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January 11, 2007

Changing Ingredients for Web 2.0 Success – Continued with Reader Help

More money, I posted, is needed for web 2.0 success now that everyone knows you can start a web 2.0 company on a shoestring. Readers of Fractals of Change have added useful breath and depth to the discussion both in the comments on that post and on their own blogs.

Brian Oberkirch blogs that there are other uses for more money than just PR (I should have been more clear about this. He’s certainly right). “The thing startups have to spend capital on is this: time. Nuance and pitch-perfect user experience are going to sort winners from losers. That takes time, community engagement, trial and error, a team.”  He cites slow-build successes like FeedBurner, WordPress, and 30Boxes who have built great value slowly rather than hurried to an early exit.

ESPECIALLY, if you’re gonna end up spending money on PR, you wanna get the product right before you start trumpeting it. Stowe Boyd picks up on this very well:  “Companies that squander their first launch with less than the "social tipping point" -- the minimum level of social features that will engender viral uptake -- will simply fall from view. There's too much innovation, too many apps, too many releases, too much to waste people's time with a half-baked product. Get it right, or you will disappear into the dustbin of failed promise.”

Stowe also laments the number of me-too products and suggests moving into the “white space” of unmet needs.

History can teach the wrong lessons because each novelty is a novelty only once. You can’t be a “me-too” novelty.  When del.icio.us first launched it had an almost impenetrable UI.  People took the trouble to learn to use it because it was an incredibly useful clipping service; enough people used it so that it benefited from the network effect of being an aggregator of many people’s clippings.  The rest is history - but DON’T try to repeat it.  One, as Stowe points out, there are already enough clipping and general purpose “also liked” services; two, since you’re going to pay dearly one way or the other to get attention, you don’t want to squander the one and only time people link from TechCrunch to your product with an unsatisfactory experience.

Reader crunchback comments:  “Raising "enough money" as you say, is key. Sometimes the right amount is $0. None, nada... …For most Web 2 entrepreneurs, the path to riches is bootstrapping or lightly funding a business that has a real revenue model out of the gate. It ain't as cool as telling all your buddies about how you closed a round that makes you worth $30m on paper. But the paper's worthless and for most Web 2.0 VC investments will stay that way….”

Seems like a contradiction to the thesis that you need MORE money to succeed but it isn’t. If you raise too much money too soon, you will be under great pressure from investors to produce results. This can lead to premature release of products, shoddy execution, or simply selling out too soon. On the other hand, if you can use just a little money to get to the point where you demonstrate great potential (revenue’s not a bad benchmark nor is it the only one), then you can raise the larger sums you’ll need later at a better multiple. Very much why Fred Wilson talks about smaller initial investments by his fund leading to larger investments later.

Come to think of it, the Web 1.0 bubble was an example of too much money way too soon.  Nothing compares with the pressure and expectations of being a public company. (OK, I’ll stop whining.)

Reader Rick Burnes comments:  “A lot of what you're saying is based on the idea that TechCrunch, A VC and Boing Boing are the blogs you have to get mentioned on in order to succeed. That's not necessarily true. Many current startups focus on verticals where these blogs are irrelevant and the bloggers that do matter have far less Web 2.0 noise to deal with.”

Excellent point.  It’s much easier to get to a critical mass of attention in a segment of the market than the whole market. If you’re introducing a vertical market product, you want attention which is focused on and credible to prospects in that market – not the general market. Even if you have a broad market product, you may well want to start by getting to a critical mass of attention in a subset of the market – then emerge from your beachhead both with more funding and a core of users.

Yahoo.licio.us is about del.icio.us and network effect.

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