The first session of the 99% Conference which I attended last week was a session with Union Square Ventures’ Brad Burnham. If you don’t know USV, you’ll know about their portfolio: Twitter, Foursquare, Tumblr, among a handful other network-oriented startups. It’s worth understanding the principle criteria for USV investments to digest the advice he gave the gathered crowd. They invest in large networks of very engaged users, defined by user experience, and which are defensive against network effects. They look for novel and differentiated networks: they won’t, for instance, won’t fund an Pinterest clone.
Brad’s talk centered on the weird economics of networks, and how they behave and are defined in fundamentally different ways to industries defined by the products they create. Networks don’t create a product: they behave much more like governments in that they provide the infrastructure on top of which the network can thrive. Instead of building roads and transport links, network companies handle the physical technical infrastructure, but also the tasks like spam control and manage user policies.
Network companies play on enabling efficiencies. Craigslist destroyed $17bn of value from incumbent, industrialised companies: i.e. newspapers. All Craigslist do with a team of about 20 is connect the endpoints: the users perform all the work. They cost next to zero to start, and Brad references Foursquare that garnered 100k users on just $25k. Tumblr has never spent a single dime on marketing. New features are deliberately hidden as easter eggs, and they leave the dissemination of the platforms functional value to its most influential users (“Hipster bloggers in Williamsburg”, he suggests).
Here are a few nuggets of solid advice fro the talk:
- You don’t always need to consider the monetary return from a user handing their data over to your network. A real-world corollary is the fact you wouldn’t throw the host of a dinner a couple of bucks after you’d eaten; the benefits of the dinner party are less tangible in the same way that your product’s benefits might be.
- Think really carefully about the core group that might initially be interested in your network. Twitter was founded by the attendees of SXSW; Facebook by Harvard students. Think carefully about the physical attributes of your userbase and what their needs are, rather anything all-encompassing.
- Don’t lose sleep over a major incumbent swooping in on your idea. (Read: Google.) Big companies are amazingly inefficient. An incumbent often can’t mobilize or incentivize their staff in the same way a very focussed team of hackers and designers.
- Even if your startup is knocked down by an incumbent, only your investors lose: you won’t. By building a product and going through the processes it demands means you are picking up extraordinary experience and connections. The time you spend on working on your product is never wasted: you will always come out stronger for it, regardless of the outcome.
- What USV looks for in a startup isn’t always easy to define. What they do look for is a team of people who are very well-versed and proficient in both code and design (David Karp of Tumblr): they are not looking for “day-trippers”: someone with an investment banking background is unlikely to be successful in creating a consumer-facing social network.
- Before approaching a VC, they want to see evidence of growth and traction. And if you are getting growth and traction, they’ll likely hear about it and approach you before you need to approach them. So focus your efforts on traction.
- Don’t overplay the importance of ad revenue in your pitch. If ad-revenue plays a very large part of your pitch, it starts to look less compelling. This may not be true however if your product or network plays to a very specific niche or consumer.
- Further to this, advertising was created for television and magazines: advertising was never created for the web (and effectively doesn’t work), so re-consider what you mean by advertising revenue; consider new approaches.
- Don’t approach a VC until you show commitment. It’s unlikely you’ll have a VC believe in you if you don’t believe in your product. You can demonstrate commitment by leaving your day job and spending your time focussed on the product. There are exceptions: Delicious was founded by Joshua Schachter while he worked at Morgan Stanley. Yet he demonstrated commitment by being willing to walk away from his $350k-per-year Quant analyst job to focus on his product.
- Ultimately it costs nothing to create a product. At least do something with your idea, however basic.