A few weeks ago, Tom Shields of Woodside Fund contributed a post to VentureBeat listing his criteria for investment in a Web 2.0 company. Rather than comment on that post, I thought I would offer an alternative version. In researching the key success factors for 20+ successful Internet start-ups on my blog, Startup Review, several recurring themes have emerged. I wouldn’t so much call these investment criteria, as much as I would describe them as leading indicators for potential success. A consumer Internet service that offers a convincing story along one (or multiple) of the below indicators may just be the next big Internet success story. If I were working at a VC firm or contemplating pursuing an entrepreneurial idea, these would be the things I would look for in an Internet company.
Product that fits the needs of an underserved niche
Conceptually this is pretty easy to understand, so I’m probably not providing an earth-shaking insight here. However, a company that has truly unearthed a market need that isn’t being met by other services and delivers upon that need with the right feature set and value proposition represents the best opportunity for an Internet start-up today. I think that the venture community tends to underestimate the potential of niches to transform themselves into the mainstream plays, which explains why companies like eHarmony, Newegg, Zappos, and Betfair were not backed by top tier VC firms until after they had proven their success.
Strong ability to leverage natural search as the primary means of user acquisition
I think this is probably the most under recognized opportunity area for Internet entrepreneurs and investors today. It is no secret that search engines, and Google in particular, have become the gateway to the Internet. Search query volumes continue to grow at a fantastic clip, and as such offer one of the best ways to acquire users at no cost. It is particularly appealing to start-ups, because search neutralizes the need for brand recognition.
Any company that can demonstrate an ability to achieve high natural search rankings for a high volume of search terms stands a good chance to become a success on some level. Recent examples here include Yelp and Digg, both of whom owe a great part of their success to natural search. In the case of Digg it was inbound linking from tech bloggers and for Yelp the production of a massive amount of searchable, local user-generated content that did not exist before.
Service that empowers people to make a living
Every Internet service needs power users, and I would argue that the best type of power users are those that have a vested personal financial interest in the success of that Internet service. There is probably no better example of this than eBay and the legion of people who earn either a full or partial salary from their eBay activities. iStockphoto is another good example, enabling semi-professional photographers access to the stock photography market, and some supplemental income for themselves. An emerging example is uShip, a company that is transforming the freight services market by leveling the playing field for sole proprietors.
Free (or near free) alternative for a previously high cost service
Again, not an amazing insight, but one that has been time tested on the Internet and hence I feel is worth re-iterating. Really this is just another way of framing the value proposition. Some good examples of this include Greenfield Online, the pioneer in online market research, Craigslist as a free alternative to classifieds, and iStockphoto for near-free expensive stock photography.
True viral distribution potential
A viral Internet service is one where each new user must involve friends to derive personal value from the service. This is best exhibited by communication and hyper-social services. Telling a friend is not an option; it is a necessity in order for the user to derive value from the service. Although it is easy to incorporate viral feature sets into any Internet service, actually getting users to utilize these features is quite hard unless they recognize the value they personally and immediately will receive by involving friends. Thus, while many Internet start-ups will claim to rely on viral marketing, only a select few will actually qualify as truly viral services.
Ability to jumpstart user acquisition through distribution partnerships
Having a distribution channel to jumpstart user acquisition isn’t a requirement, but it does increase the likelihood of success. Skype was able to acquire its first 500,000 users by being bundled with Kazaa. MySpace migrated users over from a dating service (CupidJunction) and made heavy use of database marketing. Bebo marketed to the install base of its established, sister property BirthdayAlarm.com. Even Digg launched via a TV show that reached 100,000+ of its target users (tech enthusiasts). As a counterpoint, successful services like Flickr, Craigslist, Piczo, RockYou, Xfire, and countless others did not benefit from proprietary distribution.
Story that lends itself to mainstream PR
Although many will claim the death of mainstream PR in Web 2.0, I would claim that it is still a key ingredient to achieving scale and mainstream adoption. Thus, companies that have the potential to be good PR stories after achieving some initial success, have a much greater likelihood of being break-away successes. The truth is, some services are sexy and make for good stories, whereas others do not. Companies like Hotornot and Craigslist made for great stories, and thus received massive amounts of press attention. More recent examples include MySpace, YouTube, and Zillow. Mainstream PR cannot provide the spark, but it can fuel the fire in a big way.
21 Comments
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Sundar Krishnamurthy said:
I am an avid reader of your startup reviews, great summary!
Another crucial ingredient I believe is the ability to sustain the community’s loyalty to your offering (”stickiness”, if I may use a Web 1.0 word). For instance, EBay is able to do it with the revenue potential. LinkedIn seems to do it by strengthening the member’s network with every new link, which makes leaving that much harder.
Lack of this element may explain the reports on users shifting from one social network site to another. There is nothing tangible, monetary or otherwise, to keep users coming back once the novelty wears off.
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Mike Brown said:
Hey Nisan- Nice post. I’d add a couple more thoughts, as I went through a similar exercise myself recently when thinking about what’s *hot* and what’s not-so-hot in consumer applications. I would add:
-Instant (or near instant) gratification - this means I don’t have to download something and get a ton of friends on the thing before I actually get some goodness from the product/service.
-Clear use case. Duh! Some sites are impossibly hard to understand when you show up for the first time. If I can figure out what to do there in about 10 seconds, forget it. You’ve lost me.
- Improve an existing user behavior rather than require a new user bahavior.
- Non-linear economies of scale. Obvious example is communication products but it could apply to cost reduction as well as user adoption.
- Previously unknown ability to personalize. Personalizing shopping, media, medical recommendations, restaurants, etc. The beauty of the web is in finding new ways to get ME exactly what I want.
- New or proprietary access to data presented in simple ways. It’s cool when companies take previously unknown, inaccessible or complex data and make it usable for consumers to make decisions. Zillow, Farecast, and lots of others do this.
- Assume people are really lazy and mostly selfish. Businesses predicated on people doing stuff just because it helps others are a bit naive (this doesn’t mean people don’t want to participate in collective projects, ala Wikipedia).
- Help me get the stuff I want cheaper or make better decisions about stuff I will buy.
- Help me get access to my media in new places I couldn’t get it before, e.g., my music or movies or shows on the go (iPod, TiVo, SlingBox)
- If it’s mobile, does it work on all handsets or just some? Do I need to integrate with the carrier or does the service just work out of the box?There’s more, but those are a few I thought I would add.
-Mike
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Nisan Gabbay said:
Hi Mike,
Nice to hear from you and thanks for taking the time to add to the list. I tried to keep the list broad and parallel, while some of your criteria are a little bit more specific. I do like and agree with most of them. I think the one that stands out to me the most is your first point around instant gratification.
I would re-state this as receiving a high degree of personal value from the service without their needing to be network effects in place before value is received. There were some good posts on this particular topic floating around the Web 2.0 blogs awhile back.
The other point that I like a lot is new and proprietary access to data.
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Patrick Lor said:
Nisan, Nice work! As a former shareholder/exec of iStockphoto, I’m getting a lot of inquiries regarding investments and advice. It’s absolutely essential that a startup generates enough excitement and passion to get free WOM advertising and evangelism. Businesses that require millions in launch advertising budgets are so dot.com . . .
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jon said:
I rarely comment on articles but this one deserves all the praise. Concise and to the point, and I happen to agree 100% with it. Plus, some of the specifics that Mike’s comment mentions are very relevant to my business. In particular: ‘Improve an existing user behavior rather than require a new user behavior’ and ‘previously unknown ability to personalize’. Others, such as ‘Clear use case’ are an outright mental puzzle and personal daily challenge.
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Courtney Benson said:
The most succinct article on the subject to date. Thought that Mike Browns comments were right on the money. I’ll be checking out “Startup Review†more frequently from now on.
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Michelle said:
Probably one of the best articles I’ve read yet here. You have yourself a new subscriber.
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Nisan Gabbay said:
Thanks everyone for the kind words - I’m glad that people have found the article useful. I’d like to point out that we have a nice conversation going about this post at Startup Review (www.startup-review.com). Some great feedback from Startup Review readers.
Thanks,
Nisan -
Naked King said:
Blogs are becoming self reinforcing distortion reality fields, dunked in a tank of kool-aid. Do you notice that most ‘top’ bloggers are being commented on by other bloggers and startups who are trying to be notice and written about by other top bloggers.
In other words, is anyone reading these things besides other blog writers and parasitic attention starved one man startups.
LOL.
I fit in a third category… guy looking for some time to kill on the net. Randomly hit these blogs, same one never more than once/twice a quarter.
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Heath said:
How do you find an investor when you meet all these?
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Nisan Gabbay said:
Hi Heath,
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Nisan Gabbay said:
Hi Heath,
If you can demonstrate even 3 of the 7 listed above in the real world, the investors will come find you! Unfortunately, a compelling business plan isn’t enough these days. My advice is to build the service and prove that you meet some of the points above. Don’t waste your time looking for investors.
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Tom Steen said:
Gabbay: I’m contacting you from the Midwest (Iowa) where we are still undergoing a very long term transition away from the agriculture/food chain and manufacturing sectors as primary drivers of enterprise growth. As a result, we are probably not as rich in the human capital needed to consistently succeed in growing internet enterprises. Is is possible, in a general way, to characterize the kinds of people/intellectual capital needed by upstart internet enterprises.
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dave mcclure said:
great summary & observations :)
as with your other articles on Startup-Review.com, definitely worth the read.
- dave
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Heath said:
I have one that I believe meets 11, combining the article and Mike Brown’s list. I’m a one man show and I’m wearing all the hats. It will be great to get found!
-heath
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Chris Lake said:
Nice post Nisan. Points 1 and 2 are inextricably linked - niche works really well online, makes for amazing search engine fodder.
Last night I wrote a business / feature development plan for a startup (which is about to build out a new web app). Every one of your points is represented in it. Which makes me feel even more positive about 2007… : )
c.
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PaulK said:
I think you need to add a couple other points:
1. If just a duplicate of an existing service/site, how will this make a difference? When you have free sites, you cannot gain market share by undercutting on price! Adding some cool feature is often not enough as the big name ones can add these quickly and easily too (unless so unique you can get a patent, but then the question is whether users want it).2. How will it make money? You kind of left that out! Some rely on ads only - so the question is whether you can get enough ads using some technique to add value (ie. targeting, keyword matching, profile matching, etc); will the kind of users match the advertisers who will actually place ads? If you rely on free accounts with fees to add features, how many will pay and for how long? The risk in many of these is that few will use the fee services, or will only use for a couple months and cancel.
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Mike McGrath said:
Nisan, Thank you for the insight. My businesse fulfills the vast majority of these requirments, but operates in a micro-niche. Q: In your opinion how niche is too niche, and how owuld you determin this?
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ajay said:
You got everything but the kitchen sink. Add WOMEN/girls, cause if women won’t digg it.. that click through digg isn’t going to come through…
Where do men/boys go? - whereever there are women/girls.. !
ajay
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MartinFortKnox said:
This column was very informative. Kudos to the writer. At the end of the day it breaks down to whether or not you have the patience. Patience is a virtue. There is no denying that. Patience is what I believe the 5 percent of the people who succeed in networking have that the rest don’t (yeah that number is true 95 percent of you fail, but it doesn’t have to be that way). It takes time grow anything. Nothing happens overnight. You have to realize that its gonna take months and maybe years of CONSISTENTLY putting time into your business. Consistent is the focus here. People spend an hour or two one day then don’t visit their business again for several weeks. This is an ineffective strategy to become successful.
Yeah, I know it’s hard especially when your not making any money and time is limited but if it were easy everyone would be internet millionaires.The truth is you can do it. All you need to do is understand how to focus your energy like all the top performers in any industry in the world. Through repetition, patience will be something you can turn on and off like a light switch. But what kind of repetition you ask?
“If you listen to your fears, you will die never knowing what a great person you might have been.”
-Robert H. Schuller-If you are interested in some help in your business visit my videos at
or check out my site at
http://www.bankrollmarketing.com
Thank You
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[...] Venturebeat: what to look for in an internet investment. [...]
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» Top 7 indicators of consumer Internet success - Startup Review Blog said:
[...] A few weeks ago, Tom Shields of Woodside Fund contributed a post to VentureBeat listing his criteria for investment in a Web 2.0 company. This spurred me to write an alternative version based on the recurring themes that we have seen through the case studies on Startup Review. I would encourage you to go read the full article on VentureBeat, but below is the list of the top 7 indicators, at least for the time being. If I were working at a VC firm (which I used to) or contemplating pursuing an entrepreneurial idea (in pursuit now), these would be the things I would look for in an Internet company. I’d be very curious to hear thoughts from Startup Review readers. If you have ideas for additional indicators, please leave a comment below. [...]
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[...] Z odliÅ¡ného úhlu se na úspěšnost startupů podÃval Nissan Gabay, dÅ™ÃvÄ›jÅ¡Ã analytik Sierra Ventures (a autor blogu Startup Review, pÅ™es který jsem se k diskusi dostal), který se dnes jako spoluzakladatel startupu pohybuje na druhé stranÄ›. [...]
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[...] Venture Beat Contributors » What to look for in an Internet investment (tags: entrepreneurship startup businessmodel web2.0 innovation) [...]