Just how “new” are the ideas behind successful online businesses? eBay and Craigslist started out as global garage sales. Facebook started out as a digital “PIC book” on steroids. And over time, these sites evolved and expanded into new areas. Is your business based on a successful solution from the offline world? In this blog post, Allegis Capital’s General Partner, Lara Druyan, discusses the offline strategies that inspired some of Allegis’ successful portfolio companies, and shares other sources of inspiration.
Allegis Capital has led several successful exits. IronPort was acquired by Cisco for US$830 million. Rent.com was acquired by eBay for US$415 million. Shopzilla was acquired by E.W. Scripps for US$525 million. What do these companies have in common? They were all profitable at the time of acquisition. And, two of them were well-grounded in tried-and-tested services from the offline world. As Lara puts it very well, “At the end of the day, Internet companies must relate to the analog world. They must be anchored in very well understood consumer behaviors.”
Amazon started out as an online book store and grew into an online mall. Yelp.com is grounded in word-of-mouth recommendations. Photo sites are super shoe-boxes and photo albums. E-mail is the express version of FedEx. And, the list goes on.
Lara provides a great example of Rent.com. The founders came from the real estate industry and many of the investors were REIT’s who provided their inventory to the web site. Due to this grounding in the offline world, not only was Rent.com’s value proposition tried-and-tested, but the company’s REIT-based financing strategy turned into a competitive advantage.
Packet Design, another of Allegis’ portfolio companies realized early-on that China was investing heavily in building communications networks. And so they formed an alliance with a local Chinese partner early on in their growth cycle to take advantage of this trend. In the flat world we live in, Lara advises startups to look internationally for markets right from the start. In Lara’s words, “A startup’s green fields may be far from home.”
Lara believes startups should be willing to take ideas from other parts of the world. Vente-privee.com, a successful French site, served as inspiration for Gilt.com. And of course, several of Asia’s success stories such as Baidu are based on ideas and technologies first launched in the U.S. Cultural factors play an important role. Tencent may have built its service on instant messaging (first launched by Israel’s Mirabilis and later mass-marketed by AOL, Yahoo and MSN), but because it understood China’s cultural factors, it leads in market share.
I’ve often felt that some businesses are just not meant to scale: some with respect to revenue, some with respect to profits. For example, if Craigslist aimed to grow into a business earning billions of dollars in profits, I’m just not sure it would be the wild success story it is today. What would happen to the site if they charged a fee for everything? I have to believe they would lose some customers, as customers would consider alternatives. And new web sites would be launched to meet the need with different business models. Similarly, Wikipedia has already faced issues with monetization because it’s key asset is the web’s culture of generosity. And if it tried to make money off the work of it’s editors, they would stop writing. So, I asked Lara to comment on the scalability of business models.
Lara agreed and went on to say that “startups should be intellectually honest about their businesses. Everyone thinks raising venture capital is the holy grail. The really hard part is to build the business. And when you take venture capital, you could actually risk a good exit, because you may not be able to sell the business at VC’s expected returns. You have to be very careful about whether your capital structure is appropriate for the business you are building.”
Lara’s fifth suggestion is that Web 2.0 companies should be un-afraid to spam their audiences. In fact, she challenges startups to think of ways to spam their audiences, to get them to keep coming back, but with relevant content. In her words, “It’s not spam if people think the content has value.”
Lara also believes startups should experiment with social media as a marketing channel. “If you are a startup offering video’s or photos, where are your YouTube videos that teach people to take good photos or videos?” she asks.
Finally, Lara’s advice to startups in recessionary times is to ask themselves a simple question. “Is your service essential to your audience? If not, how can you make it so?”
I really enjoyed talking with Lara. I found her pragmatic views refreshingly grounded. Lara holds a bachelor’s degree with Honors in Economics from the University of Chicago and a Masters of Business Administration from the Harvard Business School. In 2009, she was named by the Silicon Valley/San Jose Business Journal as one of the “2009 Women of Influence in Silicon Valley.” Prior to joining Allegis Capital, she was responsible for Silicon Graphics’ SGI NetMeeting collaborative software suite. She also worked at Merrill Lynch as an investment banker, and is currently a member of the Board of Directors of Apprion, Rosum Corporation and Packet Design. She also serves on the Board of Advisors to the Forum for Women Entrepreneurs, an organization that supports and encourages the development of women-run businesses.
