Sunday, November 12, 2006

Get Big Cheap

Two weeks ago I presented at Babson College, home of the nation's top ranked Blank Center for Entrepreneurship. (It's a beautiful campus, especially during the New England autumn.) Students asked for my slides, which I forgot to share, but the New York Times story on Wednesday on how cheaply one can launch a web startup reminded me to post a related segment of my talk here. (Be gentle--this was edited for a student audience far from Silicon Valley.)

...Conventional VC wisdom shied away from consumer ventures because consumers are unpredictable, branding is so expensive, and it takes a prohibitively long time to build a competitive distribution channel. So what changed? What’s now so attractive about consumer technology that makes 2006 such a better time to launch new services? Well, there are 7 new factors today that didn’t exist in the 90’s.

1. A psychographic shift in population led to fast adoption of new technologies. It’s just much harder to find someone complaining that the VCR blinks 12:00—in fact it’s hard to find a VCR at all, now that we have Tivo.

2. The blogosphere and social network sites have also accelerated the rate of adoption for new technologies, disseminating relatively objective and credible information on new products, levelling the playing field for startups.

3. Thanks to deregulation, an enormous middle class is emerging from the economic growth engines in Asia.

4. Internet entrepreneurs in Europe and elsewhere can better identify markets and reduce risk by modelling their startups on successful US online businesses like eBay, Paypal, Google, Yahoo and eTrade.

5. Nearly a billion new mobile phones enter the market each year—mostly in the hands of consumers who aren’t already equipped with a PC, TV and camera.

6. Google has enabled direct marketing for nearly every business in the world. An entire ecosystem now grows around it, including such categories as ad optimization, search engine optimization, lead generation, vertical search, local search, and meta-search.

7. XML has enabled the rapid development of integrated web services like MySpace, Facebook, YouTube, LowerMyBills, and Yelp. For the first time developers can whip together a complex community site that mashes up data and features from across the web. This last point is critical, because it enables consumer-oriented entrepreneurs to do something new and exciting: test a business plan without capital.

This dramatically changes the venture capital model. Consumer ventures used to burn so much time and money that most high tech entrepreneurs focused on carriers and large enterprises. In order to assess demand for their wares, they would need to first develop the technology and a sales force to sell it, a 3 year proposition. If the entrepreneur had a track record of success, we venture investors would take our chances on the market and fund those first three years of operation.

During the internet rush of the 90’s, intoxicated by the Internet, we tried to apply the same model to consumer investing—that is, we funded “proven teams” who had a plan to develop and brand a new consumer service. Seduced by the proposition that more capital up front would buy branding and accelerate distribution, many venture investors bought into Neil Weintraut's motto GET BIG FAST.

We all know how that turned out. No matter how proven a team may be, they still can’t predict consumer behavior, and so we spent about $30 billion acquiring eyeballs for web sites of dubious value, and when the capital dried up, so did the businesses.

But today, entrepreneurs have the opportunity to launch web sites so rapidly into a market that adopts technology so quickly, that with some iterative tweaking and feedback from users they can test their ideas in months, and on a shoestring budget. Without the need for capital, they needn’t sport a proven track record of success, and so many many more ideas can be tested, and the winners can come out of nowhere, from anywhere on earth. With the right user experience, the best innovations can attract 50 million users in their first year of general availability, as proven by Skype, Firefox, Wikipedia, YouTube and MySpace.

And so the winning recipe today for aspiring entrepreneurs is GET BIG CHEAP. Don’t waste expensive development on untested ideas, and don’t let a fat marketing budget mask a weak value proposition. If instead you tinker your way to scalable organic growth, you’ll have a valuable business on your hands. Don’t worry about how long it takes—just make sure your burn rate is low enough to accommodate several cycles of iteration.

There's never been a better time to start a company. Find a community underserved by technology – be they disenfranchised American teenagers, bored commuters in Asia, or small business advertisers in Europe – and repeatedly craft a better user experience for them until you GET BIG CHEAP.

[Pictured right: The Free Press House, a Mumbai office building housing firms with more capital under management--including Bessemer Venture Partners--than any other in India. Notice the materials used by the develoepr to erect the building!]

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  1. I was one of those Babson students, and we all really enjoyed your presentation. Thanks so much for coming.

  2. Anonymous6:16 AM

    Hello David,
    I went to Babson's business school and am a sell side technology analyst - do you think that going forward, the general investing public will have to look at the bigger players such as IBM, Cisco, Motorola, Yahoo and Google to benefit from growth opportunities offered by tech. Atleast for now, a disproportionate number of startups seem to exit by selling to one of the larger technology players. How long do you think it will take to make another Google?

  3. David,

    I agree with you in the conclusions, not the process you followed.

    First of all, the blogosphere and social networks disseminates knowledge, but not always objective nor credible. Only after some time, a general knowledge is created, more like the way our grandparents knew from their grandparents how to do certain things. And sometimes this knowledge is as bad as using mud in a bite.

    Next, you talk about eBay, Paypal , Google, Yahoo and eTrade as models. Uniqueness is what they had, and if every start-up tries to do what they did they will never succeed, because others will be trying to do the same at the same time Discovering why their value proposition was better than their competitors is more important, from my point of view.

    There is also another important thing. The time needed to discover if your idea is a really business opportunity is shorter, because market reacts quicker due to the increase of customer’s knowledge. That is what reduces times and investment.

  4. It's only a matter of time before the big players realize that they can build businesses cheap too. We're still not seeing much innovation in scalability (although Google Base and Amazon S3 are indicators of how it may play out) or revenue models. Create an innovative revenue model for an application and the world will be interested- we're seing it right now.

  5. I would love to see these slides as well! Maybe you could upload them to slideshare? ;->