The recent distressed exit of iLike reminds us of the need to build real value in our startups if we hope to create lasting companies and wealth.
I have seen cycles that last about 18 months or so in which traction gets substituted for value. Yes, we’ll sometimes see exits with big numbers attached to them during the peaks of these cycles. But only those companies that have built real value will sustain valuations during lean years and create long-term successful companies.
If we look over the past fifteen years of webtime, we see a few categories emerge where real value was created:
- Efficiency/Cost Reduction (DoubleClick, RedHat, PayPal, Craigslist)
- Monetizeable audience (Yahoo!, Google, AOL)
- Repeat customer commerce (Amazon, eBay, Netflix)
- Solve a pain point (Checkpoint, Postini)
- Create new markets (EA, Google)
The aberrations occur when traction looks like value. When Slide was funded at a $500M pre-money valuation, that was an example of traction being confused for value. Sure people posted their pictures using a Slide widget 150M times, but there was no value created. Slide did not have a real relationship with those customers and it was a stretch to believe that an ad model would occur on top of those photo widgets. Similarly, iLike may have had its application installed by 50M users, but those “customers” were simply indicating a band or two that they liked. This is not valuable data and the audience was never monetized in any meaningful way.
Another aberration was around CBS’s purchase of Last.FM for $280M. Last.FM had lots of users using its free service (something like 15M). But supporting those users was expensive (bandwidth, music rights) and the users weren’t paying. CBS viewed it at the time as a play for audience, and that makes sense. But at that price, a more successful ad model would need to emerge to overcome the content and bandwidth costs. As soon as the ad market hiccuped, that price looked exorbitant and indeed now traffic has declined and its business model unproven.
It bears noting that traction often precedes value. As VCs, we often look for early traction when vetting companies. But we also need to believe, and so should entrepreneurs, that the traction will result in an asset being created which has value. In Twitter’s case, the value of the collective shared links, I believe, will prove to be enormously valuable. In addition, creating a platform where consumers willingly subscribe to brands or information sources also has value.
I think we have returned to a time where eyeballs don’t necessarily equate to value, and rightfully so.
David Pakman is a partner at Venrock. He blogs at Pakman’s Blog: Disruption.
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