Archive for the ‘differentiators’ tag
When most venture capitalists think of “barriers to entry”, they think of things like:
– Intellectual property (e.g., patents, copyrights)
– Strategic relationships
– Infrastructure and information
But I think the value of community as a barrier to entry is greatly underappreciated. And I’m not just talking about the network effect that keeps competitors away from Facebook. I’m simply talking about the existence of a community at a particular destination site. When you dive into it, there are thousands of examples of online communities outlasting the purposes and active management of the sites they inhabit.
Take my own GoCrossCampus, for instance. It was a fairly small (100K – 200K uniques / mo) gaming site focused on strategy games and the college market. In Fall 2008, the GoCrossCampus team started building a new site — PickTeams — and greatly scaled down support of the GoCrossCampus community. Yet the members stuck around in large numbers, continuing to play, chat and complain about the low level of support. (I wrote a bit about the reasons why GoCrossCampus failed here).
And GoCrossCampus wasn’t even built to sustain a community of gamers. It was built for large campus events, not a group of dedicated users. Yet the users stuck, even after we wrapped up the company and took the site down to one server.
And it continues. When we took the site down in March of this year, it sent a diaspora of ex-GoCrossCampus users to various sites. To this day, “GoCrossCampus” is still one of the top keywords leading to my blog.
Talk to anyone with experience bringing groups of people together online, and they’ll tell you similar stories. Communities are tough to build and tough to disperse — even when there’s a “better” product or social option out there, and even if the site in question isn’t “capturing the social graph”, so to speak. Look at 4chan, for instance. It’s essentially a klugey, spam-filled message board. There are no accounts. There’s no concept of “friends”. There’s no video support (thank god). Yet millions of people continue to visit it every day.
So is 4chan “defensible”? Not in the eyes of most VCs. It has no specific intellectual property or strategic relationships, and it isn’t capturing any social graph data or asking for any “investment” of profile info from members. Yet it has stuck around for an absurdly long time in the face of intense competition. Perhaps it is worthwhile to take a second look at our concept of defensibility when it comes to online destination sites.
I meet a lot of entrepreneurs and hear a lot of ideas and business plans from all across the board. Most have — at the very least — a kernel of a good idea in them. But many don’t know what kind of business they are. There are an unbelievable number of entrepreneurs focused on technology when their entire business model is predicated on the success or failure of a marketing campaign, for instance.
This isn’t to say that technology isn’t important for those businesses, but rather that it isn’t the core differentiator that interests investors and makes or breaks the company. If you are running a sweepstakes business, for instance, I don’t want to hear about your awesome Rails architecture. I want to hear about how you are going to acquire users for $1.50 and monetize each for $3.00. Sweepstakes (in most forms) is a marketing business, and that is really what a potential investor or partner wants to hear about.
I like to put startups in three categories as defined by the core factors driving their success:
Technology Businesses: The core differentiator of your business is your technology. Generally, your company either (a) has real intellectual property around your technology and/or (b) is founded by leading engineers in the field.
Marketing Businesses: Your business is driven by its ability to acquire and retain users/customers more effectively than your competitors.
Relationship Businesses: Your business’s success or failure will be determined by your ability to forge lasting relationships with customers and/or strategic partners.
I’ve rarely found businesses that are truly driven by some combination of those factors. In most, one factor greatly outweighs all the others. And there are patterns behind misconceptions — most commonly, first-time entrepreneurs overweight the importance of technology as opposed to marketing or relationships. This makes sense, as an entrepreneur’s first goal is often to get a product up. But products are hard to build real differentiation around unless you are doing really innovative stuff, like building new database backends or search algorithms. In most consumer internet businesses, marketing is the most critical component. In B2B plays, relationship-building tends to make the biggest impact. And in general, progress on the core differentiator is what VCs mean when they talk about needing to “see traction.”
Want to generate awesome startup ideas? An interesting trick is to identify immature industries where the leading players are focused on the wrong differentiators. My own LabApp is an example of this — while the existing (immature) players are focused on relationship-building, I happen to believe that software commercialization is a marketing-differentiated business. As with all startups, time will tell if LabApp is on the right track, but looking at “differentiation-based” pivot points can be a great way to generate innovative and revolutionary products in immature industries. Some off-the-cuff ideas:
1) Take a relationship-based approach to marketing-driven social games to piggyback off of major brands’ name recognition. This is similar to what Arkadium is doing to much success with the social advergaming concept.
2) Use a marketing-driven model to gain independent adoption to a new CRM software product from the bottom up. Almost all SaaS CRM providers are currently relationship-driven, which leaves open a massive long tail of independent salespeople.
3) Use technology differentiation to pry government IT contracts out of the hands of bloated, relationship-driven contractors. Easier said than done, but someone’s gonna make a lot of money from this in the next 15 years.