We’ve looked at dozens, maybe hundreds of Web 2.0 companies over the last 18 months, but we haven’t invested in any. Why? We haven’t found any that meet our criteria. However, we think there are still tons of opportunities, and we want to invest. Here’s a primer for the sort of company we’re looking for.
The first question we will ask is: “What gives you an unfair advantage?” With a plethora of new (and old) companies doing new things, there are almost always a handful of others that sound just like you. A good competitive matrix slide helps, but the real answer we want to hear is something structural. Most likely that takes the form of deep technology, proprietary content, or an exclusive business deal. Clever UI and new implementation languages don’t make for sustainable differentiation, despite the fact that a few companies have followed that formula to success.
Here are some examples of good (as perceived by us) differentiation: Riya has deep technology in facial and image recognition, which is not likely to be duplicated by another startup in just a few months. Pandora has generated unique and proprietary content with its “music genome” concept, which has taken them years to create. And Zillow signed a deal with Yahoo to provide their home estimates on Yahoo Real Estate. These are all things which set these companies apart from the many potential “me-too” companies that VCs see.
The next question is likely: “What is your business model?” One thing technical founders often do is put the product or service out for free, planning to put in the business model later. Often, however, the business model needs as much rapid development as the feature set, and can take quite a while to emerge. We are ultimately financial investors, and while a few companies have successfully turned huge audiences and low revenues into great outcomes (cf YouTube), we are looking for real revenue models to invest in.
One more question that we are likely thinking is: “Are you a feature or a product?” If your service depends on another service or community, like MySpace, then you’re going to face questions about why MySpace wouldn’t just duplicate your functionality. There is a fine line between “boiling the ocean” (trying to do too much) and being just a feature, and that’s where you want to position yourself.
Finally, there are a couple of characteristics that will definitely help your case. One is a clear understanding of your short-term direction, and the specific milestones you are trying to reach – e.g. number of visitors, downloads, etc. Another is a culture of rapid prototyping and fast learning. The great thing about the web is how effectively you can measure progress, and how quickly you can implement, test, and refine new features and business model changes. You may not end up where you had originally planned, but if you can collect and rapidly react to feedback, you’re more likely to find something that works.
These are questions that any entrepreneur should ask themselves before starting any company, but they are particularly important to Web 2.0 companies. Our door is always open, and with these things in the bag, you might get us to open our wallet too.