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 Over the past several weeks there have been some blogosphere debates about the “Seattle Startup Index” and the “Future of Internet Investing.” I’d like to summarize my thoughts on these topics, but first I’d like to set some personal context. Back in the 70’s I was a computer science faculty member working on the ARPANet when there were a few thousand people in the world with access to networked email. Later when I was VP of the Advanced Technology Group at Apple Computer in the early 90’s, my organization helped fund the development of the Mosaic browser at NCSA that made the Internet accessible to casual users. I recall that one of my Labs launched www.apple.com on a local Internet-connected Mac as an experiment in sharing research information with others on the emerging Web (within six months Corporate Communications at Apple said “thank you very much, we’ll take it from here!”). So, I’ve been on the ARPANet/Internet/Web from the beginning, and have seen how it has fundamentally transformed business and society.
Virtually every company OVP backs leverages the Internet in one way or another (even our digital biology and energy companies). So, is there still a category of “Internet companies” to invest in, or has the Internet become a general fact of life like electricity? One perspective is provided by the (misnamed) “Seattle Startup Index” . The name implies that this is a general ranking of Seattle startups. In actuality, the index simply ranks 300+ Seattle startups by the amount of web traffic they attract each month (as such, it should be more appropriately named the "Seattle Startup Website Traffic Index"). While it's kind of fun to see who is at the top of the list in capturing consumer eyeballs each month, I question whether it really has much to do with "ranking" startups in Seattle that have a true shot at long-term business success. We kind of went through this in the late 90’s with the first wave of Web companies, hoping to attract eyeballs and then later find some way to monetize those eyeballs through a combination of advertising and up-selling premium services. We know how that worked out. To my knowledge, there are only two “eyeball” companies that have made significant profits with a pure advertising-based revenue model: Yahoo! and Google (rumor has it that Facebook may get there, but certainly MySpace, YouTube, Twitter, et al., have not).
To be clear, this is not to say that very successful companies can't be built with Web services at the center of their business model (see Amazon, Ebay, Salesforce and many others), but rather that the key to long-term business success is providing goods and services that people will actually pay for, vs. trying to live off eyeballs and advertising. My sense is that rather than thinking of themselves as “Internet companies,” we’ve reached a time when companies should think of themselves as on-line stores, or auction services, or search, CRM, social networking, travel, real estate, video sharing, photo editing, dating, etc., companies that happen to leverage the Internet, in the same sense that they leverage electricity. I am told that a handful of local bootstrapped companies on the web rankings list have achieved, or are close to, profitability on a pure advertising model. Great! One of the most attractive aspects of the Web services revolution is that a small team can create a cool company with very little capital investment, and if they hit it big with an interesting concept and keep their costs low, can start generating advertising revenue. The question is whether they can scale such a business to a substantial size (which, admittedly, need not always be the goal -- not every startup needs venture funding, especially in this space, and can have more modest exit goals than the typical venture-backed company). Perhaps a few will indeed join Google and Yahoo! as large advertising engines, which would be wonderful, but most will have to seek out additional revenue sources to grow.
Ultimately business success is about sales pipelines, revenues and profits, as it always has been. Even in the Internet era, startups need to focus on who their customers are, what value proposition they offer those customers, how they are differentiated from other companies with a similar value proposition, and how they will get paid. That is ultimately the startup index that matters.
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