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27
Mar 11
Sun

Color: an analysis (Part 1)

This is part one of a two-part post about the launch of Color.  Click here for the second part, which examines Color’s privacy practices.

Enter Color

Color isn’t the next Google.  But it could be the next Twitter.

A mobile app called Color launched this week.  It would have been an otherwise unremarkable launch had it not been accompanied by the news that the company, Color Labs, Inc., had received $41 million in funding from Sequoia Capital, the VC arm of Bain Capital, and Silicon Valley Bank.  Assuming Color’s founders still have control of the company, the most conservative estimate of Color’s implied valuation puts it at a little more than $80 million.  This investment appears to have been made on the basis of the strength of its reputedly star-studded ~30-person team (headed by Lala founder Bill Nguyen) and a working prototype, because when $41 million was plowed in, Color had no revenue, no users, and no live product.  Its most “tangible” asset was its U.S.-centric domain name, Color.com, which was reportedly acquired for $350,000.

Sequoia Capital partner Doug Leone was reported to have said, “Once or twice a decade a company emerges from Silicon Valley that can change everything. Color is one of those companies.”  Which is expected when you’ve handed over more money than Google received in its initial funding round.  It’s a big call to make.  If there’s only room for one or two a decade, I can only think of two tech companies founded within the last decade that have reached 11-figure valuations.  For a mobile app to reach these lofty heights, well… let’s just say the gut reaction is immediate.  Color is going to have to be an app that you use multiple times everyday: Email, Google, Facebook, and perhaps Twitter have achieved this.

At a basic level, Color lets you snap photos (and video) with your phone.  The photos get uploaded to Color, which then pushes them out to all Color devices in your physical vicinity (within a few hundred yards), as well as to your friends further afield.  You get to see what other people in your vicinity are seeing – some will be friends, some will be strangers.

Color’s algorithms also attempt to group together bunches of photos taken by different people based on location, lighting, past interaction with people, and even ambient noise (yes, the app apparently turns the microphone on).

That doesn’t sound like something that might be worth $10 billion one day.  But, the VCs backing Color are not mediocre people.  So I think it’s natural that we give Color the benefit of the doubt and assume that the initial app is just scratching the surface of what the team in downtown Palo Alto want to accomplish.  Let’s let our imaginations run wild and see how the premise of the current app could bloom in the future.

The possibilities

Interviews with CEO Bill Nguyen disclose that Color is not really about sharing photos.  It’s about a “new way to build spontaneous social networks – and collect massive amounts of data about what people are doing and where they’re doing it.”  Once we frame it in that light, we start to see a few use cases that may be possible in the future.

The most cited one is people attending the same event, for example a concert or a sports game, who will be able to see the event from different perspectives.  This then extends itself to news reporting, and for search and rescue in natural disaster zones.  Something happens in the world that breaks on Twitter (“massive hailstorm in Sydney happening now”), and you skip over to Color, zoom in on the affected area in Sydney, and then get instant access to photos of the event from different people who are there.

Another use case is to connect strangers who are physically close, but with whom you would otherwise have no reason to come into contact.  For example, apartment buildings or public transport.  I’m a little dubious about this, but as inhibitions regarding privacy drop, some people will definitely make use of this.  To put it bluntly, it’s entirely possible that someone has already gotten laid by someone who they met through Color.

At the moment, Color collects a lot of data.  A lot.  It is basically building up a repository of  media items which are geotagged, timestamped and associated with an individual.  Image recognition will enable people and objects to be automatically tagged, and other semantic meaning can be embedded into the media.

This all reminds me about a book co-written by Arthur C. Clarke and Stephen Baxter called The Light of Other Days.  (A similar premise was depicted in the movie Déjà Vu, featuring Denzel Washington.)  In the book, a technology exists which allows someone to open up a “read only” wormhole into any past point in the spacetime continuum.  In other words, you can pick a time and place and then watch what happened there.  This is one place where Color might be headed.  You can relive a night on the town, or a vacation with friends.  A high school class could explore future historical protests similar to the one in Tahrir Square, or journey through the bloodied streets of Benghazi in real time as seen through the eyes of those at ground zero.  This idea has already been explored in some ways – Microsoft’s Photosynth technology stitches together geotagged photos on Flickr and recreates 3D scenes from photos that were taken at the same location.

That is the promise, but Color has some work to do to get to that stage.  I installed the app when I was at work.  I immediately saw a group of about 30 users and their photostreams.  It was mainly headshots of people – people eating in restaurants, people in the street, people in offices.  But I was most amazed because there were 30 people in my vicinity that were already using Color, and every minute or so, another photo would pop up on my screen – it seemed like user adoption had blown up overnight.  Alas, I later found out that Color’s offices were literally a block away from ours, so I had inadvertently gotten to “know” half of Color’s staff.

The trouble was that I had no context for the photos.  I didn’t know these people, they didn’t know me, and I guess I could have started commenting on their photos, but that seems like a creepy thing to do… like hanging around a clique and trying to break in when you clearly don’t belong.

I tried it at home on a weeknight.  Within sniffing distance of downtown Menlo Park, no one was using it.

What’s that you say about a business model?

Color is apparently one of those businesses where the idea is so appealing that the business model is just a detail that can come later.  “Build it and they will come… we’ll monetize it later.”  The app is free and the company intends to make money via location-based advertising.  Color is going to be competing in a space which is going to be crowded: Foursquare has been working on this for a while, and Groupon is apparently trying to muscle in on it as well.

I have a feeling that Color has the potential to become an important part of the internet, but only in the same way that Twitter has.  Twitter has little revenue to show for its circa $5 billion valuation, and it has been “experimenting” with different business models for years.  Twitter received enough funding and revenue to get it through to profitability (maybe?), but at $5 billion you’d expect it to be earning profits somewhere in the low 9-figure range.  On the other hand, it’s now part of the plumbing of the net.  It’s vital infrastructure.  There is another infrastructure-style site that provides a valuable benefit – Wikipedia, which is a non-profit organization that runs on a budget of only $10-20 million a year.

I believe that Color was invested in at a very overvalued price, but there is a reason for this – the wisdom of which I have mixed feelings.  This trend seems to have been growing over the last year or so as investors clamor to get in to companies at the ground level.  I attended a Y Combinator Demo Day last year and the start-ups there were routinely raising angel funding at $5+ million valuations.

Perhaps it’s a side effect of what’s been happening with Facebook.  Even if you wanted to invest a lot of money in Facebook after you saw The Social Network, you couldn’t.  This seems to have pushed Facebook’s valuation way up.  Private stock is normally valued less than public stock (all other things being equal) because of the benefits that liquidity offers.  Perversely, the opposite seems to be true – it is because the demand for Facebook stock is so high, and the supply so tight, that the lack of liquidity is actually pushing prices up.

It still makes some kind of sense, though.  Let’s say, for the sake of argument, that Facebook is worth $20b and you had the opportunity to invest at a $30b valuation.  The 50% premium may still be attractive since you might not actually have the chance to buy it in the future.  By the time the private stock becomes available, or the company floats, the company’s “true” valuation may have grown to $100b.  You’ve still made money hand over fist because you managed to get in early.

It seems that angels and VCs have cottoned on to this a bit.  It’s a bit of FOMO.  Better to get in now at an overvalued rate, than get in later when the valuation has skyrocketed.  And it’s easier for a company to double $10m in revenue than $100m in revenue.  Of course, investing early at high valuations just pushes both sides of the risk/reward equation up.  (There’s nothing wrong with a bubble from a personal investment sense… just make sure you get out of it at the right time.  I have a friend from high school who made 100x on a sizeable punt on Rambus, having sold out shortly before its stock price crashed.)

But I’m going to move on now – many people have written more about the viability of Color in much more depth, and there are a lot of other interesting issues that they cover, such as the perils of choosing a generic word as a company name (it’s going to be challenging to trademark, not to mention issues with SEO), the app’s UI, who comprises Color’s team, and so on.  In the next part of the post, I want to talk about privacy, because Color raises a few fascinating privacy topics.

Continued in Part 2…

  9:55pm  •  Internet  •  Law  •   •  Tweet This  •  Add a comment