US. It only had 3000 downloads and went nowhere. Then the team built a version of the app for Blackberry phones, by popular demand from Eastern Europe. He listened to his audience and then the demand exploded, he got 100.000 downloads within a couple weeks.
Entrepreneurship & The Mobile Industry
Apart from cases like Evan Spiegel or Mark Zuckerberg, for most entrepreneurs nothing came easy and there are not many people who have succeeded first time. In fact, the average age of founders of billion dollar companies is 37. On average, they started 3 businesses beforehand and it takes 7 years to become that successful. So, these are not really overnight successes.
In 2007 / 2009 we were all getting on the rollercoaster which was only going up on smartphones and apps. Today an average person has about 110 apps on their phones. Out of the 2 million apps on the App Store, we only open 28 – 29 a month on average. Here is the vital bit: we spend 75% of our attention on 4 apps.
If you are building a mobile business now, how do you get in there? The benchmarking has changed and the bar is so much higher. You are no longer just adding something to the mix, you have to really perform and build and understand the audience.
If you really want to go down this path, there is an approach and a strategy that pretty much everyone in technology companies and product development follow.
In the technology industry the CEOs are actually the head of products; they translate the need that they see in the market place into in a sensible piece of software that people can understand. They are able to build products that are simple, easy and intuitive.
It’s all about making your audience happy and ensuring they stay with the app, business or solution.
How do you test a good idea?
The whole point of this part of the process is customer development, knowing who your customer is. It is best to test your idea with at least 500 people. Are you able speak to your audience and explain your concept or solution in a way that people are actually interested and do not fall sleep within the first 30 seconds? If after your explanation, your audience says that your product is fantastic you have identified a real problem and came up with a real novel way to solve it.
Once you get that solution into the market, ensure that people are using it and that you can actually measure it. See if you can start magnifying the number of users and get them to pay something, somehow, somewhere, someday.
The golden rule is: If you want to generate a billion dollars you need to touch a billion people
Currently there are 30 million active users on a monthly basis which roughly translates into a billion dollar valuation and this is a kind of metric that you should be after.
How does this actually work?
The dating industry is highly competitive and there are a lot of big players. Tinder entered into the market with big players like Match, eHarmony, Badoo and many others. Why would you launch a mobile app in such an environment?
They launched in 2012 and got a billion-dollar valuation within a couple of years. What put the app on the map was functionalities such as finding people that are close to you and being able to see if they are interested in you.
The 2012 Olympics boosted Tinder’s exposure: what better way to meet one of the thousands of athletes in the Olympic Village? The app got coverage all around the world, especially in the US. Last summer Tinder got 2 billion matches and the 40-person team hit USD $1 billion valuation in two years.
How did this app explode so fast in such a crowded market?
The app is really simple; the interface brings up profiles of people near you and the user swipes right if interested or swipes left if not interested. It is hyper localised so you can set the radius to a few km or few hundred meters. This is what mobiles are designed to do – be local, be mobile, and move with you. If both users get a match, the app alerts them. This is an amazing distillation of what e-Harmony, Match and other companies have been trying to do for years.
Anyone who has worked in the dating industry can tell you that men require one factor alone to determine whether they are interested in somebody or not and that is a photo.
How did they rock it up so fast without actually raising hundreds of millions of dollars?
Tinder’s team owns about 5% of the company; the rest is owned by IAC which also owns Match and 600 other dating websites. This was a massively innovative product; its growth came from the mothership behind it. This is an interesting example on how mobile and businesses are growing these days. Entrepreneurs come up with the products but in order to get scale and to grow fast, huge partners are needed in the background.
It is important to focus on the business model: how robust it is, how profitable it is per user, how easily people can be acquired. If you can acquire users and downloads relatively easily then your business model does not have to be massively robust in terms of what you are earning per user. If it is difficult or costly for you to acquire users then the business model becomes a more important consideration.
Hailo and Uber
Last year Uber pulled over a 8 billion USD dollars in revenue. The company accounts 2200 employees, operates in 300 cities and in55 countries. This is real business; they went from absolutely nothing to figuring out a business model that really scales.
Hailo is about 9 months younger than Uber. Travis Kalanick, founder of Uber, created an on-demand service similar to Adison Lee which is great – 3000 – 4000 cars without carrying the costs of the assets. They run the network, build the brand and get drivers to bring their own cars.
Both companies faced the same problem: when you go into a marketplace that relies on supply and demand, how do you break that? How do you get passengers when there are no drivers? How do you get drivers when there are no passengers? Jay Bregman, CEO of Hailo told me, “we really have a novel solution for this; we are going to build an app for drivers to solve their problems and sprinkle passengers on top of that.” The passengers are not integral to solving their problems. The company built these features into an app-since smart phones can track you wherever you are, they can figure out whether you have a passenger on board or not, they can tell you at the end of the day via automatic analytics that you spent 50% of your day empty or 90% of your day empty. It can create a network amongst drivers, so when drivers see there is more demand, i.e. if there is a concert, they can broadcast this message to the network of drivers. They were able to use credit cards and actually process payments on the spot especially since around 85%of cabs journeys in London are based on credit cards. When Hailo started this figure was about 3%. So this took off well, they got a few thousand drivers on the road using this day in day out for 8 -9 hours a day.
After this, it was a piece of cake designing the passenger app. The big challenge for them was not about providing the supply for drivers; the challenge was getting people to hit the ‘pick me up’ button, getting their credit cards and actually going through with the journey.
Uber did something different; they started off in San Francisco where taking a taxi 5 years ago was horrible – terrible service and impolite drivers. They started by recruiting the small players. Uber paid 20% above the fare if drivers accepted 100% of their jobs and provided the drivers with iPhones so they could use the Uber app. It took them a year to get around 2000 drivers and 4 years after that they had 300 000 drivers which is great growth.
Uber and Hailo are examples of products which fit the market. They built a model, figured out how to get drivers on board, found out how to get passengers on board, figured out how to make an advantageous product or service and fundamentally profitable business. Per transaction, Hailo charged 10% margin on the cab fare. Uber charged 30% but this was only after they demonstrated a huge success in London.
Uber was a great success in San Francisco and scaled this model to other cities, securing huge investment. For Hailo it worked great in cities such as Madrid, Barcelona, and Dublin and in a few Asian countries.
Uber’s model is more flexible; they understand that this is a transportation business- getting passengers from A to B. Most people didn’t care as long as the taxi is nice, clean, on-time and well-priced. Uber introduced Uber Black, Uber Lux, Uber Pop and Uber X. They added car owners to their portfolio who were willing to make money in their free time; this part of the business is called the steer around the world.
Uber undercut taxis fares considerably and currently makes a 5%gross margin on Uber X trips, take credit cards out of it and intakes 3% but that is what consumers want. Uber’s business model is very savvy; when the demand is high and there is not enough supply, there is “surge pricing”.
These apps are real businesses and have used strong viral marketing, the simplicity of distribution through the app store, beautiful design and huge production value.
We look at our phones 150 – 200 times a day, the huge value of mobile start-ups is where we spend time, messaging, voice calls, music play, gaming and social media, and this is where the opportunities are. You have to do something ordinary and make it better; you really have to do it differently. The average age of founders of billion dollar start-ups on the retail or consumer side is 34 years on the B2B side and the enterprise side is 37 years. The average time to make a billion dollars is 7 years.
George identified “storage” as one of the biggest problems with smart phones and created “Ice Cream” a new app that allows you to free up space on your iPhone quickly. More than 22% of all smartphone users fill up their phones every month, and 12% clog up their phones every single week, that’s over 250 million people.
To relive the live tweet of the event, click here.
If you would like to uncover more case studies and key insights shared by George Berkowski his full presentation and its highlights will be available online soon.
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