A community can make or break a marketplace. I owe much of the success of my former company, AbeBooks, to the passionate community of book lovers that came to our site. Considering more than 1/3 of Version One’s portfolio are marketplaces, I appreciate just how much a strong community can be one of the most powerful differentiators and growth drivers for marketplaces.
When a group of users starts spreading the word and engaging with your site beyond pure utility (i.e. comes to chat with other users, not just make a transaction), then that community can help build and scale your marketplace. Early eBay, Etsy, and AirBnB are all great examples of this.
Yet while community can be a marketplace’s biggest asset, it can also be its biggest liability. A marketplace company needs to strike a careful balance between giving up some control to the community, without being overrun by it. For example, much of Digg’s downfall is attributed to just how much it listened to is hard core fanatical user base…i.e rolling out new features, then quickly rolling them back when their more vocal users complained.
How can you best manage a community so it contributes to your growth? Here are a few tips:
1. Give up some control: You can’t let Digg’s story scare you into taking a 100% dictatorship approach to managing community. Your community wants to be a part of something; you’ll need to give up some control to let them participate. For example, you can listen to product feedback, ask for beta testers, and consult with them on community rules.
2. Listen to the whole range of your users: If you want to build a marketplace for a broad user base, you need to listen to everybody…and not just your vocal power users. Find ways to capture input from a diverse representation: from the vocal power users to the silent majority. Your more vocal users will make themselves heard through user forums, but you may need offline events, client advisory groups and 1:1 conversations to tap into the thoughts of everyone else.
3. Publish community values and rules: It’s best to define the values and rules for the community you are trying to build early on. This way everyone understands the ground rules from the start and you have terms to refer back to if the need arises. Ebay did a great job of defining and living by their values.
4. Invest in community managers: In many ways, communities are self-organizing, but they still require active administration and moderation. A good community manager will play both a reactive and proactive role: first to respond to any poor behavior that might drive away other participants and second to draw out the best level of contribution from everyone.
5. Always take the ultimate decision: while it’s important to engage with and listen to your community, keep in mind that you have the ultimate decision in all matters. It is impossible to make everyone happy and companies can run into big trouble when they try. You need to have a strong sense of your company’s core values and then you can weigh user feedback within the framework of your own convictions.
Facebook, Google, Salesforce, Twitter…all the top players in Silicon Valley want to get their hands on the best talent around. That’s why we’ve seen example after example of “acqui-hires” in the past few years as well as some very large acquisitions where a big driver was the talent behind a start-up (e.g. Nest, Beats).
However, only a few big companies have truly figured out how to keep founders around after the acquisition. In most cases, as Bloomberg detailed with Zynga, the founder leaves 1-2 years after acquisition. After all, someone founds a company because they want to be a leader, not a follower. Entrepreneurs have a difficult time when the acquiring company tries telling them how to run the business they have created and grown.
When the acquiring company is successful at getting the founder to stick around, it’s typically because they’ve learned to give their founders the latitude to run their start-up as an independent unit within the business. You’ll hear these founders say, “I work for Marc [Benioff]” or “I work for Jeff [Bezos]” rather than “I work for Salesforce” or “I work for Amazon.” And the start-up founders get direct access to the CEOs. Nothing changes for the start-up except who owns the company.
It is no surprise that the companies that best understand how founders tick are the ones that have still their founders at the helm: Google, Facebook, Salesforce, Amazon, etc. The companies that have figured out how to keep founders around can leverage their knowledge and expertise over time…and thus pay much higher acquisition prices than those companies that fear that acquired founders will leave as soon as they can, because they hate to get bogged down in bureaucracy and a big corporation.
Over the past few years, we have seen an explosion of start-up activity as the traditional barriers to entry have come down. The ability to raise money no longer determines one’s fate. With lowered costs to build and run websites, acquire and retain users, virtually anybody can pick up coding and start a tech company.
At the same time, funding opportunities have expanded for early-stage start-ups. More money is flowing in from a new crop of angels, newly wealthy from a number of tech IPOs. AngelList makes it easier for founders to reach angels and there are hundreds of accelerators and incubators to choose from. On top of all this, crowdfunding has now become a viable funding option for many start-ups, particularly those hardware projects that have had a tough time getting funding from the VC circles.
But this boom landscape might change soon.
While the top of the funnel has grown with all the angel and early-stage activity, the bottom of the funnel is still roughly the same size (about 10-20 billion dollar companies/year). We have all heard about the Series A crunch in the Valley (there might actually be up to 2000 companies in the Series A pipeline right now), and perhaps there’s a Series B crunch now too.
Additionally, we need to watch out for two developments on the horizon. First, there will be a consolidation in the accelerator space, with the net effect of reducing the number of available spaces for start-ups. And, we should expect angel activity to drop as new angels discover that returns from their seed investments aren’t so easy to come by.
Any entrepreneur trying to navigate the financing landscape should be aware of the over-abundance of angel money compared with subsequent rounds. You need to assess early on if your business is venture-fundable. Is your opportunity at least $100M? If not, revenue from your customers will be your best source of financing. That’s okay: many great companies have been built by bootstrapping.
There’s a lot of “easy” early-stage money floating around right now, but don’t get fooled into taking seed money if you don’t have a viable path for later rounds. It will just be leading you down the wrong track.
Lately, we have seen a growing number of entrepreneurs taking aim to solve the key issues facing our local and global communities. From improving transportation to optimizing neighborhood water usage and encouraging investments in municipal bonds, innovative start-ups are trying to make a difference.
Along these lines, we are thrilled to announce our investment in HandUp, a platform that lets you donate directly to a person in need simply by sending a text. San Francisco-based web designer Rose Broome and mobile developer Zac Witte created the app to address two key challenges in the current system:
- While individuals and households donate $26 billion to human services like shelters and food banks, there is little transparency as to how effective these donations are, and how much of it actually goes to those in-need. We often hear stories about the high overhead associated with many non-profit organizations.
- We all want to directly and immediately help those in need within our community – for example, when we see a panhandler standing on the street corner. However, it’s hard to know if this is the best way to help that person and if the cash will go to the wrong purchases.
HandUp solves both of these issues. People in-need sign up for a HandUp membership through nonprofit partners already working in the community. Donors can contribute to a specific member through their web profile or SMS. Funds can only be used at a HandUp partner organization (i.e. Project Homeless Connect) for food, medical care, gift cards to grocery stores and pharmacies, and other basic needs. HandUp is currently working in San Francisco and plans to expand into other cities by end of the year.
Rose and Zac are alumni of Tumml, the first urban ventures accelerator. We’re incredibly excited to be working with them on this important mission. Version One is co-investing alongside SV Angel and some prominent angels.
The beauty of HandUp’s approach is that it’s simple, personal, and yields virtually instantaneous results. It fits into Version One’s investment thesis that civic startups need to innovate and get traction outside of the current system (Boris earlier blogged about the opportunities to disrupt government earlier).
The big debate among tech circles has always been if it’s possible to build a “Silicon Valley” company outside of the Valley. Is Silicon Valley a physical place or a state of mind? Can upstart ecosystems in New York, Los Angeles, Toronto, or Seattle churn out tomorrow’s billion dollar tech companies? Considering a large proportion of Version One’s portfolio is located outside Silicon Valley, I absolutely believe that major tech companies can emerge outside of the Silicon Valley bubble. But there are some considerations…
When it comes to hiring, start-ups located outside of Silicon Valley have an initial advantage, because there’s a lot less competition for engineers. Smaller start-ups in Silicon Valley, particularly those in un-sexy markets, have a tough time drawing in top engineers and designers. A start-up located near a strong university system, like Toronto-Waterloo, has great access to talent without having to compete with 20 other companies and ballooning pay scales. As a result, they can get the talent they need while keeping their payroll expenses relatively low. Starting a company is one thing, but scaling is much tougher outside of Silicon Valley. While smaller ecosystems provide a strong pool of engineers and designers, they’re lacking senior talent. It’s relatively easy for a company to scale to 20-25 employees in Seattle, but when a start-up is ready to find its first VP of Sales or Marketing, it often needs to look beyond the local area. In many cases, a start-up will either need to relocate or open a second office in order to attract the right senior level talent.
The other consideration is the type of business. B2C start-ups typically have more flexibility for where they can be located, while enterprise oriented startups need to be where the customers are…and that means Silicon Valley. B2B start-ups need to have at least sales and marketing based in the valley, if not their entire operation. Keep in mind that SaaS and consumerization of IT are changing this dynamic slightly. Today, it’s a major advantage to be able to drive down 101 to meet your customers, but just 5-10 years ago, it was mandatory. Of course, all these points are generalizations.
The truth is that a great company can be built anywhere, just as building a viable tech start-up is tough no matter where you are. In many cases, success comes down to the founder’s ambition and mindset. Today we’re seeing more founders start a business on their home turf, come to Silicon Valley for an accelerated program like Y Combinator, then bring the Valley mindset back home. As more Valley-based investors and incubators reach out to assist founders across other ecosystems, the Valley can just be a state of mind.