Sunday, March 25, 2007

My Simple Multiple Choice Test For Consumer Internet Startups

Anyone thinking about starting or joining a consumer Internet startup should be able to answer the following question, and if the answer is "d) none of the above," then I'd suggest looking for a new job.

So, here's the question: does your company attract users with any of these things?
  1. an inherently viral idea
  2. search engine optimized content that grows naturally with usage
  3. the ability to spend money to acquire users with a very fast payback
  4. none of the above
Why do I think those three things are critical? Because without at least one of them, you're building a Field of Dreams. Though it worked for Ray Kinsella (played by Kevin Costner), it simply doesn't work for Internet entrepreneurs. I have met too many people under the delusion that if they build it, people will come. With tens on millions of web sites competing for eyeballs, it just doesn't work that way online.

There's also a group of startups who think they have passed the multiple choice test, but that's because they have misunderstood the answers. This blog post is my attempt to clarify them.

1. An inherently viral idea
Very, very few sites can correctly offer this answer because very few concepts are inherently viral. You may have a great site and may rightfully think users will tell their friends about it, but you probably don't have a viral site. You're not benefiting from a viral idea, you're benefiting from word of mouth. Word of mouth is nice, but it's not nice enough to form the foundation of a business. To be viral, the utility of your site/service needs to grow substantially as your friends use the service. Great examples of inherently viral services include Skype (with no friends to call, it's useless), Facebook (you can't trade messages with your friends if they're not on the site) and LinkedIn (you can't access your business network if you haven't established it on the site). Bessemer had one fantastic investment success with Skype and is hoping for a second with LinkedIn. Too bad we missed out on Facebook.

Viral ideas are the most powerful of all because they grow exponentially. Skype had 500,000 users less than a month after beta launch in the summer of 2003 and has reached more than 100,000,000 people since.

2. Search engine optimized content that grows naturally with usage
Almost everything starts with Google and its search engine brethren these days. If you can build a service with lots of web pages that get indexed by Google and show up naturally as top results for a large number of searches, you will get a lot of free traffic. It sounds simple. But it's not.

There are dozens of techniques and tricks to building search engine optimized (SEO) web sites, and there are countless firms who will sell you advice on how to do it correctly. Most importantly, though, the idea underlying your site must lend itself naturally to SEO. First, consumers have to be doing a lot of searches for content on your site. Second, your content has to grow -- ideally through contributions from users. Bessemer had a very successful investment in Site Advisor (acquired by McAfee) that leveraged SEO distribution. Several of our current investments -- OLX, Wikia and Yelp are SEO-driven.

3. The ability to spend money to acquire users with a very fast payback
If you can spend money to make money, you can control your own destiny. Generally, you have to be in the business of selling something to consumers. Online retailers are great examples of companies in this category. If 2% of visitors complete a purchase and if the average purchase is a $50 with a 30% gross margin, then you can afford to spend $0.30 for a visitor. Assuming a small fraction of the eventual purchasers will become repeat buyers, you will have a profitable business. Retailers and subscription sites like Improvement Direct and Match are great examples. In fact, most of the IAC properties fit in this category. Online media properties that monetize through advertising can rarely spend money to make money. It just costs too much to acquire a customer.

There are a few companies like LinkedIn and Yelp that benefit from more than one of the user acquisition techniques mentioned above. LinkedIn is primarily viral but leverages SEO through its personal profile pages. Yelp is primarily SEO driven but has a viral element among its core contributors who invite friends to the service to share and compare reviews.

There may be one other compelling customer acquisition strategy for consumer Internet companies, but in my mind, the jury is still out. This fourth technique leverages the open APIs for widgets offered by MySpace and many of the leading social networks. Although it's clear you can drive tremendous usage through widget-based distribution, I'm not yet convinced that these widget companies will develop viable business models.

12 comments:

Nivi said...

Dear sir, which of these techniques did Google use?

Jeremy said...

Nivi,

Google didn't use any of the three techniques I wrote about above. However, Google had two other critical things in its favor, which are impossible (in the first case) and nearly impossible (in the second) to replicate.

a) Google started building it's amazing brand in 1999. I'm not sure it's possible to build the next Google today. The online world is much more competitive and sophisticated.

b) Somehow Google convinced its biggest competitor at the time, Yahoo, to provide it with a fantastic cobrand partnership. This was brilliant and lucky. I would be willing to bet on any startup that is able to secure a similiarly compelling distribution deal, but it's scary to invest in a company that depends on such a partnership until after it manages to secure one.

Nivi said...

I don't agree with the first point about Google. You and I see a lot of online "noise" because we track the industry. The "average joe" is still simply looking for great products that they can hire to do jobs. These products are very rare.

There may be more competition because there is more money – one may to circument the competition is to solve hard problems.

P.S. I enjoyed the post!

chathard said...

In March 2006 you promised not to turn this blog into a series of plugs for companies that you invest in at Bessemer. The fact that you have reneged on this promise only shows how the companies you support rely on the web 2.0 buzz cabal rather than on innovation . YUO DONT CHAT HARD ENOUGH JEREMY


"In this blog, I have focused on topics related to areas I think are ripe with innovation and, therefore, present fertile ground for venture investing. And I have rambled on about miscellaneous gadgets, technologies and anecdotes that have captured my imagination (or at least my attention). I deliberately shied away from referring to my Bessemer investments to prevent this from becoming a shameless promotional tool. I included the simple link to my investments in the right-hand column and left it at that."

Jeremy said...

Chathard, I think it's a bit unfair for you to characterize this blog post as a "plug for Bessemer companies." Yes, I did mention a few companies in the post, but I also mentioned a bunch of non-Bessemer companies such as Facebook and Match.com. I mentioned all of them as examples of techniques used to generate traffic. I'm certainly not promoting them. In fact, I didn't even explain what any of them actually offer.

Perhaps when you have a chance, you might explain what it means, exactly, to "chat hard."

Thanks,
Jeremy

chris m. said...

Jeremy, enjoyed the post and still looking forward to the version about Enterprise Companies. Is it still forthcoming?

RAJA said...

Google started building it's amazing brand in 1999. I'm not sure it's possible to build the next Google today. The online world is much more competitive and sophisticated.

Lars said...

I use Improvement Direct (now Build.com) ads on my site to generate income. Their average order size is around $350 and they pay 4-10% commission. http://www.build.com/index.cfm?page=help:affiliates

I like to experiment with different programs. I didn't have as good of luck with Amazon's affiliate program.

DanImports said...

Internet startups - I have read a lot of blogs in terms of startups but nobody has ever mentioned internet startups. You are right there are a lot of startups that greatly need investors, I currently work from home selling export goods and it has been really feasible and I want to make a good online venture on it.

DanImports said...

Internet startups - I have read a lot of blogs in terms of startups but nobody has ever mentioned internet startups. You are right there are a lot of startups that greatly need investors, I currently work from home selling export goods and it has been really feasible and I want to make a good online venture on it.

DanImports said...

Internet startups - I have read a lot of blogs in terms of startups but nobody has ever mentioned internet startups. You are right there are a lot of startups that greatly need investors, I currently work from home selling export goods and it has been really feasible and I want to make a good online venture on it.

DanImports said...

Sorry for the multiple posts, I was lagging.