I’ve been wondering lately if the current practice of building web2.0 companies with little capital can last. Obviously it will benefit me as a VC if companies need more money, so all of this may just be wishful thinking, but here goes….
Best practice for financing web2.0 style companies has been (for a while now) to:
- Have an original idea for a new product
- Quickly launch a rudimentary service
- Capture feedback as traffic grows to improve the service so creating a virtuous circle (note the winner-takes-all nature of this)
- Find a way to monetise
It is usually only at the third stage of this that money on the venture capital scale is required and companies need less money overall. I have commented on this previously in Venture Capital Model Changing But Not Broken, You Gotta Go With Traffic, and You Can Only Go With Traffic.
The companies that have been successful with this model are those that have combined a great idea with marketing flair – there are many examples. Google, Flickr, Delicious and Digg all fit this model.
I am now wondering if this might change soon. Recently I have been reading a lot about the importance of customer service as a differentiator – Brad puts in this context on the Union Squares blog and JP recently wrote the following:
As we move towards realms where more and more things get commoditised, and more quickly at that, it is reasonable to assume that the only aspect of a service offer that differentiates one firm from another is the quality of the customer experience.
If this is true it is bad news for venture capital. Customer service and the customer experience are of course important to get right, but they are more about perspiration than inspiration – and inspiration is where the big money is at. You wanna be investing in companies that have revolutionary products – like the ones I listed earlier.
So I was wondering if it was right that customer service is where the game is at now.
Then I was thinking back to some of the posts I made before I went on holiday (and yes, thanks, it was a good one…). A key conclusion was that there is a long way to go in innovation. Another was that social networks might start to look more like virtual worlds, or to put it another way virtual worlds might become the next social nets. That says to me that it will remain possible to make money out of inspiration.
To take the thought a stage further, it might be that the next generation of web services will be inherently more complex and will therefore need venture capital investment prior to launch (in addition to angel money). Examples of this might be social networks with virtual world style functionality and a return to client side development being important.