危 wēi  danger

Jason Goldberg and Bradford Shellhammer founded a gay social networking site called Fabulis a couple of years ago, I was lucky enough to meet Jason as he was thinking it through. Within 3 months of launch the site had attracted 50,000 members, only to plateau 9 months later at 130,000 members, with only 30,000 active.  Facing this slowing of demand the team took the brave decision to go back to the drawing board, believing that they wouldn’t be able to iterate their way to a business model. Their one glimmer of hope was that a flash sale feature they had added to the site, a “Gay Deal of The Day,” had achieved some success – they had sold over $40k worth of product within 20 days of it being launched.  That  ‘feature’ became Fab.com and 3 months after its launch it was profitable with 600,000 members and six-figure sales days.

The potential was clear and Goldberg decided to raise a significant funding round last October in order to meet it.  However, he worried that fundraising would divert his management team’s time and attention away from running the business at a critical time (their first holiday season).  Instead of potentially losing focus and perhaps failing at raising the capital perhaps they should simply slow their growth?

Once he was ready he created a shortlist of VCs that added the specific value he was looking for: the ability to write a large cheque, recent success with ‘hot’ startups and experience scaling e-commerce businesses.

The team then approached its shortlist, giving each a login to the Fab.com metrics dashboard before agreeing to meet.  This open approach is wildly different from most funding processes I have seen in the past (in which teams go through rounds of meetings before metrics are discussed in detail), yet rightly VCs look at metrics closely. By providing full access to the data Goldberg sent a clear message to potential investors; “here we are, here’s the data, we’ve got nothing to hide, take a look and decide for yourself if you want to pursue investing in Fab.”

In the end, Fab.com had the choice of multiple firms that wanted to invest, ultimately choosing to take $40m from Andreessen Horowitz.  The process had worked well because they were able to pick the partner they wanted to work with while avoiding disruptions to their operations…

危 wēi  danger

More and more often startups are built with a total dependency on a third party, for example on external platforms such as Facebook, Twitter, Google Apps or iTunes.  The allure of access to a sales channel, rich data and potential customers is obvious but surely that dependency creates huge risk?  What if the external platform changes its approach or decides to develop its own version of the startup?  What if the platform decides that it will no longer support third-parts apps as Twitter did last week.   Zynga, the social gaming company, is an interesting example – it has been valued at over $10bn – surely this is crazy given its complete dependency on Facebook?

机 jī opportunity

I was inspired a few weeks by an article on Techcrunch.  The article categorizes dependencies as symbiotic or parasitic.  Parasitic dependencies are problematic, increasing the chance of the third party taking a hostile approach but symbiotic dependencies, in which both parties derive a benefit, pose less of a risk.

By this definition I think Zynga’s dependency on Facebook remains symbiotic.  Facebook has benefitted because games such as Farmville enrichen the Facebook’s user’s experience – currently over half of FB users play Zynga games, increasing their average time on site considerably.  In addition, Facebook Credits are integrated into all Zynga games (for which Facebook takes a cut of 30%) and the company is reportedly the largest advertiser on Facebook, spending millions a year to drive new installs.

In return, Zynga has benefitted by leveraging the rapidly growing FB community, successfully harnessing FB tools such as user news feeds to promote game updates.  It’s hard to imagine that Zynga would have grown its user base for CityVille within a week of launch to over 3 million at the end of last year without FB.  Given this symbiotic dependency, Facebook’s growth rate and estimates of it making $630m this year, Zynga’s valuation seems more reasonable.

It is also worth pointing out that none of this has stopped Zynga building a Plan-B, if only to improve its negotiating power with FB.  For example it began requiring email addresses from users (enabling it to contact them outside FB) and buying mobile application companies – including Newtoy (creator of Words With Friends and Chess With Friends) last year and New York developer Area/Code last month.

In the case of Twitter it seems ruthless for them to close down so many apps, after all those 3rd party clients helped create behaviors that now make Twitter so valuable: @ mentions, direct messages, re-Tweets and so on (none of which were Twitter’s idea originally).  But, those app’s were effectively in direct competition with Twitter, placing their own advertising and pulling users away from Twitters own platform – a parasitic dependency.  Twitter’s rationale as outlined in this developer forum explains this and the message is clear – if you’re going to develop apps make them symbiotic…

How About…

• Considering who your business might be dependent upon?
• If you do have dependencies can you make them symbiotic rather than parasitic?
• And how can you plan for the worst?

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