Is your startup a feature, a product or a business?May 11, 2013 Back to blog
Through my development as a junior VC, I regularly find myself asking questions similar to those of my entrepreneur friends.
Without many ghosts of pitches past, I glean knowledge from others’ refined judgement and execution. Take it this way: venture capitalists are paid to act on a point of view, ideally one that proves profitable. But how do VCs identify what will return multiples on their money, many times years ahead of an outcome? What do they pay attention to when making such decisions?
Even the most basic of feedback can seem confusing.
Just one thing
Frequently, founders are told “Do one thing and do it well.” Instagram is an oft-cited winner that honed in on a simple task: mobile photo sharing. Instagram’s former self, Burbn, was scrapped after feeling cluttered and overrun with features, with its wider offerings around location check-ins and social event planning. Instagram CEO Kevin Systrom said, “Focusing on one thing and doing it really, really well can get you very far.” In fact, $1 billion far.
Cue envy. Cue funding funneling to players riding at the coattails. There were so many Instagrams for video at one point that The Next Web felt compelled to pick just the top ten.
Okay, that’s easy enough. Crush it performing one task.
Not so fast. Founders also sometimes hear that they are not building real businesses. Instead, they are declined as FNACs - just buttons on a page. Well, any number of technology behemoths could build that; how defensible could this be? Thanasis Delistathis from New Atlantic Ventures cleverly pointed out that blue chip companies like Apple, Google, and Microsoft “have built such a cash cow in a business line…that in their search for growth spend lots of money to give features away.”
But as we’ve seen, the ecosystem can bear fruit to many winners. Spark Capital’s Andrew Parker astutely cut up the Craigslist homepage to show how the directory has given way to category-oriented companies like HomeAway, OkCupid, and StubHub. It’s an image regularly shared across the web, though infrequently commenters address Parker’s amazement of how Craigslist continues to compete, “if not dominate”, with basic HTML/CSS UI and fewer features.
So, how does one define and identify this “one thing”? What exactly is a feature? A product? And, what do investors consider to be businesses?
A matter of perspective
Here’s the secret: investors themselves often struggle to delineate the difference among these identities. Wasn’t Twitter just the status bar feature on Facebook? Facebook Places launched in 2010, a year after Foursquare. Did Foursquare then qualify as a feature?
Bill Gurley from Benchmark Capital drew criticism after claiming Dropbox to be a “major disruption” because the team “had taken a hard problem – file synchronization — and made it brain dead simple” as disbelievers fell into the Steve Jobs camp that file sync is a feature, not a product. Rory O’Driscoll from Scale Venture Partners came to Gurley’s defense, stating that the feature label should be taken as a compliment. “To get any traction in software today you have to start with a feature — an atomic unit of delight. You have to solve one problem superbly.” Dropbox is currently valued at over $4 billion.
Google, Yahoo, and more recently Mailbox are other examples that were turned away, or funded, based on subjective viewpoints of their status. Where did startups like Disqus and UserVoice first fit in? Attempting to find the common thread was perplexing.
Pulling discussions together, features perform an action. Products, normally a package of features, solve a problem. Businesses, potentially a package of products, provide recurring value to users. Ideally, these users offer up some measurable currency (data, time, cash) in exchange, otherwise it is not a particularly sustainable business. Do keep in mind that what may be disruptive and novel today may only be a button on a page tomorrow, shifting investors’ attitudes accordingly. Further, it could be argued that at the early stage investors almost never see full-blown companies, but kernels of opportunity through features and products.
Cool. How does this apply to raising venture capital?
Jason Mendelson from Foundry stated that the discussion around FNACs ultimately comes down to single question: is this a big enough opportunity in which to invest?
Venture capitalists evaluate the size of an opportunity centered on one primary ‘thing’: anticipation. Investors anticipate the behavior of competitors (current and prospective) and customers (also current and prospective), before checking into any concerns regarding management, the government, and black swans. Their interest is to pinpoint, then pile their time and capital into, high potential exits. They place bets on predictions, encouraged by evidence.
When considering competitors, VCs will ask, “What is challenging to replicate?” With incumbents and future contenders boasting perhaps more talent, funding, and scale, where is the edge? For some, this may be their sticky network (Evernote, Buzzfeed, WhatsApp), for others, a growing pool of insightful information gathered from complex algorithms (Palantir, bitly, Etsy). Is this particular opportunity unassailable?
When considering customers, venture capitalists will ask, “What are the trends?” Where are the signals indicating that people are climbing over themselves to be a customer and evangelizing the solution to peers because it is simply so special? Is the dynamic likely to continue and grow into the future? A good example might be Airbnb, which has grown by leaps and bounds domestically and abroad despite the challenge of building a two-sided marketplace and initial skepticism of renting a stranger’s home.
The shift of the experience from experimental (at the least this will make for a good story) to utilitarian (I just want the most affordable/delightful/convenient stay) is key for unlocking hearts and wallets of the masses.
Getting back to this “one thing” – ignore the labels. Utilize focus to be one step ahead. Build a powerhouse, not a business.