Young Net entrepreneurs discover how to leverage the Web anew

February 1, 2004

BY MICHAEL KRAUSS

The kids in Silicon Valley are coming back smarter. Consider Napster co-founder Sean Parker’s newest venture, Mountain View, Calif.-based Plaxo Inc.

When Parker helped found Napster, he had more than legal troubles and music downloads on his mind. He couldn’t keep track of all the people he met. That led him to establish Plaxo.

Plaxo is a simple idea: software that keeps your computer address book up-to-date with your friends. When my contact information changes, the network automatically updates your computer. In time, if all our contacts use Plaxo, we’d never have to update anyone’s information; it would be done automatically (including appropriate privacy safeguards).

Plaxo sounds vintage dot-com--all cyberconcept and vague profit prospects. But Plaxo’s entrepreneurs learned from their forebears’ mistakes. Their approach to product design and marketing is pragmatic, yet they build on the positive aspects of the Internet age.

“Sean had this experience at Napster. He was meeting people all the time,” Plaxo co-founder and Chief Architect Todd Masonis explains. “His address book was always wrong. People were always moving. Cell phones are changing. E-mail addresses are changing. Technology is supposed to make things better, but technology is making the problem worse.”

So Parker hooked up with two young Stanford University engineers, Masonis and Cameron Ring, to form Plaxo. They started raising money in mid-2001 and slogged through the downturn. They snagged $2 million from Sequoia Capital in February 2002 and released a beta version last May.

Adding to Sequoia’s $2 million, Plaxo recently raised $8.5 million from Globespan Capital Partners. And today, Plaxo’s board is a who’s who of the digital glitterati: Tim Koogle, former chairman and CEO of Yahoo; Ram Shriram, previously of Netscape, Amazon and Junglee and a director of Google; Jon Callaghan, managing director of Globespan Capital Partners; and Michael Moritz, from Sequoia Capital.

More impressive, seven months after launch, Plaxo has signed up more than 1 million users across 200 countries with the subscriber base growing at 50% a month.

From the outset, Parker, Masonis and Ring knew the realities of Metcalfe’s Law (coined by the founder of Santa Clara, Calif. start-up 3Com Corp.), which says the value of a user network is equal to the square of the number of users. The more people you sign up, the more valuable your network.

The obvious difficulty in building Plaxo: Why join if none of your friends are users? Why become the first subscriber? To combat this, Masonis offered immediate value to customers.

“You download our software to get your address book up-to-date in just a few clicks,” he says. “We send out e-mails to your contacts--you specify which ones--they respond. Then we put it in your address book and get it up-to-date.”

The result, Masonis says, is that “there’s value immediately even if you were the first person to ever use Plaxo.”

Like the start-ups of the late ’90s, Plaxo gives its core product away, at least for now. Masonis expects that to change as subscribers increase and new, segment-specific product offerings are introduced. “We plan to have a version of Plaxo for the user with 3,000 to 5,000 contacts,” he adds. And Plaxo recently launched a VIP support service for power users at a cost of $19.95 annually.

At the height of the dot-com boom, start-ups paid $2.2 million for Super Bowl ads vainly hoping to achieve scale. They thought awareness would automatically drive sales, as it did for Procter & Gamble. They forgot P&G succeeded because it had great products.

Parker, Masonis and Ring focused first on building a great product with emphasis on the quality and caliber of the user experience, figuring such a product would build its own awareness and sell itself. After all, as each new user signs up, they e-mail their contacts for updates and each contact gets an offer for free Plaxo software.

“Your personal address book is sacred territory,” Masonis says. “We set out to build a really easy-to-use product. We do lots of refinements on the user experience to get it as frictionless as possible.” Masonis’ aim was to make sure no one was more than three or four clicks away from updating their address book, and the development team at Plaxo refines and tests their product in the marketplace in real time.

Plaxo did have some product development hurdles. It couldn’t be a stand-alone program; Plaxo wasn’t going to replace Outlook, Outlook Express or Lotus Organizer.

“We wanted to integrate into whatever you use,” Masonis says. “Integration is difficult because you can encounter bugs in Outlook that Plaxo didn’t cause but might tickle. If we crash your Outlook, you’re going to be upset and think it’s Plaxo. So it set the (product development) bar even higher.”

Then there’s the spam issue, and consumers’ skittishness about using any product that might invite more of it into their e-mailboxes. Plaxo spokeswoman Darcy Hansen notes that “Plaxo does not send spam or create spam mailing lists” out of users’ e-mail addresses or those of their contacts.

“(A) member’s information is the member’s own personal property, and we do not share this information with anyone else without the member’s permission,” she says.

One problem that has come up is that new Plaxo members (me included) may choose to send e-mail requests for address updates to everyone in their address book, even contacts they vaguely know. One person’s update request may be another’s spam.

“People’s biggest complaint is against receiving e-mail updates from Plaxo members they do not know,” Hansen says. “This is a member education issue regarding proper etiquette. Plaxo members should only request updates from people they truly wish to stay in contact with.”

I agree. Mea culpa.

Plaxo, I think, will comfortably manage the spam question. Too, the issue will decline in importance as more people join Plaxo because e-mail requests are not sent to other Plaxo members. The system updates the address book behind-the-scenes.
Will Parker, Masonis and Ring succeed? Time will tell. One thing is clear: The kids at the Internet start-ups are learning. Maybe that’s why the NASDAQ was up more than 50% last year.

Michael Krauss is a partner with Marion Consulting Partners based in Highland Park, Ill., and can be reached at Michael.Krauss@Marionpartners.com or news@ama.org.